China - Zhongyuan - Wenliu Petroleum Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-3480-CRi REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO $100.8 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR THE ZHONGYUAN-WENLIU PETROLEUM PROJECT March 9, 1983 This document has a restricted distribution and may be used by recipients only in the perfornance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (September 1982) 1 Yuan (Y) = $0.53 Y 1.9 = $1.00 WEIGHTS AND MEASURES 1 barrel (bbl) = 0.159 cubic meters (cu m) 1 British thermal unit (Btu) = 0.252 kilocalories (kcal) 1 cubic foot (CF) = 0.0283 cubic meter (cu m) 1 kilogram of coal equivalent (kgce) = 0.64 kilogram of oil equivalent 1 kilometer (km) = 0.621 miles (mi) 1 kilowatt (kw) = 1,000 watts (w) 1 megawatt (MW) = 1,000 kilowatts ABBREVIATIONS AND ACRONYMS CNOOC - China National Offshore Oil Corporation LPG - Liquefied Petroleum Gas MOF - Ministry of Finance MOPI - Ministry of Petroleum Industry PCN1 - Production Company No. 1 PVT. - Pressure, Volume, Temperature ZPEB - Zhongyuan Petroleum Exploration Bureau FISCAL YEAR January 1 to December 31  FOR OFFICIAL USE ONLY CHINA ZHONGYUAN-WENLIU PETROLEUM PROJECT Loan and Project Summary Borrower: The People's Republic of China Beneficiary: Zhongyuan Petroleum Exploration Bureau (ZPEB) Amount: $100.8 million, including capitalized front-end fee Terms: 20 years, including 5 years of grace, at standard variable interest rate Relending Same terms and conditions as the Bank loan. ZPEB bears Terms: the foreign exchange risk. Project Description: The proposed project would assist the Government in developing oil production in the southern part of the Wenliu oilfield; exploring and evaluating the potential of the eastern part of the oilfield; and recovering liquefied petroleum gas (LPG) from associated gas. It would include a 3-D seismic survey of the South Wenliu and part of the East Wenliu structures, drilling of production, injection, exploration and appraisal wells, and construction of an LPG plant and ancillary facilities. A very important objective of the project is to introduce modern technology and methods to the petroleum industry in China - a process initiated under the Bank's first petroleum project in Daqing. The project would help optimize oil recovery and production rates through appropriate secondary recovery techniques and improved completion practices. It would also provide modern oilfield equipment, computer and training centers, laboratories and technical assistance (including 416 man-months of expatriate consultant services). The main benefits from the project are production of crude oil, gas and natural gas liquids, highly probable discovery of additional reserves, and transfer of technology that would improve operational practices. The project involves operational risks and safety hazards common in petroleum exploration and development. To reduce these risks and hazards, however, the project has been designed to improve existing safety standards, upgrade workers skills and provide modern equipment. Another risk is that geological conditions may turn out less favorable than anticipated. The 3-D seismic survey and technical assistance included in the project should minimize this risk; moreover, even with smaller recoverable reserves than estimated, the project remains economically attractive. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Estimated Local Foreign Total Costs: ------- ($ million) ------ Drilling - South Wenliu 190.0 44.1 234.1 Drilling - East Wenliu 20.1 2.8 22.9 Surface facilities 24.2 - 24.2 LPG plant 22.4 16.0 38.4 Other imported equipment 10.6 53.0 63.6 Buildings 3.5 - 3.5 Studies and technical assistance 0.5 7.4 7.9 Physical Contingencies 29.0 10.7 39.7 Price Contingencies 42.0 22.75 64.75 Total Project Cost /1 342.3 156.75 499.05 Front-end Fee - 0.75 0.75 Total 342.3 157.50 499.80 Financing Local Foreign Total Plan: ------- million) Government/ZPEB 342.3 - 342.3 Suppliers Credit or Government/ZPEB 56.7 56.7 IBRD - 100.8 100.8 Total 342.3 157.5 499.8 Estimated IBRD FY 1984 1985 1986 Disbursements: ------($ million) ------ Annual 27.0 58.0 15.8 Cumulative 27.0 85.0 100.8 Economic Rate of Return: 74X Staff Appraisal Report: No. 4183-CHA, dated March 9, 1983. /1 Local costs include taxes and import duties (estimated at 15% of imported goods) amounting to $23 million.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF TIE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE PEOPLE'S REPUBLIC OF CHINA FOR THE ZHONGYUAN-WENLIU PETROLEUM PROJECT 1. I submit the following report and recommendation on a proposed loan to the People's Republic of China to help finance the Zhongyuan-Wenliu Petroleum Project. The loan, for $100.8 million, would have a term of 20 years, including 5 years of grace, at standard variable interest rate. A portion of the loan ($96.8 million) would be onlent to the Zhongyuan Petroleum Exploration Bureau (ZPEB) on the same terms and conditions. ZPEB will bear the foreign exchange risk. PART I - THE ECONOMY 2. An introductory economic report, entitled "China: Socialist Economic Development" (No. 3391-CHA), was distributed to the Executive Directors on June 1, 1981.' A country economic memorandum, which updates the report, particularly on developments over the past two years, will be distributed shortly. In the next President-s Report, the economy section (Part I) and the country data in Annex I will be updated to reflect new information on changes during 1982. Development Objectives and Performance 3. China's economic system combines an urban state economy modelled after that of Eastern European countries, with a rural commune economy based on the country's own traditions as well as its socialist ideology. The state economy is characterized by public ownership, centralization of economic decisions, strictly hierarchical control, and relatively little reliance on markets or prices. In the commune economy, land and most capital are owned collectively by production teams of 30-40 households, which generally corres- pond to traditional villages (or neighborhoods of larger villages). Each team is part of a brigade, each brigade part of a commune: these higher level units organize land improvement projects, run industrial and other enter- prises, and deliver education and health services. 4. Development efforts over the past three decades have consistently been directed toward two main objectives: first, industrialization, and in particular development of a heavy industrial base; second, elimination of the worst aspects of poverty. Chinese development strategy has also been shaped by two major constraints: first, an extreme shortage of cultivable land in relation to population; second, a high degree of international isolation. 5.' These two constraints have sharpened the conflict between the two objectives. The prospective returns to investment in agriculture (the  - 2- principal source of income for the poor) have been limited by land scarcity and by the fact that the easiest advances in intensive cultivation have already been made. Similarly the inevitable competition for capital and skilled manpower between industrialization and other means of poverty reduction was for a long period aggravated by reliance entirely on domestic resources and technology. 6. The Chinese response to this dilemma has been to approach the two objectives in two different ways. Following an initial phase of institutional change and property redistribution, poverty reduction - mainly through rural development and the provision of basic health and education services - has been based largely on local resources and initiative. Industrialization, by contrast, has been based mainly on a massive infusion of centrally mobilized resources, with little concern for cost effectiveness, and using largely Soviet technology of the 1950s. 7. Tension between these two approaches has contributed to sharp policy oscillations, as has a continuing debate on the role of political criteria in economic decisions and on the most appropriate degree of centralization. The country is only now recovering from the latest political upheavals - the Cultural Revolution (1966-76) - during which extreme leftist views often predominated, and egalitarianism and ideology were emphasized at the expense of economic efficiency. 8. Notwithstanding these policy swings, which have engendered some dramatic economic fluctuations, there has been substantial progress toward the two main objectives. Industrialization has been very rapid, largely as the result of an unusually high rate of investment, virtually all of which has been financed by domestic savings. The share of industry in GDP (around 44%) is currently similar to the average for middle-income developing countries. However, agriculture still accounts for 35% of GDP and over 70% of employment - similar to the average for low-income developing countries. Around 85% of the population still lives in rural areas. 9. Over the whole period 1949-81 the population expanded at a little under 2% a year. Despite the tightly constrained agricultural sector, rapid expansion of industrial output has caused national income per person to grow fairly fast. With adjustments for international comparability, per capita GNP appears to have grown at an annual rate of 2.0-2.5% in 1957-77 and (because of a spurt in recent years) 2.5-3.0% in 1957-81. Even the former rate is signi- ficantly above the average for other low-income developing countries (1.6% in 1960-78) - though the latter is still well below the average for middle-income developing countries (3.7%) and has not been high enough to pull China out of the low-income group. Strengths and Weaknesses 10. China has clearly displayed an outstanding capacity to mobilize domestic resources - material, human and financial - in pursuit of compara- tively well-defined national objectives. Given the shortage of land and  -3- initially high yields, agricultural growth since 1949 has been quite impres- sive. Yields of the major crops are now among the highest in the world though labor productivity remains low. Agricultural growth, at about 3% a year, has, however, been eclipsed by industrial growth at an average rate of more than 10% per year. Although a large minority of the population (around 200 million people) remains very poor, low income groups in China have been made better off in terms of employment, nutrition, health and basic education than their counterparts in most other poor countries. Partly as a result, but also through an intensive political campaign in the 1970s, the population growth rate has been reduced in recent years to a remarkably low level (1.4% in 1981). Life expectancy - whose dependence on many other economic and social variables makes it probably the best single indicator of human welfare in a country - is (at 64 years) outstandingly high for a country at China's per capita income level. 1l. The outstanding weakness of China's economy is inefficiency - in converting inputs into outputs, in matching supply with demand, and in invest- ment decision making. This is partly the result of technological backward- ness, caused by two decades of international isolation. But it also reflects the virtual absence of medium-term planning from 1958 until recently, the lack of economic criteria in investment analysis, and serious weaknesses in the economic system - in particular, inadequate contact between producers and users, insufficient use of markets and price incentives, inadequate linkage between effort and rewards, and an overstaffed and cumbersome bureaucracy. Recent Developments 12. Since 1977 there has been intense discussion within China concern- ing both the ends and the means of economic development. Though partly the result of political change, the debate has been fuelled by some important underlying economic considerations. Future growth will inevitably have to depend mainly on improving the efficiency of resource use. The benefits of technological isolation as a stimulus to improvisation have been overtaken by its costs in terms of backwardness and bottlenecks. And the remarkable progress made in industrialization and in meeting basic needs has not been matched by - and has created a demand for - a commensurately rapid rise in general living standards. Reform and Adjustment 13. In 1979, the Government initiated a program of reform and adjust- ment. Economic reform is aimed at improving the overall efficiency of the economic system. It involves: restoring and improving the quality of central planning and policy coordination; devolving more decision-making authority to lower level units in the economic system; establishing more direct links between incomes and performance of economic units and individuals; and placing more reliance on market mechanisms and economic instruments, less on administrative directives, to influence economic activity. Structural adjustment is aimed at speeding improvements in living standards and involves  readjusting the relative shares of consumption and investment in national income, some sectoral and subsectoral readjustments, and more emphasis on foreign trade. 14. Economic reforms have affected planning and management at both the central and local government levels. A major reorganization of the central government has strengthened the core planning and management agencies (especially the State Planning Commission and the State Economic Commission) and reduced the total number of commissions, ministries and agencies under the State Council from 98 to 52. Central-local government relations have been affected by a decentralization of fiscal and foreign trade management, and the legal rights and obligations of economic agents have been better defined. 15. Other reforms have affected the management and organization of the state enterprise and collective sectors. Management of state enterprises has been affected by changes and experiments aimed at improving incentives, including the introduction of profit retention schemes and more flexible payment and employment practices. There has also been experimentation with different types of state enterprise organization, a greater variety of marketing channels, some price flexibility, and greater autonomy for state enterprises in production decisions. In rural areas, more responsibility has been given to lower level collective units and to households, and incomes have been more directly linked to the output of groups and house- holds. There has been an increase in the number and types of rural markets at which households can freely trade commodities. In urban areas the scope for collective and individual economic activities has been expanded. Some of these reforms - especially those in rural areas - have already improved economic efficiency, while others will take longer to have an impact. 