China - Guangxi Rural Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY CA. /Y6/667614 Report No. 4849-CHA STAFF APPRAISAL REPORT CiHI NA RURAL CREDIT PROJECT April 9, 1984 Projects Department East Asia and Pacific Regional Office This docurnent 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.  CURRENCY EQUIVALENTS Yuan (Y) 1.00 = US$0.50 Y2.00 = US$1.00 FISCAL YEAR January 1 - December 31 WEICHTS AND MEASURES 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 miles 1 hiectare (ha) = 2.47 acres (ac) = 15 mu 1 kilogram (kg) = 2.205 pounds (lb) 1 ton (t) = 1,000 kg = 2,205 lb AkBBREVIATIONS AND ACRONYMS ABC - Agricultural Bank of China RCCs - Rural Credit Cooperatives PBC - People's Bank of China IFAD - International Fund for Agricultural Development PU - Project Unit p.a. - per annum cu m - cubic meter mm - millimeter  FOR OFFICIAL USE ONLY CHINA RURAL CREDIT PROJECT Staff Appraisal Report Table of Contents Page No. I. BACKGROUND ....... ........ . . ...... .. .. 1 The Agricultural Sector , . , * ,. ......... 1 Bank Group Assistance to Agriculture ........... 2 Project Rationale ................ ,.*., . . 3 II. AGRICULT.'r L BANK OF CHINA. ........... . , .............. 4 Objectives, Organization, Staffing and Traininig......... 4 Operating PoLicies and Procedures..................... 5 Interest Rates.....* ....7........ ...... 7 Sources and Uses of Funds ......... . ... ... .. .. 7 Accounting Systems and Auditing ........................... 9 II. PROJECT AREA AND BENEFICIARIES..................... 9 Agricultural Situation.. ........ 10 ABC Organization and Operations............................ 10 Other Support S esv i c e s 11 Project Beneficiaries ...* * * * * * ...... ............ . ........ 11 IV. THE PROJECT...............,....... ...... 6 11 Objectives... ......*............. ........ 11 Description.......... .**.* ....... , ..... , 12 Detailed Features .... ............. *.... .... 12 Cost Estimates and Financing.............................. 14 Procurement. .. ........... ............ ........ 16 17 This report is based on the findings of a joint IDA/IFAD project preparation mission and an IDA appraisal mission which visited China during April/May 1983 and September 1983 respectiveLy. In addition to the proposed project, the preparation mission also helped prepare a separate project for financing by IFAD. Members of the preparation mission were S.J. Khoo, r.. t.Wiens, I.C. Porter (IDA), M. Majid (IFAD), W. Bitters, L.C. Chen, J. Kitson, M. O'Connor and S.E. Ong (Consultants). The appraisal mission comprised S.J. Khoo, T.B. Wiens, I.C. Porter (IDA) and M. Johnson, A. Brown and N. Byron (Consultants). |This document has a restricted distribution and may be used by recipients only in the performance of their ofcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Page No. V. PROJECT IMPLENENTATTION ..................................... 18 Organization and Management . . . 18 Subloan Terms and Conditions....................... 19 Accounts, Audit, Monitoring and Eva1uation..luatio.. n.. 20 Envirotimental Impact.....P.....*. .......... 9* ......... P 21 VI. MARKETS, PRICES AND FARM INCOMES .................. ...... ... 21 Market Prospects.. . ................. * . 21 Prices ......... ..... *-9 * * .............. 22 Farm Incomes aad E met...... 23 VII. BENEFITS, JUSTIFICATION AND RISKS................,......... 23 Production Benefits..... ...... ..... .. . . , . . . a .... 23 Other Benefits. ,.. P P * P .. . P P * . . .. . .. . . . ..P P a . P . P 24 Financialj tinalysis.......*,........... . 24 Economic Analysis ........ ....... ......... 25 Risks ................. ......P.... . . 26 VIII. AGREEMENTS REACHED AND RECOMMENDATIONS ..................... 26 ANNEXES 1. Table 1: Consolidated Balance Sheet of the Agricultural Bank of China, 1982 Table 2: Consolidated Income Statement of the Agricultural Bank of China, 1982 2. Agriculture in Guangxi 3. ABC's Operations in Guangxi 4. Table l: Economic Prices for Traded Goods Table 2: Selected Conversion Factors for Inputs 5. Tables on Investment Costs and Financial Analysis of Selected Subprojects Table la: Mandarin Oranges (Guangxi) Unit Cost for Investment Table lb: Mandarin Oranges (Guangxi) Investment in Fixed Capital Table lc: Mandarin Oranges (Guangxi) Unit Costs for Production Table Id: Mandarin Oranges (Guangxi) Financial Returns Table le: Mandarin Oranges (Guangxi) Project Financing Table Za: Unit Costs for Anise Production  1 iii - Table 2b: Financial Returns to Anise Production Table 2c: Star Anise Project Financing Table 3a: Freshwater Fisheries (Guangxi) Unit Cost for Investment Table 3b: Freshwater Fisheries (Guangxi) Investment in Fixed Capital Table 3c: Freshwater Fisheries (Guangxi) Unit Cost8 for Production Table 3d: Freshwater Fisheries (Guangxi) Financ.iaL Returns Table 3e: Freshwater Fisheries (Guangxi) Project Financing Table 4a: Cattle Breeding (Guangxi) Unit Cost for Investment Table 4b: Cattle Breeding (Guangxi) Investment Costs Table 4c: Cattle Breeding (Guangxi) Unit Costs for Production Table 4d: Cattle Breeding (Guangxi) Financial Returns with Project Table 4e: Cattle Breeding (Guangxi) Financial Returns without Project Table 4f: Cattle Breeding (GuangMi) Project Financing Table 5a: Poultry Breeding Investment in Fixed Capital Table 5b: Poultry Breeding Operation Cost Table 5c: Poultry Breed!ng Financial Returns Table 5d: Poultry Breeding Project Financilag 6. Estimated Disbursement Schedule 7. Related Documents and Data in the Project File MAP IBRD 17483R1  CHINA RURAL CREDIT PROJECT I. BACKGROUND 1.0! The Government of China has requested an IDA credit of US$50 million equivalent to support the medium- and long-tenm lending program of the Agri- cultural Bank of China (ABC). Project funds will be channelled through the ABC and used to finance investments for the development of orchard and other tree crops, livestock, aquaculture and agro-processing in Guangxi Zhuang Autonomous Region (attached Map 13RD 17483R1). The project also includes a technical assistance component to strengthen the operations of ABC. The Agricultural Sector 1.02 Agrictilture, including livestock, forestry and fisheries, provides basic sustenancet tu China's populat-.on of about one billion people. This sec- tor accounts for some 35% of the couantry's GOP and is the main source of live- lihood for the rural population of 800 million. Only about 100 million ha of China's land area of 960 million are arable. Farming systems are intensive, with large inputs of labor, chemical and organic fertilizer and water. Nearly half of the arable land is Irrfgated. Foodgrains occupy 80% of the cropland and account for 65% of total agricultural output. This intensive system of food production allows China to meet the basic food requirements of its popu- lation (about 22% of the world's total) from less than 8% of the world's arable land. Agricultural production is carried out in people's communes, state farms and privately managed plots which account for about 87, 5 and 8%, respectively of the country's arable land and 80, 4 and 16% respectively of the gross value of agricultural production. 1.03 Agricultural deveLopment has been accorded high priority since the foundinrg of the People's Republic. Investment in agriculture has averaged about 20% of total national investment and recent economic reforms have been designed to increase the efficiency of investment in the sector. Despite declining per capita availability of arable land, efforts to develop China's agriculture have been broadly successful. Food production has expanded more rapidly than population growth and a food security system has been put into place which provides adequate basic nutrients to most of China's population. The agricultural sector grew by about 3.2% p.a. in the 1955-79 period and by more than 5% on average since 1979. There has also been a substantial diver- sification of the agricuLtural sector in recent years with the rapid expansion of cash crops, sueh as oilseeds, cotton and sugar, and livestock. Reflecting population and income growth and diversion of larger quantities of grain to livestock feeding, aet grain imports have risen in recent years to about 15 million tons p.a., or less than 5% of total consumption. Exports of raw and processed agricultural products contribute about 27% of all foreign exchange earnings.  - 2 - 1.04 The Government controls the pricing and marketing of most agricultural products and inputs. It fixes annual production quotas for the major crops such as grains, oilseeds and industrial crops (cotton, sugar and rubber) and purchases them at predetermined prices. Production In excess of the quotas can be sold to the Government at negotiated prices or on the free market. Minor crops, such as vegetables, and other products grown in house- hold plots, are sold in rural markets at prices regulated by the provinces or c-unties. Economic reforms since 1976 have decentralized production deci- sions, substantially increased prices paid for most agricultural products, increased the maximum area allowed in household plots, expanded the role of rural markets and emphasized the role of loan finance through the Agricultural Bank of China rather than grant finance of rural development projects. Institutional reforms in 1982 combined several government agencies involved in agric,ltural product marketing and input distribution to improve the effi- ciency of these activities. 1.05 A major task of China's agricultural sector will be to expand and diversify agricultural production to meet the food and agricultural raw material requirements occasioned by population growth and gains in per capita income. The land constraint will require steady increases in yields from already cropped areas and the growing problem of surplus rural labor will make job creation an increasingly important policy objective of the Government. To meet these challenges the Government is implementing new policies aimed at giving rural workers more production incentives. Area quotas for particular crops have been relaxed, although minimum grain marketing quotas are still maintained. Production incentives are encouraging crop specialization in economically suited areas and the production of industrial crops is being fostered by