16. Progress in structural adjustment has been impressive. The share of investment in net material product (NMP) has declined from 37% in 1978 to 30% in 1981, and the share of agriculture in NMP has increased from 36% in 1978 to 40% in 1981. Emphasis on light industry, which accounted for 43% of industrial output value in 1978, was needed to provide more consumer goods to match higher incomes. The shift in emphasis from heavy to light industry, which began in 1979 and has become even more dramatic in the past two years, has led to a sharp increase in this proportion - reaching over 51% in 1981. In fact, in 1981, heavy industry output actually fell by 4.7% while light industry output grew by 14.1%. Stabilization Program 17. The implementation of adjustment and reform policies in recent years was accompanied by some macroeconomic instability in 1979 and 1980: there were large budget deficits, moderate inflation, rapid growth in the money supply, and a widening of the current account deficit from $0.7 billion in 1978 to $2.4 billion in 1980. Except for the budget deficit (5.1% of NMP in 1979 and 3.5% in 1980), the symptoms of instability were quite mild by international standards. They were, however, taken very seriously in a  - 5 - country accustomed to insignificant inflation rates during the last two decades. Accordingly, in 1981, the Government introduced a stabilization program, which included a moderation of currency and credit expansion, restoration of budgetary balance and sharp cuts in investment. 18, Monetary and Fiscal Policy. Restoration of price stability, the Government's major concern, has been largely achieved: retail prices increased by only 2.4% in 1981 compared with 6.0% in 1980. In rural areas shortages of consumer goods and repressed inflation remain, but in urban areas measures to restrict increases in nominal incomes in 1981 improved the demand-supply situation. Meanwhile the major changes in relative prices between urban and rural areas and within sectors continued through 1981. Some price flexibility has also been introduced: above-plan output can be sold at prices negotiated directly between buyers and sellers, and there is considerable downward price flexibility for goods in excess supply. 19. Strict price controls were one element of the stabilization pro- gram but fiscal policy has also played an important role. The Government reduced the budget deficit significantly in both 1980 and 1981, primarily through major cuts in capital construction: after rising by over 50% in 1978 and nearly 14% in 1979, budget expenditures on capital construction were reduced by 19% in 1980 and 22% in 1981. Moreover, the mode of deficit financing in 1981 was less inflationary than in previous years. Because of the Government's concern about open inflation, many of the increases in agricultural procurement prices have not been passed on to urban consumers but instead were financed by rapidly increasing subsidies (Y 8 billion in 1978 and Y 36 billion in 1981). Total domestic revenues have continued to increase but not as rapidly as NMP, due in part to the introduction of profit retention schemes and the shift in the composition of industrial output from heavy to light industry. On the other hand, extrabudgetary funds of enterprises and administrative organizations have grown rapidly and were about half as large as budgetary revenues in 1981. 20. Innovations like credit financing of investment and profit reten- tion schemes mean that monetary policy potentially has a more important role to play in China. After rapid increases in 1979 and 1980, the growth rate of the money supply was reduced in 1981 as a result of strict control over currency expansion. The velocity of circulation of money fell in 1979-81, but this was to be expected during a time of major institutional and struc- tural changes, including the increased monetization of rural economic acti- vities and the proliferation of collective and individual commercial and service undertakings. Bank branches have been given more autonomy to mobilize and allocate resources, and efforts have been made to influence economic decision making at the micro level by increasing and rationalizing interest rates. The increase in interest rates is expected to attract savings and induce enterprises to economize on fixed investment and working capital. However, the allocation of investment resources in China continues to be made primarily administratively, rather than by interest rates.  - 6 - 21. Balance of Payments. The Government's current policy includes continued emphasis on foreign trade and on making more use of imported technology. The performance of merchandise exports has continued to be very impressive, with the real growth rate averaging about 20% p.a. during 1978-81, due mainly to rapid growth in manufactured exports. However, merchandise imports, which also grew rapidly in 1979 and 1980, fell by 4.5% in value and 8.6% in volume in 1981 due to the stabilization program, especially the sharp cutback in the investment program. As a result, the $2.4 billion deficit of 1980 was converted into a $2.0 billion current account surplus in 1981. 22. The strong export performance is due in part to institutional and policy changes. In January 1981, an internal settlement rate of Y 2.8 per US dollar (the official exchange rate was Y 1.6 per US dollar) was introduced for all trade. The central government has actively encouraged decentralization of foreign trade decision making and has introduced material incentives, primarily in the form of foreign exchange retention schemes. It appears, however, that some provinces and organizations may have striven to increase exports even if this meant undercutting exports of other provinces or units or exacerbating domestic supply shortages; greater access to foreign exchange has also stimulated a faster growth of imports than would have been permitted under a more centralized system. In the absence of price and other reforms, the Government has felt obliged to deal with these problems by introducing export quotas for 78 commodities, levying export duties on other commodities, restricting some consumer goods imports, and raising import tariffs on others. 23. The Government's approach to foreign borrowing has remained very calutious. In 1980 and 1981 it cut back sharply on interbank borrowing and in 1981 took advantage of the unexpectedly strong current account position to repay commercial bank and other loans. In 1981, China's debt service ratio was 7.8%. Gross international reserves at the end of 1981 were sufficient to cover about five months of 1981 imports of goods and services. 24. Investment. In 1978, China's rate of investment was much higher than the average for other low-income or middle-income countries; moreover, the overall efficiency of investment was low and getting worse due to shortages of necessary materials and supplies, major transport constraints, and inappropriate and inefficient procedures for selecting and implementing investment projects. In these circumstances, the Government decided to cut back on the investment rate while introducing measures to improve investment efficiency and thereby protect future growth potential. The reduction in the investment rate has been achieved in spite of difficulties in cutting many investment components: the share of inventory accumulation in total investment has remained high; investment financed from retained earnings or local resources has grown sharply as a proportion of the total; and there has been rapid growth of nonproductive, particularly housing, investment. As a result, most of the cutbacks have had to be in large centrally financed projects, which will probably have an adverse effect on future growth.  -7- Growth and Income Developments 25. The overall rate of economic growth in recent years has been impressive, averaging 5.6% p.a. between 1978 and 1981 - a much higher rate than in the first half of the 1970s. In 1981, however, the rate dropped to 3.0% as a result of the stabilization program. 26. The combination of structural adjustment, economic growth and a low population growth rate (1.3% p.a. between 1978 and 1981) has led to rapid increases in the general standard of living in recent years. In urban areas, general wage increases and higher bonuses have more than offset the increase in the cost of living index, and real per capita incomes increased by 4.9% p.a. between 1978 and 1981. The number of urban unemployed has been reduced dramatically and, with government encouragement, urban self-employment has grown rapidly. 27. Even more impressive, however, has been the increase in rural incomes. Information from several sources suggests that at current prices, per capita rural incomes increased by 16-18% p.a. between 1978 and 1981; and when account is taken of price changes, the increase in real per capita incomes has been 10-12% p.a. About 60% of this dramatic increase is due to increased rural production and the remainder to shifts in the terms of trade in favor of rural producers. While areas and households that were already relatively well off may have benefited the most, many poor areas and households have also enjoyed substantial income improvements. Sectoral Strategies 28.' The rapid development of agriculture has been essential because 800 million people depend on agriculture for their livelihood; moreover, rising incomes elsewhere in the economy and the requirements of light indus- try have placed new demands on agriculture. Between 1978 and 1981, gross agricultural output at constant prices increased by 5.7% p.a.; despite poor weather in 1980 the growth rate was 2.7%, and in 1981 when China was again affected by severe droughts and floods, the growth rate rose to 5.7%. There has been a substantial diversification of the sector, with production of cash crops expanding rapidly and large increases in livestock and sideline production. Grain production has also increased since 1978 despite a decline in the grain area, but domestic grain requirements have increased more rapidly due to higher incomes and fast-growing requirements for live- stock feed. As a result, foodgrain imports have been expanding steadily. 29. The strong performance of agriculture in recent years is largely due to the combination of improved terms of trade for agriculture and other policy interventions and institutional changes that encourage local and institutional specialization according to comparative advantage. Of parti- cular importance have been the changes in the organization and management of rural collectives (para. 15).  - 8 - 30. Adjustment policy in industry has included increased emphasis on light and consumer goods industry rather than heavy industry (para. 16); stress on modernization of existing enterprises, particularly through importation of new technology; and energy conservation. Promotion of manufactured exports has also been necessary to pay for imported technology. These exports have been growing rapidly but still account for only 4% of gross industrial output, and imported equipment as a share of capital construction in industry has risen from 3% in 1978 to 26% in 1981. 31. Reforms in industry have focussed the attention of organizations and individuals on profits and efficiency (para. 15). Innovations have included profit retention schemes, piece rate wages, and bonuses, which for workers in state enterprises now average more than one month's pay. New types of industrial organization include foreign partnerships, joint ventures between urban state industrial enterprises and rural communes, and industrial corporations with authority over a group of enterprises producing similar output. Charges on the fixed assets and working capital of state enterprises are intended to encourage them to use capital more productively. However, these reform measures have not yet been backed by price reform and enterprises still do not bear full responsibility for losses. 32. Since 1979 when energy conservation became a major policy issue, energy consumption has stagnated or fallen while NMP has grown by 10%. As a result, China has remained a net exporter of energy despite declines in energy production in 1980 and 1981. The fall in energy use per unit of output has been due in part to the changing structure of industry: heavy industry consumes about four times as much energy per unit of output as light industry, and heavy industry output grew very slowly in 1980 and declined in 1981. The Government has been stressing the importance of improved efficiency and energy savings within sectors and has been pursuing energy conservation through rationing and other administrative measures. 33. Market-oriented reforms and greater regional specialization call for expanded and more efficient domestic transportation and commercial systems. In the commercial sector, the real value of sales has risen rapidly and the role of markets in the allocation of resources has expanded. Collective and individual commercial activities have proliferated, filling gaps left by, and forcing improvements in, the state commercial system. Growth in the volume of freight transport slowed greatly in 1980, and there was virtual stagnation in 1981, indicating that bottlenecks in this sector remain severe. Development Issues and Prospects 34. Although changes in the system of economic management as well as in the structure of the economy will undoubtedly continue, a difficult period of transition lies ahead. After spending three decades pursuing a particular set of goals with particular instruments, the country will inevitably find it hard to switch tc a path that is not only new for China, but also one that has been successfully followed by few other countries.  - 9 - Reform of the economic system will be especially difficult. The measures described above, though diverse in form, have a unity of purpose, namely to make the economy more efficient in the sense of both cutting costs and matching supply more closely with demand. But the attempt to reform parts of the economic system without a coherent overall program has also had some adverse consequences. Bureaucratic reform is under way but will likely be a lengthy and difficult process. 35. Constraints. China's efforts to improve its people's living standards will, in the coming decade, be subject to a tight set of interlocking constraints. Some of these are of long standing; they reflect the country's fundamental resource constraints, especially the shortage of agricultural land and the difficulty of increasing yields further. Others are of more recent origin, however, and largely reflect the price that the country must sti'll pay for more than a decade of waste and economic mismanagement starting in the mid-1960s. They include shortages of trained manpower, energy, and financial resources for new investment. 36. The food problem facing China in the 1980s is likely to be similar to that in the past, but it may be exacerbated by growing demand for feed- grain to support increased meat production. Grain output will continue to be constrained because of the extreme shortage of new cultivable land and the limited opportunities that remain for increasing yields. Although sub- stantial gains will probably be possible in the short and medium term through improved policies and management, the foodgrain balance will remain precarious and substantial food imports will have to be maintained. Main- taining a low population growth rate is also crucial. 37. In both rural and urban areas, the country's effort to modernize the economy will be seriously constrained by the lack of trained manpower. Despite considerable progress in basic education, technical and higher education has been neglected and was severely disrupted during the Cultural Revolution. Current enrollment in both universities and technical and voca- tional schools is one quarter of the average for other developing countries. Many teachers in advanced education are underqualified, curricula are outdated, and scientific equipment is scarce. 38. The outlook for energy production has recently deteriorated. Oil output peaked in 1979 at 106 million tons, dropped to 101 million tons in 1981 and is likely at best to remain at about 95-100 million tons a year during the 1980s. Coal output (which contributes about 70% of total commer- cial energy) declined to 620 million tons in 1980 and remained at the same level in 1981. It is unlikely to exceed 700 million tons in 1985 and about 850 million tons in 1990, even if high priority is given to this subsector. Growth of total primary energy production in the 1980s will thus not exceed 3% per year - less than one quarter of the 1952-80 growth rate. 39. The prospects for economic growth in the 1980s will thus depend critically on reducing energy use per unit of output. In particular, the  - 10 - availability of oil for use as an industrial raw material will fundamentally influence growth prospects. The potential for energy savings is very large, as China is now among the world's most inefficient users of energy. In addition to substantial new investment, however, conservation will require fundamental reform of energy allocation procedures, incentives for reduced consumption and changes in relative prices, and indeed, a total change of thinking at the enterprise level on the way energy is used - all of which will be difficult and slow to implement. 40. The energy sector is already absorbing over 40% of industrial investment and very large capital outlays would be required in the next several years to accelerate the growth of energy output in the second half of the 1980s. Competing claims for investments in other sectors are consid- erable, especially those for badly needed urban housing and for relieving transport bottlenecks. The attempt to modernize the huge industrial sector built upon outdated technology will also require enormous investment out- lays. Thus, notwithstanding the Government's effort to improve the alloca- tion and use of its financial resources, a high level of investment will need to be maintained in the 1980s to build a sound foundation for sustained growth over the longer term. However, investments in key sectors like energy and transport are presently caught between the Government's desire to reduce the saving rate (in order to accelerate the growth of consumption) and its loss of control over parts of the investment program as a result of decentralization and reform. 41. The Government's attempt to foster a much more open economy than in the past may be impeded by a shortage of foreign exchange. Domestic bottlenecks in the supply of certain agricultural and industrial materials, together with the need to purchase foreign technology (in the form of software as well as hardware), will make continued expansion of imports essential for growth and modernization. The rate of growth of export earnings depends critically on two uncertain parameters, namely the rate at which nontraditional manufactured exports can be increased and the degree of success in energy conservation. Even if energy conservation is fairly successful (growth in energy use at, say, three fourths of the GDP growth rate), oil exports will almost certainly disappear by the second half of the 1980s, and imports of energy may well be required, at least until new domestic production capacity is established. If the external economic environment improves, manufactured exports could grow, from a relatively small base, by 9-10% a year in constant prices during the decade. Nonetheless, declining energy exports will cause total foreign exchange earnings to grow by no more than about 2% a year in the first half of the 1980s and 8% a year in the second half. Thus the strong balance of payments situation in 1981, brought about mainly by restrictive measures (cutbacks in investment), masks serious medium-term constraints. 42. China's access to concessionary capital is limited: apart from what it might obtain from the Bank Group, concessionary capital is only likely to come from Japan and a few other bilateral donors and will likely  - 11 - average only $500-600 million a year during the 1980s. Quantitative projec- tions show that if China is to maintain reasonable growth and modernization and keep its debt service payments at a manageable level, then it needs to obtain the necessary foreign capital at an average interest rate substan- tially below the market rate. China also has a strong claim to concession- ary lending because it is still one of the poorer countries in the world. 43.T For China, as for many other developing countries, the 1980s will be a difficult decade, and one whose problems will be compounded by errors made in the 1960s and early 1970s. But looking further ahead, China's econ- omic prospects appear favorable. By 1990, most new entrants to the labor force will have received some secondary education, and the skilled manpower deficit will have been reduced. Further progress will have been made in tapping China-s large energy potential, and in using it more efficiently. Continuation of recent manufactured export trends should generate sufficient foreign exchange for the Government to have more confidence in using foreign capital and be less concerned about its terms. If the country's immense wealth of human talent, effort and discipline can be combined with policies that increase the efficiency of resource use, China will be able, within a generation or so, to achieve a substantial increase in the living standards of its people. Whether this potential can be realized, however, will depend crucially on the success of the Government's program of reform and adjustment in the 1980s. PART 1I - BANK GROUP OPERATIONS IN CH-INA 44.' In view of the particular circumstances of China and the economic transition now underway, the Bank's relationship with China should have several broad objectives. Firstly, the Bank should offer China its consid- erable development experience and institutional knowledge. Moreover, working with the Bank represents one means for China to re-establish its position in the world community after its lengthy isolation. Secondly, the Bank should assist China in removing the major constraints on development - the shortages of energy, transport infrastructure, skilled manpower and modern technology. Even more important, the Bank should help the authorities to use these and other inputs more efficiently, by improving project analysis and investment control, as well as overall economic management and planning. Finally, the Bank should help the Government identify ways of reducing China's remaining poverty. Since the Government has been successful in meeting the basic needs of most of its people, these efforts should concentrate on increasing incomes in the poorest rural areas. 45.' Since China's change of representation in the Bank Group in May 1980, six projects involving lending of about $690 million have been approved. Two have been in education (University Development and Agricultural Education and Research), one in agriculture (North China Plain Agriculture), one in transport (Three Ports), one in industrial development financing (Industrial Credit), and one in energy (Daqing Oilfield Gaotaizi  - 12 - Reservoir Development). Annex II contains a summary statement on these loans and credits, as well as notes on the execution of ongoing projects as of September 30, 1982. Economic and Sector Work 46. The Bank's economic and sector work was initially designed to provide a basis of knowledge on the development and functioning of the Chinese economy. This work resulted in completion of a nine-volume introductory economic report in June 1981. A follow-up country economic memorandum analyzing developments over the past two years will be distributed to the Executive Directors shortly. In addition, the Bank is undertaking studies in several areas important for our understanding of the Chinese system, including rural finance and urban planning and management in Shanghai. 47. Other economic work is designed to assist China in its present effort to promote efficient use of investment resources, and more generally to introduce new methods of economic management and planning. As prepara- tion for the Industrial Credit Project, an appraisal manual has been developed with Bank assistance by the new financial intermediary, the China Investment Bank (CIB). The Bank is now helping to develop a similar manual for the Agricultural Bank of China (ABC). A program of economic research on China's development problems, aimed at the application of advanced analytical techniques, has begun in collaboration with Chinese economic research institutions in the areas of enterprise incentives and analysis of structural change. 48. Sector studies will help inter alia to identify and prepare future investments. Some have been included in Bank-financed projects, e.g., agricultural development in Shandong province under the North China Plain Agriculture Project, containerization under the Three Ports Project, and agricultural manpower and research under the Agricultural Education and Research Project. A health sector review is reporting on rural health care delivery systems and health manpower development. Near-Term Lending 49. Work has begun on a range of projects, with emphasis on improved management and efficiency as well as on training. Several are in the key sectors of energy and transportation. In energy, the Bank's efforts will help to increase the supply of fuel and power. Petroleum projects would be onshore and emphasize training, field management and studies. The first project at the country's largest and most productive oilfield, Daqing, will help develop new reserves and introduce enhanced recovery techniques. The proposed project, at the Zhongyuan oilfield, would include both development and exploration. Other operations are proposed to support hydropower generation in southwest China and the development and management of large underground coal mines in Shanxi province and an open-pit mine in Nei Monggol. Support of transportation began through the modernization of container and coal handling facilities at China's three major ports. The Bank plans to  - 13 - finance further projects in ports and railways where additional capacity is needed to transport coal from mines in Shanxi to the east coast. 50. In view of China's shortages of manpower with higher or technical education, the Bank will continue its support of education, notably the TV university, a pilot program of basic colleges, another university development project, and a second agricultural education project. Support of agriculture will also continue through projects to develop presently uncultivated land in Heilongjiang province for grain production, develop rubber cultivation in Guangdong province, provide rural credit in two provinces with emphasis on improved project appraisal and institution-building, provide further assistance in agricultural research, and assist the government in a forestry project. Besides the Industrial Credit Project, further loans would be made to the China Investment Bank for modernization of light industries and export projects. The Bank may also become involved in technical assistance and investment in support of energy conservation in industry. In health, a project would help improve rural health care services and medical education. Bank assistance is also planned for a water supply project. PART III - THE OIL AND GAS SUBSECTOR Introduction 51.' China is the world's fourth largest producer of commercial energy, and its achievements in developing energy resources over the last three decades have been impressive. Production of coal has increased from some 60 million tons in 1952 to 620 million tons in 1981. During the same period, power generating capacity increased from about 2,000 MW to 67,000 MW. In 1981, about 310 billion kWh of power was generated, of which about 80% was thermal and 20% hydro. Oil production increased from about 0.1 million tons in 1950 to 106 million tons in 1979; about 20% of oil output is currently exported, generating roughly $4.75 billion, or about 27% of China's total foreign exchange earnings. This rapid development has made China the world's third largest consumer of commercial energy, behind the USA and the Soviet Union, but ahead of Japan. However, consumption per capita is only about 650 kg of coal equivalent (kgce) p.a., which is slightly above the average for developing countries (620 kgce). 52. These positive developments notwithstanding, the future prospects remain uncertain. While China is likely to remain self-sufficient in energy throughout the 1980s, it probably cannot sustain the growth rate achieved over the last two decades. The major oilfields, which together account for about 90% of China's oil production, have peaked and entered a declining phase; no new discoveries have been made of a magnitude to offset this decline. In 1981, oil production fell marginally to 101 million tons. Rapid expansion of the coal industry faces intractable problems in terms of investment, location and transportation. The remoteness of potentially major hydro sites from centers of consumption and the long gestation period of hydro projects preclude any sizable increase in hydropower's share of energy production in the 1980s.  - 14 - Resource Endowment 53. China is well endowed with primary energy and has abundant resour- ces in terms of coal, hydrocarbons, oil shale and hydropower potential. Coal, China's traditional source of energy, meets some 70% of its demand for commercial energy. Coal and lignite reserves are concentrated largely in the north and northeast, which represent about 70% of the total recoverable reserves in China (600 billion tons). While future plans call for increasing coal production significantly by such measures as opening new mines and increased mechanization, transport (essentially railroad capacity) appears to be the single most important constraint to achieving this objective. Reserves of oil shale in China are estimated unofficially at 400 billion tons. Current production of shale oil from the Liaoning and Guangdong mines is about 300,000 tons. China's hydropower potential, among the largest in the world, is estimated at 1,900 billion kWh per year (present hydrogeneration is about 60 billion kWh). While geothermal phenomena are abundant in the mountainous southwestern part of the country, geothermal energy has not been developed to a significant extent in China and its role is likely to remain limited. As in other developing economies, non-commercial fuels such as crop residue and animal waste are used extensively, especially in rural areas. China pioneered and is now the leading producer of biogas. 54. Oil and Gas. Unofficial estimates of proven oil reserves range from 1.8 to 2.5 billion tons, while possible and probable reserves are currently estimated at 5-10 billion tons onshore and 4-8 billion tons offshore. Recoverable reserves of non-associated gas are currently estimated at 80 bil- lion cu m, about 90% of which is located in Sichuan Province. In addition, recoverable reserves of associated gas are estimated at about 50 billion cu m. Total recoverable gas reserves (130 billion cu m) are equivalent to over 110 million tons of oil. However, gas reserves may not have been adequately explored yet, and the ultimate recoverable reserves could be very much higher. 55. Over the last two decades, China has made considerable progress in exploiting these reserves. Although oil was discovered in China in 1897, annual oil production before 1950 was no more than 120,000 tons, of which about 50,000 tons was from oil shale. During the 1950s, exploration in northwestern China resulted in some small discoveries. After 1957, explora- tion began in northeastern and northern China and led to the discovery, in 1959, of China's largest oilfield in Daqing. This was followed by discoveries in Shengli and Dagang in 1964. In 1965, petroleum production reached 11.3 million tons, making China self-sufficient in oil. During the 1960s, the increase in oil production was relatively moderate; the major spurt came in the 1970s, with production increasing from 30 million tons in 1970 to 106 mil- lion tons in 1979. This increase came largely through development of the Daqing oilfield and, to a lesser extent, of the Shengli and Renqiu oilfields. The average annual investment in the oil and gas subsector over the last five years has been about Y 2.8 billion (representing about 7% of China's total annual capital construction investment).  - 15 - ExplorationPoicy~ 56. Onshore Areas. Until the late 1970s, China was remarkably successful in implementing a policy of total self-reliance. However, the rate of discovery has recently been declining and, faced with the prospect of falling oil production, China has modified its exploration policy. It now proposes to undertake detailed seismic surveys around existing oilfields and to shift the focus of exploration from the north and northeast to the northwest, where an estimated 50% of China's onshore recoverable reserves are located. However, the basins in northwestern China are remote and have extremely hostile weather and difficult drilling conditions; developing this area would therefore require a quantum jump both in investment and technology. China has secured limited assistance from foreign companies in undertaking seismic surveys and exploratory drilling in particularly difficult areas and is considering inviting foreign companies to participate in exploration and production, especially in these difficult areas. 57. Offshore Areas. China's seismic work and development of offshore structures in the Bohai area prior to 1979 made the limitations of its offshore technology apparent. Thereafter, in a major policy departure, China sought the active cooperation of foreign oil companies in these areas. Forty-eight foreign oil companies, from 12 countries, were invited to undertake geophysical and seismic work in over 420,000 sq km of China's offshore sedimentary basins. On the basis of these surveys, six prospective oil-bearing basins have been identified. 58. In early 1982, the Government promulgated regulations that would enable foreign oil companies to participate in exploring China's offshore basins. Further, the China National Offshore Oil Corporation (CNOOC) was created to invite and evaluate bids and enter into offshore petroleum agreements with foreign oil companies. The new regulations allow petroleum contracts that make foreign oil companies bear the cost of all exploration investment and the accompanying risks. Once a commercial oil and/or gas field is discovered, both the foreign contractor and CNOOC will invest jointly in its development. Initially the foreign contractor will be responsible for developing and operating the field, but CNOOC may take over as the field's operator whenever it deems fit. The rights of the foreign contracting party to recover its investment and expenses and to receive remuneration for the petroleum produced would be specified in the contract. The first round of bidding, for an area of about 150,000 sq km, has already taken place, and considerable interest was evinced by foreign oil companies. Current and Anticipated Level of Oil Production 59. Over the past year, oil output has fallen by about 3% and, more important, production from the major oilfields has peaked. With no major discovery to offset this fall, China will need to rely increasingly on infill drilling, enhanced oil recovery methods, exploring and developing peripheral reservoirs, and rapidly developing small discoveries. The Ministry of Petroleum Industry (MOPI) has initiated such actions, and efforts are under  - 16 - way to expand several oil fields. These actions may allow China to tempora- rily stem the decline and maintain annual oil output in the 95-100 million ton range up to 1985. However, beyond that, oil output from the major fields would be declining rapidly. Furthermore, while prospects for offshore discoveries are very good, oil from the offshore areas is unlikely to augment China's oil production significantly before 1990.- Similarly, even if major discoveries are made in the northwest, intractable logistics make field development and oil transportation an extremely complex and time-consuming proposition. Thus, between 1985 and 1990, oil production may fall to 90 million tons p.a. Prospects beyond 1990 depend on the success of current initiatives in developing the northwestern region and offshore structures. Consumption Pattern 60.' Rising oil production has increased the role of hydrocarbons in the Chinese economy (replacing coal, the traditional source of commercial energy), with the relative share of oil and natural gas increasing from about 2% in 1965 to over 20% in 1981. The major consumers of oil are the industry and commercial sectors (43%), followed by transport (25%) and power (20%). An unusual and wasteful feature of the consumption pattern is the direct use of 8 million tons of crude as fuel oil. This is partly attributable to the nonavailability of refining facilities close to the producing field, transportation constraints and the poor quality of crude. 61. Over the last 16 years, consumption of oil has been growing at an annual rate of about 13%. However, faced with falling oil and gas production, efforts are being made to decelerate this growth (consumption in 1981 was reported to have been about 82 million tons against the peak of 90 million tons in 1978). However, a further reduction of consumption may not be possible without adversely affecting the country's rate of economic growth. Substitution of coal for oil would require substantial investment in terms of transportation and extensive retrofitting. Similarly, once a production mode has been determined, the energy efficiency factor is locked in and major improvement in energy use cannot be secured without discarding the investment. Prices 62.' A comparison between petroleum product prices in China and international prices (Annex IV) reveals that the average price of the reconstituted barrel works out to be Y 55 ($29), which is in line with the international price. The State Pricing Bureau is considering increasing the price of crude oil sold to refineries from Y 100 (and in some cases Y 130) per ton to Y 175 per ton, but this increase may not be reflected in end prices. The refineries sell petroleum products to the Ministry of Commerce, which is responsible for marketing the products. There is a price differential at every point, with the oilfields, the refineries and the Ministry of Commerce acting as profit centers for the State. In order to encourage energy conservation and fuel substitution (oil to coal), the Government began in September 1982 to charge an excise tax of Y 70 per ton  - 17 - of crude and heavy oil burned. In effect, the retail prices of petroleum fuel to end consumers would amount to Y 170 and Y 155 per ton of crude and fuel oil respectively. The Government has also had some success in reducing energy consumption and encouraging substitution of fuels through energy targets for individual enterprises and other administrative means. In the present Chinese system, administrative measures would still have more influence than prices on energy use and production, but as decision making is decentralized, it will become increasingly important to ensure that price incentives reinforce rather than contradict administrative regulations. However, the Government believes that a solution to the underpricing of some important energy products can only be achieved over an extended period. Demand and Supply of Natural Gas 63. Gas production declined by about 13% between 1980 and 1981, when it amounted to 12.5 billion cu m, composed of about equal amounts of associated and non-associated gas. Non-associated gas fields in Sichuan Province, which is the major producing area and has been active for over 100 years, have now entered a declining phase. Similarly, with the decline of oil production in the major oilfields, production of associated gas would also decline. A fall in gas production would inevitably stimulate demand for liquid hydrocarbons, which makes it necessary to explore and develop non-associated gas prospects. About 30% of natural gas is used for fertilizers, about 10% for petrochemicals and synthetic fibers, and 60% as fuel, of which about 12% is used for thermal power plants. Institutions 64.' The Ministry of Petroleum Industry (MOPI) generally oversees all activities in the oil and natural gas subsector, including policy making and overall planning, exploration, production, distribution, transportation, research/design and training. Created as a bureau in the Ministry of Fuel Industry in 1949, it became a full ministry in 1955 and oversaw the opening of the Daqing oilfield in 1959 as well as subsequent discoveries. The petroleum industry has been in a state of continuous change since the 1970s; this has blurred the lines of responsibility and created considerable overlap of function in exploration and refining between MOPI, the Ministry of Geology and the Ministry of Chemical Industry. Some of these problems may be resolved as the Government s program for reorganization is implemented. 65. The Zhongyuan Petroleum Exploration Bureau (ZPEB) is responsible for the development of the Zhongyuan oilfield. Zhongyuan oilfield operations came under the Shengli oilfield management until September 1981, when a separate oilfield administration for the basin was established, reporting directly to MOPI in Beijing. In April 1982, the area of operation for this entity was increased from 5,300 sq km to 20,000 sq km and its name was changed from Dongpu Oilfield Administration to Zhongyuan Petroleum Explora- tion Bureau. ZPEB's president is assisted by eight vice-presidents in charge of production, drilling, capital construction, administration, geology, research and design, personnel and logistics.  - 18 - 66.- ZPEB's functions are largely managerial. All tasks relating to exploration are currently undertaken directly by ZPEB.' Specialized companies, are responsible for various oilfield activities such as drilling, surface construction, production, maintenance, design and research. These companies, which are sub-units of ZPEB rather than separate legal entities, are divided into brigades and teams according to the standard Chinese organizational pattern. The brigade leader and his staff (usually 10-15 specialists) are professionals with managerial responsibilities. A team typically consists of 50-100 skilled workers, one of whom is designated the team leader. 67.' Production and net income targets are set annually by MOPI. These targets in turn form the basis for ZPEB's budget for operation, working capital and investment on a one-year basis. ZPEB enjoys considerable opera- tional autonomy, but less financial autonomy. 68. ZPEB's personnel are hardworking, disciplined and competent. Its managers are aware of existing technical and organizational problems, both in research and production. Technical deficiencies arise from outdated equipment, obsolescent technology and a general lack of familiarity with deep drilling and concomitant problems. The main organizational problem is that, under the present system, a discernable premium is placed on the achievement of physical targets but not on quality control. Taking these limitations into account, the project emphasizes technology transfer and institution building. Overall, there is little doubt that ZPEB will be able to carry out this project with competence and speed. Sector Issues and the Role of the Bank 69.' From available evidence it is clear that China at least in the mediumrterm faces the prospect of declining oil production. Sector strategy over the longer-term would require China taking steps to increase its exploratory efforts, especially in the offshore and the northwest onshore areas, undertaking fuller development of coal and hydro potential and making structural adjustment in industry to improve the efficiency of energy use and permit the replacement of oil by coal. Critical as these measures are, they do not represent a medium-term option. Coal mines would have to be modernized and the transportation constraint resolved; while prospects of offshore oil discoveries are rated as high, oil in significant amounts would be secured only after an extensive period of exploration and development; similarly projects for developing hydro potential have a long lead time. In fact investment in these areas is unlikely to yield significant results during the 1980s. 70.' China is now facing problems typical to all oil producers, that is, being required to undertake exploration and production under increasingly difficult and complex conditions. Its capabilities in this regard are limited. Because of an extended period of technological isolation during the development of its oil industry, China has not been successful in discovering  - 19 - petroleum in complex geological environments nor has it developed the techno- logical capability to increase the recovery of oil from existing fields. Much of the equipment used in the fields such as Daqing is already obsolescent; field practices such as drilling, cementing, casing and formation logging are outdated and require an in-depth evaluation. China needs to upgrade the quality of its seismic work, data processing, reservoir engineering, and techniques relating to enhanced oil recovery. In addition it needs to import modern oilfield equipment and technology related thereto and train oilfield staff in these new methods. The Government is seeking the assistance of foreign oil companies in exploring and developing its offshore areas. This, in addition to developing its offshore structures, would, over a period of time, result in the transfer of offshore technology relating to seismic work, exploration, field development, etc. In the onshore area, especially in regard to the discovered and developed oilfieds, the Government expects the Bank to act as a conduit for similar transfer of technology. 71. Bank assistance would supplement these efforts to consolidate China's oil production capabilities and help stem the anticipated decline in oil production. Initially Bank lending in the petroleum sector will have three basic objectives: first, to develop known hydrocarbon bearing structures in order to partially offset the anticipated decline, second, to provide a vehicle for introducing modern technology to the Chinese oil industry, and third, to train and upgrade the skills of its personnel in current oilfield practices. In the medium term the Bank's involvement in the sector would be aimed at developing rapidly the small oilfields which have already been discovered, undertaking seismic surveys in the vicinity of existing producing fields, and identifying and initiating enhanced oil recovery programs. The Bank's role in the longer term would be determined taking account of the role of other sources of finance and expertise in Chinese conditions. 72. The proposed project would address itself directly to these issues by helping to finance the import of modern equipment and technology. During project preparation, substantial staff input was required to identify areas where technology should be upgraded. Further work will be needed in preparing terms of reference for technical studies, selection of consultants, supervi- sion of studies, evaluation of findings, and finalizing and implementing a plan of action based on these results. Another important objective under the proposed project is the training of Chinese technical staff and strengthening of their capabilities. Engineers and technicians would be trained in the use of new equipment and in modern petroleum engineering practices; a training center would be established and operational laboratories appropriately equipped to supplement the operational work in the field. The project would also assist in shaping the future investment program by helping finance important pre-investment studies. PART IV - THE PROJECT 73. The project was identified in Sepember 1981 and appraised in September 1982. Negotiations were held in Washington from February 28 to March 4, 1983. The Government of China was represented by Mr. Ge Fucun,  - 20 - Director, External Finance Department of the Ministry of Finance, and ZPEB by its President, Mr. Hu Xiaoyun. A Staff Appraisal Report (No. 4183-CHA, dated March 9, 1983) is being distributed separately to the Executive Directors. Supplementary data are provided in Annex III. Project Area 74. The Zhongyuan basin lies about 500 km south of Beijing in a densely populated agricultural area. It covers an area of 5,300 sq km, most of which lies in Henan Province and a small part in Shandong Province. Seismic surveys of the basin started in 1974, and in 1977 the first commercial oil discovery was made. Since then 17 structures have been shown to be hydrocarbon-bearing. Four of these, Wenmingzhai, Weicheng, Pucheng and Central Wenliu, have been brought into production with a current annual yield of 2.10 million tons of oil and 291 million cu m of associated gas. In addition, four other fields, including South and East Wenliu, have been determined to contain sufficient quantities of hydrocarbons to be of commercial value. Estimates of the reser- ves in these fields are 200 million tons of oil-in-place, 19.7 billion cu m of associated gas and 15.6 billion cu m of free gas. Project Objectives 75. The immediate objectives of the proposed project are to: develop the oil production potential of the South Wenliu field; explore and evaluate the oil production potential of the East Wenliu discovery, which is estimated to have about 80-100 million tons of oil-in-place; and recover LPG from associated gas, which in 1982 was flared at the rate of 0.45 million cu m per day. Important elements in developing the South Wenliu field will be the optimization of oil recovery and production rates through appropriate secondary recovery techniques and improved completion practices. For the longer-term, a more important objective is to continue the process of introducing modern technology and methods into the Chinese petroleum industry a process initiated under the Bank's first petroleum project in China. To this end, the proposed project provides through Bank financing imported modern oilfield equipment, computer and training centers, laboratories and technical assistance. Project Description 76. The proposed project would comprise the following components: (1) 3-D Seismic Survey - acquisition, processing and interpretation of a three-dimensional seismic survey over an area of 100 sq km covering the South Wenliu and part of the East Wenliu structures. (2) Development of South Wenliu Oilfield - drilling of 204 production/injection wells and the construction of: (i) surface oil producing facilities; (ii) water/gas injection facilities; (iii) associated gas treating and compression facilities; and (iv) other utilities and infrastructure.  - 21 - (3) Exploration Drilling in East Wenliu - drilling of 13 wells, of which 6 are planned to be exploration and the balance appraisal wells. (4) Natural Gas Liquids Recovery - construction of an LPG plant and ancillary facilities to process 1.D million cu m per day of associated gas. (5) Laboratories - equipping of laboratories for special core analyses, PVT, oil, water and gas analyses, water flooding and cement and mud testing. (6) Computer Center - establishment of a computer center for storing and processing technical, administrative and financial data on the oilfield. (7) Training Center - establishment of a training center for skilled workers, to be equipped with a drilling rig, surface production facilities, simulators, visual and other teaching aids. (8) Imported Oilfield Equipment - import of drilling, logging and production equipment including blow-out preventers, downhole tools, cementing trucks, oilfield trucks, cranes, mobile work- over rigs, fracturing and blending trucks, well logging and production logging units. (9) Technical Assistance - carrying out studies and technical assistance in connection with: (i) design, erection and commissioning of an LPG plant; (ii) drilling and completion practices; (iii) reservoir engineering with special focus on secondary recovery techniques; (iv) design of curricula for training and teaching methods; (v) management information system; and (vi) oilfield safety practices. (10) Pre-investment Studies - undertaking conceptual and feasibility studies in connection with other projects identified in the petroleum sector for possible Bank financing. Project Implementation 77. All project components are scheduled to be completed by end-1985. South Wenliu development drilling and the installation of surface production and operating facilities should be completed by end-1984 and exploration drilling in East Wenliu by end-1985.- The LPG plant should be completed by mid-1985 and be commissioned and fully operational by the beginning of 1986. ZPEB will have the overall responsibility for implementing the project. Under its supervision, Production Company No. 1 (PCNI), one of ZPEB's three production companies, will implement, and subsequently operate, the South Wenliu oil development component of the project. A Gas Management Company (GMC), which was established at the end of 1982, will have similar implementation and operating responsibilities for the LPG plant. ZPEB will  - 22 - supervise the East Wenliu exploration drilling to be carried out by the Drilling Company No. 2, which was established at the end of 1982. In developing production in South Wenliu, PCN1 will essentially act as the concessionnaire of the area. It will subcontract the various implementation tasks to other ZPEB subunit companies. The three subunits playing major subcontracting roles will be: (a) the Drilling Company No. 1 (which in turn will subcontract such services as well logging, testing and completion to specialized well service companies of ZPEB) for the production and injection wells; (b) the Research and Design Institute for design and engineering of all surface installations and facilities; and (c) the Surface Construction Company for the construction of these surface installations and facilities. The LPG plant will be procured from a foreign supplier on a turnkey basis. Expatriate consultants financed by the Bank would assist in the various implementation activities, including construction supervision, commissioning and initial operation of the LPG plant. The Geophysical Services Inc. (GSI) of the United States has been contracted to carry out the 3-D seismic survey described in para. 76. Assurances have been obtained that ZPEB would establish by September 30, 1983: (a) a special Project Unit in PCN1, headed by a Deputy Director, to supervise and coordinate the development and exploration activities in South and East Wenliu; and (b) a similar Project Unit in GMC to be responsible for the LPG plant project component (draft Project Agreement, Section 2.14). 78. ZPEB is encountering considerable difficulties on account of hostile drilling conditions and inadequate equipment and technique. Pay zones are deep (3,500 to 4,000 m), and deeper wells are being planned to explore horizons up to 6,500 meters; high pressure and temperature are continuously encountered. These and other factors have resulted in problems such as sluggish drilling, corrosion, collapsed casing, hole enlargement and difficulties with cement bond. ZPEB would need to import not only equipment capable of drilling to these depths, but also techniques suited for the specific drilling conditions in Zhongyuan. This issue was reviewed with ZPEB and MOPI. ZPEB has agreed to appoint qualified consultants to study the various drilling, mud and completion problems, with a view to evolving a package of field practices which would be consistent with the needs of the Zhongyuan basin and which would help to reduce costs through savings in material and reduction of drilling time (draft Project Agreement, Section 2.09). Notwithstanding the drilling difficulties noted above, ZPEB's drilling record is impressive and about 180 deep wells have been drilled and completed every year. 79., ZPEB and its subunit companies are staffed by dedicated and competent personnel who have the requisite experience and capabilities to carry out effectively the respective project tasks. However, because of ZPEB's short history as an independent entity and its transition from being predominantly an exploration organization to a major petroleum production organization, management capabilities, especially in the subunit companies, need to be augmented and redirected. To develop them into a smooth functioning group, attention must be given to lines of responsibilities and coordination among the various organization units. The existing structure is  - 23 - inadequate for providing pertinent technical information on a timely basis, and management is not organized to ingest and respond adequately to such information. The computer facilities proposed for the project would make it possible to design and implement a management information system that would enable ZPEB to effectively manage and monitor the oilfield activities. In this context, the costing techniques of ZPEB would need to be evaluated in order to provide its management with appropriate operational information (both technical and financial) for monitoring and control purposes. ZPEB has agreed to appoint consultants, to be financed under the proposed loan, to devise a management information system, and to review, by December 31, 1983, the consultants recommendations with the Bank for purposes of formulating a future course of action (draft Project Agreement, Section 2.08). 80. The major thrust of the project is to introduce new technology, refurbish research facilities, evaluate and improve field practices, and upgrade the level of training. Assurances have been obtained that ZPEB would pursue these aims by undertaking the following studies and actions (in addition to the studies already mentioned above), using qualified consultants and under terms of reference satisfactory to the Bank: (1) after completion of the 3-D seismic survey undertaken by consultants and drilling of the first three exploration wells, consult with the Bank and agree on objectives and location of further drilling in East Wenliu (draft Project Agreement, Section 2.13); (2) appoint qualified consultants by June 30, 1983 to assist in the development of the LPG plant (draft Project Agreement, Section 2.02); (3) undertake a study on reservoir engineering by December 31, 1983, review its findings with the Bank and agree on a plan of action (draft Project Agreement, Section 2.10); and (4) establish a training center for skilled workers and develop for the center a training curricula in consultation with the Bank by September 30, 1984 (draft Project Agreement, Section 2.12). Ecology and Safety 81.' The ZPEB drilling and production operations pose a minimal threat to the ecology. Oil and liquid wastes, which would be the major concern, are kept in closed systems and treated before disposal. Although crews are well trained, there is concern over safety measures and practices in ZPEB's well drilling operations because of the outmoded equipment and technology, especially with regard to blow-out prevention. There is also evidence that safety precautions are not enforced as strictly as they should be. This issue was discussed with ZPEB, and it was agreed that a safety expert, well versed in the safety aspects of the petroleum industry, should visit ZPEB's  - 24 - operations with a view to developing adequate safety standards and practices. Assurances have been obtained that ZPEB will appoint a consultant to carry out such a study by August 31, 1983, review with the Bank the consultant's findings and recommendations and develop and implement, in agreement with the Bank, an action plan to improve safety in its operations (draft Project Agreement, Section 2.11). Project Costs and Financing 82. Total project cost, including import duties,/l is estimated at $499.8 million equivalent, of which $157.5 million or 32% represents the foreign exchange component. A cost breakdown is given in the Loan and Project Summary at the beginning of this report. The local costs for drilling and construction are estimated on the basis of ZPEB's past experience. They are subject to tight control through budget allocations. In estimating the cost of expatriate consultant services (416 man-months), a man-month rate of $17,000 has been assumed for personnel at the home office and $20,000 (inclu- sive of travel and subsistence) for staff assigned to China. These rates are deemed to be both reasonable and in line with current charges prevailing in the petroleum industry. The cost of service contracts for highly specialized equipment is included in equipment costs. A physical contingency of 7% was applied to the cost of all imported equipment and materials and of 10% to local costs, except for the LPG plant which carries a contingency of 20%. A relatively low physical contingency rate was applied to foreign costs in view of the fact that most of the imported equipment provided under the project has already been identified. The cost estimate is based on end-1982 prices; price escalation for both local and foreign costs has been assumed at 8% for FY83, 7.5% for FY84, 7% for FY85 and 6% for FY86. No contingencies were added to the 3-D seismic survey costs since a fixed price contract for this work is already in effect. 83. The Bank loan of $100.8 million, including a front-end fee of $0.75 million, represents 64% of the foreign exchange component and 20% of the total project cost. The remainder of the foreign exchange component ($56.7 million) represents the cost of tubular goods, which would be financed by available supplier-s credits or by the Government/ZPEB. The Government/ZPEB would meet all local costs, equivalent to $342.3 million. The Government would onlend $96.8 million to ZPEB on the same terms and conditions as the Bank loan. ZPEB will bear the foreign exchange risk. Procurement and Disbursement 84.' Drilling and construction work would be carried out by force account (ZPEB's own forces); this practice has been shown to be cost effective because /1 Import duties at 15% of the cost of foreign goods, amounting to an estimated $23 million.  - 25 - ZPEB's personnel are experienced and competent to carry out the work and because salaries in China are extremely low compared with international levels. Goods and services to be financed under the proposed Bank loan and the LPG plant (which is expected to be procured on a turnkey basis and financed by the Bank loan) would be procured by international competitive bidding (ICB) in accordance with the Bank-s guidelines, except in cases where limited international tendering (LIT) and direct purchase are more appropriate. LIT would be used in procuring highly specialized goods or services available only from a limited number of suppliers, in which case bids would be requested from those qualified international suppliers known to be capable of supplying such goods and services. In view of the high proportion of proprietary and specialized equipment provided under the project, it is anticipated that disbursement under ICB and LIT would represent about 40% and 57%, respectively, of the total loan. Spares and goods or services costing less than $150,000 equivalent and not likely to attract international bidding may be procured through direct purchase up to an aggregate of $3.0 million (3% of the Bank loan). All bid packages having an estimated value of $500,000 or more would be subject to prior review by the Bank. 85. Disbursement of the Bank loan would be made against 100% of the foreign exchange cost of consultants' services and training programs; 100% of the foreign exchange cost of the LPG plant and imported equipment and materials; and 100% of the ex-factory cost of the LPG plant, equipment and materials supplied from local sources under ICB. For the LPG plant, disbursement would be made against the design, supply and commissioning, but excluding civil works and installation. The loan is expected to be fully disbursed by June 30, 1986 and the closing date would be December 31, 1986. In the absence of a standard disbursement profile applicable to this type of project, the disbursement schedule is based on a three-month time lag between the time the expenditure is expected to be incurred and the time the equivalent funds are disbursed from the loan. Financial Aspects, Accounts and Audit 86. ZPEB is operating in a centrally planned economy in which all the factors of production are tightly controlled. Fundamental differences exist between some of ZPEB's practices and those of commercially oriented petroleum enterprises. ZPEB's production is marketed as directed, and at prices fixed by the Government. ZPEB's performance is measured on the basis of product output under given budget parameters rather than profitability. It is required to transfer all net income and 50% of its annual depreciation to the Government. Its internally retained funds are derived from three sources: (a) 50% of annual depreciation; (b) provisions for overhaul; and (c) oilfield upholding provisions for field investment and maintenance. These provisions are classified as "expenses" for purposes of calculation of net income to be remitted to the Government. The Government covers the approved cost of exploration and also makes specific contributions to development. Under procedures initiated in mid-1982, ZPEB is required to borrow from the People's Construction Bank of China for a portion (about 20% over the next five years) of the government funds for development.  - 26 - 87. ZPEB-s finances were consolidated with Shengli Oilfield Adminis- tration (SOA) until the end of 1981. Since January 1, 1982, ZBEB's financial operations have been separated from SOA. Within the context of the financial arrangements in China, ZPEB-s present financial position is satisfactory and is expected to remain so in the future. Over the next five years, production growth is expected to outpace cost increase. Based on the current crude oil price of Y 130/ton, ZPEB-s operating ratio is estimated to decrease from 0.77 in 1982 to 0.61 in 1986. Taking account of the rising costs of oil extraction in the country, MOPI has recently proposed an increase in the price of crude to Y 175/ton throughout China. The major impact of the price increase on ZPEB would be to increase significantly its contributions to the Government, which by 1986 would amount to Y 422 million as compared with Y 266 million based on the existing price. ZPEB-s self-financing ratio for field investment and maintenance is projected to average 32% over the next five years. Its debt position is projected to remain low, and notwithstanding the recently instituted system of debt financing for development, its debt/equity ratio is estimated at 1/99 in 1982 and 16/84 in 1986. The results of sensitivity analysis indicate that even under less favorable conditions than those assumed in the base case, ZPEB's finances will remain satisfactory. 88.' The proposed project (estimated to cost about $500 million) represents about 40% of ZPEB's planned investment and field maintenance program over the next five years. The DCF financial rate of return of the project is estimated at 14% (in real terms) over the life of the project. 89.' Management control at ZPEB relies heavily on the budget and budgeted cost is a major yardstick against which performance is being measured. However, it appears doubtful whether the budget basis - especially in regard to quantity inputs - provides for adequate monitoring of the efficiency of operations. It is recommended that an evaluation of ZPEB-s costing techniques be undertaken by consultants as part of the study for devising a management information system (para. 79). In addition, assurances have been obtained that ZPEB will review annually with the Bank its current and projected finances, focusing in particular on the trend of production costs, budget variance analysis, and its investment and related financing arrangements (draft Project Agreement, Section 4.03). 90.' Present accounting practices in China do not provide for an external audit of such scope and depth as to meet internationally accepted standards. The Ministry of Finance is currently setting up an independent audit group within the Ministry to review and certify the statements of all state-owned enterprises. Regulations on auditing will be formulated, and the independent audit groups could in the near future be transferred to the jurisdiction of the State Council. Technical assistance is being provided for the group by several organizations, including the UN, and through bilateral aid. Assurances have been obtained that ZPEB will maintain separate project accounts (draft Project Agreement, Section 2.05) and that audited accounts of ZPEB and of the project would be submitted to the Bank within six months of the end of each fiscal year (draft Project Agreement, Section 4.02).  - 27 - Benefits and Risks 91. The major quantifiable benefits from the project are production of crude oil, gas and natural gas liquids. Production from the South Wenliu oilfield is expected to reach by 1985 a peak of 11 million tons of crude and 196 million cu m of gas p.a. Annual production from the LPG plant has been estimated at 64,000-tons of LPG and 14,000 tons of condensate. For the purpose of economic return calculation, project costs include the capital expenditures (75% of total project cost) and operating expenses directly related to the development of South Wenliu and the LPG plant. The economic rate of return for the project is estimated at 74%, and the net present value (at a 12% discount rate) amounts to $942 million over the life of the project. A sensitivity analysis indicates that in the worst-case scenario, where the value of crude oil remains at the 1984 price level throughout the life of the project, 20% cost overruns are incurred, and production is only 70% of expectations under the base case (which assumes a recovery factor of 34%), the economic rate of return would still be a satisfactory 37%. 92. In addition to the quantifiable benefits, the project would facili- tate the transfer of technology. This would be achieved through training of staff (management staff as well as engineers and technicians), import of modern and high technology equipment for oilfield and laboratories, establishment of a computer center and provision of technical assistance. This should lead to improved operational practices, and ensure that workers can handle the sophisticated equipment purchased as part of the project. Furthermore, while it is as yet difficult to quantify the benefits to be derived from the exploration of East Wenliu, the fact that hydrocarbons have already been found in certain parts of that area indicates that possibilities for the discovery of additional reserves are high and the potential returns from this investment would be significant. 93. The project carries the operational risks which are inherent in petroleum exploration and development. The inadequate safety practices in drilling operations and the absence of blow-out preventers increase the risks to human life and equipment. To attentuate these risks, the project would include a review of ZPEB-s safety practices (para. 81). In addition, the utilization of modern equipment and the provisions for expatriate technical assistance in deep drilling, the various studies and training included in the project would help reduce operational risks. 94. The project also involves geological uncertainties. The behavior of a reservoir can never be predicted with certainty and the zones of thin productive sands at South Wenliu may present production problems and reduce the effectiveness of secondary recovery methods. However, in the case of South Wenliu, data from 35 wells drilled into the structure and the results of seismic data of generally good quality make for a fairly good estimate of the size of the oil deposit. Even with lower, more conservative estimates, the project remains economically attractive. Regarding East Wenliu, oil has already been discovered by two wells in the northern portion and from a geological standpoint, there is promise that the rest of the field will be  - 28 - oil-bearing. The 3-D seismic survey and technical assistance included in the proposed project should attenuate the geological risks associated with the development of South Wenliu and exploration of East Wenliu. PART V - LEGAL INSTRUMENTS AND AUTHORITY 95. The draft Loan Agreement between the People's Republic of China and the Bank, the draft Project Agreement between the Bank and the Zhongyuan Petroleum Exploration Bureau, and the Report of the Committee provided for in Article III, Section 4 (iii), of the Articles of Agreement of the Bank are being distributed to the Executive Directors separately. 96. Special conditions of the project are listed in Section III of Annex III. Special conditions of effectiveness are that China's State Council shall have approved the Loan Agreement and the Project Agreement; and that a satisfactory subsidiary loan agreement shall have been signed between the Government and ZPEB. 97. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 98. I recommend that the Executive Directors approve the proposed loan. A. W. Clausen President Attachments March 9, 1983 Washington, D.C.  - 29 - ANNEX I Page 1 of 6 TABLE 3A CHINA, PEOPLE'S REP. OF - SOCIAL INDICATORS DATA SHEET CHINA * REFERENCE GROUPS (WEIGHTED AV5RAGES LAND AREA (THOUSAND SQ. KM.) - MOST RECENT ESTIMATE))- TOTAL 9561.0 MOST RECENT LOW INCOME MIDDLE INCOME AGRICULTURAL 3184.0 1960 /b 1970 /b ESTIMATE /b ASIA 6 PACIFIC ASIA & PACIFIC GNP PER CAPITA (US$) .. .. 290.0 261.4 890.1 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 559.9 434.9 733.6/c 448.7 701.7 POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (THOUSANDS) 672865.0 815253.0 976735.0 URBAN POPULATION (PERCENT OF TOTAL) .. 12.0 13.2 17.3 32.4 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 1245.2 STATIONARY POPULATION (MILLIONS) 1570.2 YEAR STATIONARY POPULATION IS REACHED 2070 POPULATION DENS ITY PER SQ. KM. 70.4 85.3 100.9 158.1 255.9 PER SQ. 1M. AGRICULTURAL LAND 211.8 253.7 302.9 355.9 1748.0 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. .. .. 32.3 36.8 39.9 15-64 YRS. .. .. 63.7 59.7 56.8 65 YRS. AND ABOVE .. .. 4.0 3.5 3.3 POPULATION GROWTH RATE (PERCENT) TOTAL 2.0 1.9 1.8/d 2.0 2.3 URBAN .. .. 2.8 3.3 3.9 CRUDE BIRTH RATE (PER THOUSAND) 40.1/e, g 39.6ZI 21.1/g 29.3 31.8 CRVDE DEATH RATE (PER THOUSAND) 13.6/e! 8 9.6Z 7.8k 11.0 9.8 GROSS REPRODUCTION RATE .. .. 1.4I: 2.0 2.0 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. USERS (PERCENT OF MARRIED WOMEN) .. .. .. 19.3 36.3 FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-100) .. 100.0 117.0 108.1 115.6 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 86.0/e .. 103.0 97.3 106.4 PROTEINS (GRAMS PER DAY) 58.07 .. 62.6 56.9 54.4 OF WHICH ANIMAL AND PULSE .. .. 26.0 20.0 13.9 CHILD (AGES 1-4) MORTALITY RATE .. .. 4.5/h 10.9 6.7 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) .. .. 64.0/h 57.8 59.8 INFANT MORTALITY RATE (PER THOUSAND) .. .. 56.0/h 89.1 63.7 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. .. .. 32.9 32.0 URBAN .. .. .. 70.7 51.9 RURAL .. .. .. 22.2 20.5 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. .. .. 18.1 37.7 URBAN .. .. .. 72.7 65.7 RURAL .. .. .. 4.7 24.0 POPULATION PER PHYSICIAN 3009.8/e,i 1709.1/i 1096.2/5 3297.8 8540.4 POPULATION PER NURSING PERSON 2847.1/eif 538.8/f 483.2if 14929.3 4829.4 POPULATION PER HOSPITAL BED TOTAL 2142.5/e 737.8 492.8 1100.4 1047.5 URBAN ,. .. 172.1 301.3 651.6 RURAL .. .. 702.3 5815.7 2597.6 ADMISSIONS PER HOSPITAL BED .. .. .. .. 27.0 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL .. .. URBAN .. .. RURAL .. .. AVERAGE NUMBER OF PERSONS PER ROOM TOTAL .. .. URBAN .. .. RURAL .. .. ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL .. .. URBAN .. .. RURAL .. ..  - 30 - ANNEX I Page 2 of 6 TABLE 3A CHINA, PEOPLE'S REP. OF - SOCIAL INDICATORS DATA SHEET CHINA * REFERENCE GROUPS (WEIGHTED AVERAGES - MOST RECENT ESTIMATE)- MOST RECENT LOW INCOME MIDDLE INCOME 1960 /b 1970 /b ESTIMATE /b ASIA & PACIFIC ASIA & PACIFIC EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 102.0 103.0 118.0 97.4 96.2 MALE .. .. 111.0/k 101.0 99.8 FEMALE .. .. 114.0/k 87.8 92.1 SECONDARY: TOTAL .. ,. 79.0 53.0 37.6 MALE .. .. 92.0 63.8 41.1 FEMALE .. .. 65.0 41.3 34.1 VOCATIONAL ENROL. (% OF SECONDARY) .. .. 2.4 1.7 20.8 PUPIL-TEACHER RATIO PRIMARY .. .. 27.0 37.7 35.5 SECONDARY .. ., 19.0 20.2 25.0 ADULT LITERACY RATE (PERCENT) .. .. 66.0 52.1 73.1 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION .. .. .. 1.5 9.8 RADIO RECEIVERS PER THOUSAND POPULATION .. .. .. 35.4 116.5 TV RECEIVERS PER THOUSAND POPULATION .. .. .. 3.2 37.6 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION .. .. .. 16.4 53.7 CINEMA ANNUAL ATTENDANCE PER CAPITA .. .. .. 3.6 2.8 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 234602.4/e,j 339960.5fl 403163.1/j FEMALE (PERCENT) .. .. .. 29.5 33.6 AGRICULTURE (PERCENT) .. .. 71.0 70.0 52.2 INDUSTRY (PERCENT) .. .. 17.0 15.0 17.9 PARTICIPATION RATE (PERCENT) TOTAL 37.01e 41.7 41.8 40.0 38.5 HALE .. .. .. 51.8 50.5 FEMALE .. .. .. 23.8 26.6 ECONOMIC DEPENDENCY RATIO .. .. 0.9 1.0 1.1 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS .. .. HIGHEST 20 PERCENT OF HOUSEHOLDS .. .. LOWEST 20 PERCENT OF HOUSEHOLDS .. .. LOWEST 40 PERCENT OF HOUSEHOLDS .. .. POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. .. 133.8 194.7 RURAL .. .. .. 111.5 155.1 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. .. .. 178.2 RURAL .. .. .. .. 164.9 ESTIMATED POPULATION BELOW POVERTY INCOME LEVEL (PERCENT) URBAN .. .. .. 43.8 24.4 a RLRAL .. .. .. 51.7 41.1 Not available. Not applicable. NOTES * All data exclude Taiwan, China. /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends an availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1978 and 1980. Ic Country estimate is 644 kilogram of coal equivalent. Td Latest estimate of annual growth of population is 1.2%. /e 1957; /f Including barefoot doctors; /g Bank crude birth and death rate estimates for 1979 were higher than the official data. The official rates have been adjusted accordingly; /b Bank demographic analyses utilize a higher estimate of the crude mortality rate than the 6.2 that is officially given. The values of infant and child mortality shown here, based on the Bank's analyses, are thus higher than use of the official figures would indicate; and the estimate here of life expectancy is lower than the official figure of 68.2 years; /i Excluding traditional medical doctors. Ij Including military personnel and those awaiting permanent jobs, most of whom are in temporary jobs; /k 1977. Hay, 1982  - 31 - ANlNEX I ________OF __IA_____TM Page 3 of 6 W..-; Aisbeegh th, dat. are dram Irn5000 e.esl jodd deeh -" .hibotttl- sod reliable, i should als o .e..ote tbt thy wayouhels- sotesulyruest oboo soa of the tori of sradstdirod deifttitor sod --prnto -sd by diff.et-r --saoto toJo. oto tbu data. Tho daa.r, sure-n fbel.-, -fsril so des..rIbe orders of -goittdo, lodtrantrtd." -td -htostt crrl ajo- diff-r-re hoooo sobIs I -rtaec groaett (I) oe'ans.o-trytoop o ehssohj-tco--ocyad (2) a ..sorrygt-peilbe -soof.o h -gtreotoga - fuoabtheoosere 000 oflb sb] -or.c Cocy for "High Irco- dOt oore gophot- "tfddts Z_os so_t grits sod etddls fat"isclse b-rsat of attS-e so ocloo f-lioj os . go ho ooroegroop data oh. a-ooo- at- pop.lartotsefgbtd arlfmatcwostE eah tod-t-oo sod obos o-ty sbe attolo)o ib. -.ooic i a. gcoac har haro for that irdirto- Si-r the -etge of roore so ho todosor dep_do _o the -rl-abilly of dats tdIs o Ibot.rorosoalh sootl-eed _1.Uato doetoso of too tedlrot- to sother. Th.-o avrges ace oly taut1 i t:to omaro tbo Ooita of AME (th-o...od sq.ku.l ~pprtao yei optlgd.. " t toto1, orbn, sod e-l Poaotr(total. Outlal - Totol sofoe- aooa ropaoLsg fo-d are sod blood ostoc; 1979 deta. -obo s od toro) idodd by h nob -ep-l-e -ober of hosplte1 beds Aotfk.ot-tr - furfoota of atrotaa -os osed tooporarlly or porsotly seolable io paloil aud prbare g--rrl aof ep-rlaled hsIa sd r- 000 rope pasoeca sorot od kifrhat gerdos ot to lib folios; 1979 d.to. hbbli-rttououse. fopitols oe eutobllsbowtts por-otly ostffed by 01 isat -u phystil- Oatabliohsosto yroeldbg prln-lpa1ly ossto- 190P Pl 1117k 100) - Iffy yet ceylla .urtmat- at -eret sarloe price, -t- di. 1 toes -r .et lorlodod. oRal1 ho-yti.L. h-t,er ilorods health foIste by sawoooealr do as Oorld look Attda- (1970-30 bosto); 1990, ood sotaltroee rot Pes=octly .tofted to a physlolo (hot bya iog. std 100 dan_ sedi_olasltst. _toal alft, er.) seoth offet. -a, eooro dartr. ard pooldo a lsiteod I-s. of solto f-I ltlo.to statI- 55100 f09lOotfiIg ?Ro CAPITA - -.-Ia tsapro f -oascisso--gy I(oa trodl p-cpus arbor hospirtef rld O. hrolal5or l tpttas, ued ligolto, parcol-ta,;ort-l gas s-d hydro-, oa-le-o aod Iot .les- aod ..r. boyroa = lorIsi. orctsl houpitels sad sodt- ardseuy irtrtc) Ie killg.... of col- oooestt slo 1960. t970, ard 190 rtes.lers.od hspitatu -u ierladed oy sod- at total. data. -anoso R ret .Sootla sod - Totlol _toA- of adstusloot oeo tahta fee tospitola dleided by the -oeo- of beds. POPULAT.yN 05 De VITAL OTATtOTOft Total fpoelssbso. fOld-Yea fthooa-dsl - A. of daly 1; 1990. 1970. ord 1991 ff009101 dues. dosrsoo~~~~~~~A.t Ott of Hosobodh-oeoe ssbosrod) - totet. otboo. asd eoa Mrba Peea -t - ferolo oal ) t - gat of roZeto total popoltotlo; Ahoofodtostsof a groop of lodtvldo-ls who share liiolt os oe Sitsoldflal.tioo lor so ara say of_te -p.. oa hiIity of data -rd their solo asas. A b-sdeo oe lodfIt say or sy so ho iorloded t _mo rctzele; 1960. 1073.sd190dt. thu ho..ebhld for stotiutlrt. posposen Pee,1ttlab Projectg.e ouAonoorkuo et reeso....s tP o- ntat , orbar. so roo - oreg o Popattlon 0 ysr 1L0 - Correot yoplaloopri- tlolar haoo.d so 190 hot of Pors.t. Per soon lo all r-bo,-.r toss. o.rayd rososottal total yooat by afe -ud s and ttsit wornollty and f-elility rates fejsitge,_tenpolioly. Doe1lioteoo-ladoout-peeooet eteatare- and Prjotopar- -et tot soota1ty ftale .nprls- of theo totem saco- o-totpled pato.. log !ite sy-tlty at hItth Ilutt..olog sith -otttytA Per ca 9 It Uoroso bre- to ttn-rrltty fysrosot o deeitegs) - tttal, orat. cod -1ro - _-el, ac bot lt -opo- .so -tbtlistg at 77.5 pears. Thy yRo-- Creoo ..loooi damilga alth 1elsoittIcy I5 lotftgcfaer Pa p -teatge otet 0o fe_Ititny _sro also oo rhrs- Isoets as-to g dellr o f otl aeb, ol cora d-ltogoo_yorts-ly. f-toilicy so-odlot to Lrow- eri sod past tartly pi l0p-cfo--cc lohcoooyI thor _stoo ott of theotlnroht- lonof oo-tilty 0001A91 sd 'feerilty t-eds forpoo- o opas djna ooittllr trtottor- 2poolatlo-Iooot_ttoo- oootsteet t ocitostlayshoolP. -h ' total, solo atd foso1e - Grot- -Ito, solr o feoa thehi th areIt qoo t tie door rota, , ro alotiso..t. ro r stroiteor of o a0u t0 tha pebir ta-el sptotasof -tap-tl- sots I.totu. int trchl-rd -tic nyt- fItoilfoy roto d-rlt- topluy -otog oorros otsot tolda8ues gd b-il the " - -isoo isor of sot- - 0 -1psycdootioo tare ubh- eal-h eto yoru hot odlostd f-o difffrrot isogna of prborysd-rtioo; Itt of-_se rupi-o ilosoif e-orly. h ontltsoty popoloriot slo -teo oos ilslth ur,toersL sd -atouur -ot so - red100 psernt sti-sod so ftho hoat of the ytoj,ctsd rastrtto f rho toOloliot oioe- o .-pupils ar bo1 or shoo the ffIio1 school ag.. to the yea 7201. sod Ithe -a of d-oli- of tettlitny eats to replo- Oosd tyhsbsl - t101s, solo ord femle -Cfopotod os oboro .e..ed"r sot _ivl drtlorqIe at Isast foo ysr to a Hros pristy Instrortlun Yeooatoay oulto Is rnarhrd - The y-o nhao ototi..ary popoloti- Prooldot goo_ri, ooctlooa.. I e tece tooo locroloafrpopls ule ti berosthed. _soly of it to it pose of oge; ....r.spoodeo.t. oeo or goosrally yet sq. is. - Mid-year ypyiplo. yp- q--c kflootne (100 h- -tte) of Oootsletls sftr f secsodoty) - Vorot...oIlo-titttioh- tot- 0100; 1960. 1970 sod 1979 fot. loI_f otoca,ldotta,o thor progro-t obich opeote l~dtepod- P_ so. ho. so-crlooollso - totttd oo -o foE sclolo t -d sooty ot .s dnpor-st rI eoodsty -ti-tlro-os al;19,1901 oud 0970 dotoa. Ptttohccto-etoy o n lc oa tdooooldI to aoAgbo inotoro, fnct)- tblldto- (0-14 yssraf. -ooiof-ofo li5- prIto ood `crodsr tee dtotdsd by oosbr o .f te"h-,t to the 94 yssr) " -t rtod (65 ya..a atd -oer as y-orsta0a of eld-yo- y.oy- rorrospoodlof Isola. latiot; 1607. 197'0. aod tod0 data. dotc tIIry oefyrst -Lrroodt fsbio to road a=,-ito) yea yorloio for 9501-90 199-7.,ad 1970-i l!.olAtorbo booth Rate (e__to) - other - lo-a groth -ro of -tbat pops- COhtltf07OdO tarius origO-bi.lOf-yg as 1907-~80. ysostln er _nhooodcoonto - ssur tars -totioe sotor Crod Oiei lts (er -utond) - do-1o lbs. b-trha - thoosod of oii-ye- ro seoio L_s t.oeghtyns; sotlodss asholoor, heotas aud yplloo.toth; 1990, 1970, oed 1990 dora. atittoeo- lls crras leanh lre (ptor thorsd) - dAe.o. Oothn p-r thoo--d of ud-y-o Rd710 ItEloet (yt tha...and poyritltoof - 011 typoso tersoo t foerdlo p Irslo 1960. t9 70 oo ,9B0 dato. b-odra-u to gerotol pobitc P., lbooud of ypotutio.; ...clodouso Croo oeyerdo-olott~ sot-berge t-b-r of doorsrh- ooa nill Osor 10 ..eo coteo_r In ono_tes aed t _ytt uto regintrtlor" of rodto hoc ..-Io c-ycdoorlo ynoiod if ohs r-p-tnrsrruo rroi-n-nt s--- to ff-te; dab fo srl ylot toy ro be -p-0otbl. i10c tiltryrstno; suoalfytfion- I -&oncr 00d10t is 1991, 1971,. od 19ff. soot coso-cir abolohrt tlrro- g. Psato Plu.stg-Arrertu,~. OOO thooos A otoole.b-n of acotore loorescofl o oheueoi yrolais) - V -ere-n- for b-od-our to of hlrb-rootol detros oosr soototo o sotlcol fooly ybnogyrgrso. gooa olrptlh-ood popolotioo; rotld- onlirneo-d TO r_el_o tsdrleoo-or (prst -orldno Po - Peeoso oforld toott _odlt. yeto- thote-gluc-ttreo" f TV -setuus -t tobi-otiot d-tetd prbiot ly tornelo goea hena It t -oid-rd P0OD AM0 flkIfTLOt tobn'aly if it atysor.ta leas.t foo flown sorb. toden ofPood Prdootiorper Capta 1196-7N100)- tede of Pn e-pitaoo-oo fioso Mo..at_AtAetd-oryyr lapitiaro Yf- -osed os the o-b of Psost Ha f l oo to oiots- Prodaetono-lod-see so d feet aod titbet sold dortog the ysoo. ilocdlug aduloalo- to deio-lo looo IsIn Iosdt erbosa.Condltil..o...r prlssey goodu (r.g. sogn--o aol bible union boo tead o sgt) htsaeodible sod _toOossrtnt t. . ooffet sea to r sooel Agegt pr-d-rolt of esbch . rog.r Is ..u.. .. L.000 FORCEt uaiaslaecg roon prc og.s 916,17,od 1980 dato. Total Lso rott (tosado -loostaly actio- psto, looloog Pe itylne. nyof _slorto_ycnt f _etosnoa - --totd 0t. cooatd forte ood onsploynado b o- -lodlflosrotet toeCt. nr, e.tory oqo-sitt of -1-foo oorplieaolo b -lehtotr Pre capIta toto pooltloo of all aoss O tioro- o ear t- -o-ot- are pot day. A-o1lble soppit..... toaelo do-ooto. F-odo-o." ispotto lr,- o cos-rbir; 1960. 1070 rod 1980 fb esor.ora rbaasos Ltokooh Not -rplits so-lrde soloa fead, usea,tesl (p-ooot) - F..l lbefores otrs... o..f totel labor forr- q-sottoe- -od to fred -rrs e,sd I --s to dtsrtboeoe - shoir- botri-sto. fsrost Lahtr foros lu fotoing,E..forotry, 0.,1100 sod sot tort ofae by PIA Oar -3hooigci od for otorsl oct- fishio,o reeorg f -ooi~ labor forre; ig, 1070 sod 1980 data. oly sd haith toodnidelg rero tal temeteat-r body roigh-o ase Iedrary frrceer - oboeforc fcc 1017, reterto -eofa-triuo sod -s dlert'b'tio of -pltito aud altslo 10porc for osote at aed olrrift. -o- -rd gaod sesoo of tot1 labor forts; boo-hoIto.. loI; 1991-At, 1970 ood I197'7 dota.. 1900,1"l9t70 td 190 ds-o * ~~~~~~~~Pee oaeteo -uoyet of eoeo}eo a) - tonl toetot of yPrtpita fartloptea - hats (p_-ru) - tl sl., sod f-sIr - Potbrtoiptis-o 00 py of food pre day. lot -cpply offood is deftsodooohos. Is- a-ttityrstos ore -op-td storal -, soi..od froal obor forra orur_tos for oI _ootr.- rotbitabod by 0004 pt-iods ort uoisi p-etco "fo of total, solo -od forlo yoyoltoolo of all agn spe-t-losy; atosrsof 60 grm ftoto protet Per doy dod 20 gr- of niola srd 1960, 1970, and l9g0 dUta. TOss or hated 00 Ill's poetiicpstboo rtsa yots- prteti, ofwhich, 17 gra- Isoil Os, aebo.l prot hto . flrotad- reft-tiog age.set .teotor- of ths ?potlftioo, sod long tw treed.A aoisolptotso 00 0 lorcto tfo -rorld, pyooy-n iy M0 Io thu maLd ltorOesd oto - otgo of opola.tiot sod- it o-d 65 os-d s Worl Pod oroy 1 _6-99 i170 and 1077 dst. to thtItot1 labor fott. Io ryraeott I'rl fros oobso aod "I-u-P--crO uoept of f00t dt- rts -fs uofo.l sod polate ~ to rs po -,; 1961-95, 197t ard 1077 data. ISttOO DOOTROBTtfO _tldtor -) Deth hos(-e ciososed) - o-oo de-hb yrr t-oosad to Perc-roo of -E rre -o ots (it to rash ord i-f ootrd by etiutt age gr-a 1-4 yooea. to obilderni tohib age gooop. tot mas devlpttgoto- peroot.frIh.s 0pero.oro A2 lercet. s-d pooes 400ot tries data dorbod Iron life robl-t; 1960. 1970 std 1960 dato. of heoo.ebo1de. Hff097. P0010Th TORGO.tm01011 III goeooacy o tlth year) -Aont-g to-bor o y-oa of life r-sing The " foloeo siceto ar -osy yprooluato oso of posorty i-ole, 51bel 90 970 so 91 ao rd soadhetoeprtd ehcoldalsato. of Ig pet hboaetd Iluo blrobs; tOd0, 1970 so 1990 lod oaoPsoerty Ioss moot Is that irow isos bels whtb a sistos Acces tohef Osoo fpc__t of orshst-ool doto 1 rars - gs- -oltitllssly adeosto dInt pi.. esseotL1 os-tood esqit-oats tO 000 bne of p-prtr (toto, c1 o sodroal tih osoal cos oefe aigud.ble. so tr eob . tor romPrteore booobe rTeg", o -sltr'sI.o) a soleantpocygcaoorlioe-thlr. ofescospr atl yreaeuof thoir spotcppltos es - :orbos ossaspobloc ya-sotl oone ol the co-tY. Orbes lese Le dertund f o the r-Ie -roao readpo- a.ted ..1sos th-a 100 se.ler feos o boos may bs leel te adjonawo for huiler r.st of isetu io orbsoea rooldered asbeug withIn r--onble s-oes of hot hue..-. rsrsl sta1 fssstrfP- olroosoo Ab.olsru r s Tr-arm Leosl fr-roon -otban seasobis a-ee sod lowl that~ the husoe-ife or e rot of the bososheld asdesel - Prrrt of p (.,soc oeh oedrea)wsoe"bsle do_t ha.e Is epsd a dbsproporotoo par ft h day In f...biag lthuya fastlpa surer need.. b- .. Ns-be of pesple trotel. sobso, sod rort seve by eerreee disps..laI prengsof thbotne-peoti-pusotus.E_stn diposo ap wtsltde esd easmbobeyae-os hy.a r b see of plt peises sod sle- Husase arPyfra Pogo1s'L-t dibodod by o,*sr of ePsoLehot phys- Srnsrsd soss saooi-loso -fe ulfldfe 5 sdtceb eohool an asesestry lere. trosos A-lys.s sod Posisrafow esesoe- Peeslstiffe se Vseh- Ree-uo - Our.soenbooOtlded bWu~ E o erto.isOe Ry 1960 age sod fault itsdan oso estate -ares er-otital se  - 32 - ANNEX I Page 4 of 6 Population: 977 million (mid-1980) GNP per capita: US$290 (1980) CHINA - ECONOMIC INDICATORS Annual Growth (%) at Constant Prices 1957-70 1970-77 1978 1979 1980 1981 Production Gross Output Agriculture 2.2 3.4 9.0 8.6 2.7 5.7 Light industry 8.3 7.8 10.8 9.6 18.4 14.1 Heavy industry 11.6 9.3 15.6 7.7 1.4 -4.7 Net Material Product (NMP) 5.2 4.8 12.4 7.0 6.9 3.0 1957 1970 1977 1978 1979 1980 1981 Prices Retail price index (1970-100) 92.2 100.0 102.7 103.3 105.4 111.7 114.4 N1MP deflator (1970=100) 90.7 100.0 99.6 100.4 105.1 106.5 109.6 Exchange rate (Y/US$) 2.46 2.46 1.83 1.66 1.54 1.50 1.71 Amount 1981 Shares of GDP (Z) Average Annual Growth (Z) at Constant Prices National Accounts ($ billion) 1957 1979 1981 1985 1990 1957-70 1970-79 1979-81 1981-85 1985-90 /a /a /a GDP 263.2 100.0 100.0 100.0 100.0 100.0 5.8 5.8 4.9 4.1 4.2 Agriculture 91.4 .. 31.4 34.7 33.3 31.4 1.6 3.2 4.2 3.0 3.0 Industry 115.5 .. 43.7 43.9 44.9 46.6 12.1 8.9 7.7 4.6 5.0 Other 56.3 .. 25.0 21.4 21.8 22.0 3.5 4.3 -3.1 4.5 4.5 Consumption 185.0 76.4 69.8 70.3 73.8 76.2 2.7 5.4 5.0 5.3 4.9 Investment 76.5 23.2 31.1 29.1 27.5 25.0 9.8 6.8 2.1 2.6 2.3 Exports GNFS 24.4 3.7/b 6.0/b 9.2 8.5 10.0 1.6/b 8.0/b 23.1 1.7 7.8 Imports GNFS 22.7 3.5Tb 7.0 T 8.6 9.8 11.2 2.37h 9.4Th 9.3 7.3 7.1 National savings 78.5 23.6/c 31.5 29.8 26.3 24.3 .. ... 3.9 0.9 2.6 As % of GDP Public Finance 1957 1979 1981 Current revenues (excluding foreign 28.7 27.3 21.J borrowing) Current expenditures 15.1 17.0 15.6 Surplus (+) or deficit (-) +13.6 +10.3 +6.1 Capital expenditures 13.7 15.6 8.5 Foreign borrowing 0.7 0.9 1.8 Other Indicators 1957-79 1979-81 1981-85 1985-90 GDP growth rate (%) 5.4/d 4.9/d 4.1 4.2 GDP per capita growth rate (x) 3.5/d 3.6/d 2.8 3.0 Energy consumption growth rate (%) 8.3 ICOR 5.4 .. 6.3 6.2 Marginal savings rate 0.42 0.17 0.17 Import elasticity 0.95 1.90 1.78 1.69 la NMP basis. /b Goods only. /c GDS. Id Based on the official real NMP index (as are all figures for past XMP and GDP growth in this data sheet). At Indian prices, GNP is estimated to have grown at 4.6% and GNP per capita at 2.7% during 1957-79.  - 33 - ANNEX I Page 5 of 6 Population: 977 million (mid-1980) GNP per capita: US$290 (1980) CHINA - EXTERNAL TRADE Amount Annual Growth Rates (X) (million US$ at (at constant 1980 prices) Indicator current prices) Actual Projected 1981 1978 1979 1980 1981 1982 1983 1984 1985 1986 External Trade Merchandise exports 22,027 10.1 25.5 16.8 15.9 -3.9 -0.8 1.7 6.9 7.7 Energy 5,054 .. .. .. .. -45.2 -20.6 -27.2 -40.2 -73.9 Other primary 5,306 .. .. .. .. 6.5 1.6 4.0 4.0 5.0 Manufactures 10,533 .. .. .. .. 9.7 2.3 5.6 6.8 7.8 Other 1,134 .. .. .. .. 5.0 5.0 5.0 5.0 5.0 Merchandise imports 20,292 32.6 21.7 16.7 -8.6 3.2 15.1 4.3 4.2 7.9 Food 5,340 .. .. .. .. 3.0 7.0 5.0 5.0 5.0 Petroleum 0 .. .. .. .. 0 0 0 0 -/a Machinery and equipment 5,317 .. .. .. .. 7.8 9.9 4.0 5.0 5.0 Other 9,635 .. .. .. .. 3.3 22.5 4.1 4.1 4.1 Prices Export price index (1978=100) .. 100.0 113.3 131.3 134.9 137.6 146.7 158.7 171.7 185.5 Import price index (1978=100) .. 100.0 119.4 139.2 145.5 149.4 158.8 170.4 182.6 195.1 Terms of trade index (1978-100) .. 100.0 95.2 94.3 92.7 92.1 92.4 93.1 94.0 95.0 Composition of Merchandise Trade (X) Average Annual Increase (%) (at current prices) (at constant prices) 1978 1979 1980 1981 1985 1990 1957-70 1970-79 1979-81 1981-85 1985-90 Exports 100.0 100.0 100.0 100.0 100.0 100.0 1.6 8.0 19.4 0.9 7.8 Energy 13.8 19.5 25.1 22.9 4.2 0 .. .. .. -34.0 -/a Other primary 39.7 34.1 28.4 24.1 23.3 26.9 .. .. .. 4.0 5.0 Manufactures 46.5 46.4 46.5 47.8 66.5 68.0 .. .. .. 9.7 9.0 Other 0 0 0 5.2 6.0 5.1 .. .. .. 5.0 5.0 Imports 100.0 100.0 100.0 100.0 100.0 100.0 2.3 9.4 9.9 7.6 7.4 Food .. .. .. 26.3 24.4 25.5 .. .. .. 5.0 5.0 Petroleum 0 0 0 0 0 8.0 .. O 0 -/a -/a Machinery and equipment 17.5 25.2 27.5 26.2 25.0 22.0 .. .. .. 6.4 5.0 Other .. .. .. 47.5 50.6 44.5 .. .. .. 9.9 4.1 Share of Trade With Share of Trade With Share of Trade With Countries with Centrally Industrial Countries (%) Developing Countries (Z) Planned Economies (%) /b Direction of Trade 1978 1981 1978 1981 1978 1981 Exports 37.3 45.9 51.6 50.2 11.1 3.9 Imports 73.3 76.8 17.5 18.7 9.2 4.5 /a China is expected to become a net importer of petroleum between 1985 and 1990. /b Includes the Soviet Union, Eastern Europe, Cuba, North Korea and Mongolia.  - 34 - ANNEX I Page of 6 of 6 Population: 977 million (mid-1980) GNP per capita: US$290 (1980) CHINA - BALANCE OF PAYMENTS, EXTERNAL CAPITAL AND DEBT (millions US$ at current prices) Actual Projected Indicator 1978 1979 1980 1981 1982 1985 1990 Balance of Payments Exports of goods and services 10,606 15,351 20,901 25,157 24,663 33,700 71,451 of which: Merchandise f.o.b. 9,607 13,658 18,492 22,027 21,585 29,037 70,166 Imports of goods and services 11,912 17,582 23,946 23,628 24,928 38,848 75,509 of which: Merchandise c.i.f. 10,745 15,619 21,243 20,292 21,513 34,126 65,799 Net transfers 597 656 640 467 617 767 1,017 Current account balance -705 -1,575 -2,405 1,996 352 -4,381 -4,327 Private direct investment - - 57 265 315 465 715 MLT loans (net) -830 822 1,756 769 1,278 Z,773 5,536 Orticial .. z,198 3,231 -,546 Private .. .. .. -920 -458 -10 other capital 822 1,362 1,082 -787 0 1,143 -572 Change in net reserves t'-" = increase) 708 -609 -490 -2,243 -1,945 0 1,353 International reserves 6,283 6,892 7,382 10,096 12,041 12,041 18,164 of which: gold .. .. 5,120 5,120 5,120 5,120 Reserves as months imports 6.3 4.7 3.7 5.1 5.8 3.7 2.9 External Capital and Debt Gross disbursements .. Concessional loans .. DAC OPEC IDA Other Nonconcessional loans .. .. Official export credits .. .. IBRD /c Other multilateral .. .. Private External debt Debt outstanding and disbursed .. .. 5,441 5,696 Official Private Undisbursed debt .. .. Debt service Total service payments .. Interest Payments as % exports GNFS .. .. 5.0 7.8 Average interest rate on new loans (x) Average maturity of new loans (years)  35 - ANNEX II Page 1 of 1 STATUS OF BANK GROUP OPERATIONS IN THE PEOPLE'S REPUBLIC OF CHINA A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of September 30, 1982) Loan or Credit Amounts ($ millions) Number Year Borrower Purpose Bank IDA Undisbursed 2021 1981 People's Republic University 1167 of China Development 100.0 100.0 199.7 1261/a 1982 People's Republic Agricultural of China Development 60.0 60.0 Total 100.0 160.0 259.7 Total now held by Bank and IDA 100.0 160.0 Total undisbursed 100.0 159.7 259.7 /a Became effective October 7, 1982. B. STATEMENT OF IFC INVESTMENTS (as of September 30, 1982) None C. PROJECTS IN EXECUTION Loan No. 2021 University Development Project; $100 Million Loan and Credit No.1167 $100 Million Credit of November 4, 1981; Effective Date: February 4, 1982; Closing Date: June 30, 1986 Good progress has been made in project implementation; bid evaluation and recommended awards for about $45 million in equipment have been approved by the Bank. Initial disbursements for technical assistance (about $300,000) have been made and a major contract for about $5 million in expert services is awaiting final signature. Credit No. 1261 North China Plain Agriculture Project; $60 Million Credit of June 23, 1982; Effective Date: October 7, 1982; Closing Date: December 31, 1987 Project civil works began immediately after credit signature and are well underway; other project works are also progressing on schedule.  - 36 - ANNEX III Page 1 of 2 PEOPLE'S REPUBLIC OF CHINA ZHONGYUAN-WENLIU PETROLEUM PROJECT Supplementary Project Data Sheet Section I: Timetable of Key Events (a) Time taken by the country to prepare the Project : One year (b) The project was prepared by : The Government and the Bank (c) Date of first presentation to the Bank : September 1981 (d) Date of first mission to Consider the project : September 1981 (e) Appraisal mission September 1982 (f) Completion of negotiations March 1983 (g) Planned loan effectiveness August 1983 Section II: Special Bank Implementation Actions None. Section III: Special Conditions A. Conditions of Effectiveness (a) The State Council shall have approved the Loan Agreement and the Project Agreement; and (b) A satisfactory subsidiary loan agreement shall have been signed between the Government and ZPEB. B. Other Conditions The Zhongyuan Petroleum Exploration Bureau would: (a) establish by September 30, 1983 special Project Units in Production Company No. 1 and the Gas Management Company (para. 77);  - 37 - ANNEX III Page 2 of 2 (b) carry out studies on the following issues with the assistance of qualified consultants, review the findings and recommendations with the Bank, and agree on a plan of action: (i) drilling and completion practices (para. 78); (ii) management information system (para. 79); (iii) reservoir engineering (para. 80); and (iv) oilfield safety practices (para. 81); (c) after completion of the 3-D seismic survey and drilling of the first three exploration wells, consult with the Bank and agree on a plan regarding objectives and location of further drilling in East Wenliu (para. 80); (d) appoint qualified consultants by June 30, 1983 to assist in carrying out the LPG plant project component (para. 80); (e) develop training curricula and provide equipment for a training center (para. 80); and (f) annually review with the Bank its current and projected finances (para. 89).  - 38 - ANNEX IV PEOPLE'S REPUBLIC OF CHINA ZHONGYUAN-WENLIU PETROLEUM PROJECT Petroleum Product Prices lb Domestic price /a International as % world Ex-refinery prices Retail prices price prices Y/ton $/ton Y/ton $/ton $/ton Gasoline 590 310 800 420 310 135 Kerosene 420 220 680 358 300 119 Diesel 240 126 420 220 260 85 Fuel oil 55 29 134/c 71 165 43 LPG 230 120 300 158 225 70 Natural gas - - 2.9 1.6 4.0 40 ( Y/MCF) ($/MCF) ($/MCF)/d /a Weighted average price; 30% of fuel oil is consumed as feedstock and is not charged the special tax on petroleum fuel. /b FOB Singapore price on March 1, 1983. /c Assume transport cost, averaged at Y30/ton. /d In terms of Btu fuel oil equivalent.  IBRD 16780 60' 666 a' ISO' ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~DECEMBER 1982 0l 1 ~ 60661/6,1, I'l 606' I 06066 066'66 60 . , ~ 6,yI 6666606k 66 SOvIE6 UN ON \.. .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~HRUNI(N~v u-,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~/ / S 06.AA~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~DSI1S66II /RPB-6j / "' rfl~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~O OE </o,ooo6 MO 6~~~~~~~~~~~ o 0 L I A A I~~~~~~~IN v ~ ~ ~ ~ */ZM/A/ . 0 ~ ~ ~ ~ ~~~~,\ --7 / SDNEM/A,C