assuring supplies of food grains to farm workers in those areas. Incentives to workers on both communes and state farms are being improved to link rewards more closely with work effort. In addition it will be necessary to use the few retaaining opportunities to expand the cultivated area, increase cropping intensity and yields on existing cultivated areas throughi relatively quick yielding land and water resource projects, increase investment efficiency, and introduce high yielding crop varieties and practices through research and education. Bank Group Assistancc to Agriculture 1.06 The objectives of Bank Group assistance to Chinese agriculture are to: (a) assist China in expanding and diversifying agricultural production to keep pace with the rapidly growing demand for food and other farm produce resulting from population growth and increases in per capita incomes; (b) finance inputs which will help remove development constraints; (c) help improve economic efficiency through better planning and improved project analysis; and (d) reduce poverty by raising rural earning power in the poorer regions of the country. These objectives are being pursued through both project lending and sector work. 1.07 The first Bank Group lending in the agricultural sector, a $60 mil- lion IDA credit for the North China Plain Agriculture Project (Credit 1261- CHA; June 15, 1982) will provide irrigation and drainage for 200,000 ha covering parts of nine counties in three ptovinces. Work on this project, the  - 3 - first large-scale attack on soil salinity and waterlogging in China, is proceeding well. A second project, the Agricultural Education and Research Project (Credit 1297-CHA; November 2, 1982) for $75 million, will support the Government's program to strengthen higher education and research in the agrlcultural sector by providing technical assistance and equipment to selec- ted agricultural colleges and research institutes. Inplementation of the project is progressing satisfactorily. The Heilongjiang Land Reclamationi Project (Loan/Credit 2261/1347-CRA; April 18, 1983) will develop 200,000 ha on state farms in Northeast China by constructing surface drains and access roads and providing various agricultural machinery and other support services to increase marketable surpluses of wheat, maize and soybeans. Procurcrient of the equipment is underway. The Rubber Development Project (Credit 1417-CHA; November 29, 1983) will assist in new planting and replanting of 40,000 ha of rubber in Guangdong Province. Future project possibilities include irrigation and drainage, agricultural research, seeds development, forestry, support services for livestock and fisheries development, and integrated rural development in poor areas, as well as further rural credit projects. 1.08 A survey of the sector undertaken as part of the Bank's 1980 economic report covered natural resources, policies, institutions, output, productivity and future prospects. This was followed by a study of the rural finance system, an overview of agricultural pricing, and a study of trends in food and nutrient availability. A number of sector studies, now in progress as contributions to the Bank's 1984 economic report, will examine long-term development prospects in the sector. These studies will cover such topics as food supply and demand, land and water development potential, livestock prospects, fertilizer requirements, and the outlook for yield improvement in major crops. Project Rationale 1.09 The project would be part of a high priority development effort by the Government to increase agricultural and rural production and incomes through the diversification and modernization of agricultural production and processing. This is a major rationale for Bank Group involvement in the project. As part of the overall program of economic reform that is now underway in China, the Government is increasing the role and autonomy of the banking system and making more use of credit instead of grant finance of development projects as a means of improving investment efficiency. The Government's encouragement of household agricultural activities and individual enterprises through expanding the area of privately managed plots and increas- ing use of the production responsibility system has also led to a rapidly expanding demand by households and individuals for loan funds from the Agricultural Bank of China (ABC). ABC is the major source of institutional credit for agriculture and rural development in China. It has a wide network of offices which serve households, collectives and state enterprises through- out the rural areas of China. However, ABC staff have little experience with sound technical, financial and economic analysis of development projects and ABC's lending for such projects has been constrained by the limited avail- ability of long-term funds. The other major rationale for Bank Group involvement in this project is therefore to increase the availability of medium- and long-term funds to ABC and to assist ABC in develo,ping and  - 4 - implementing improved procedures and methodology for appraising agriculture and rural development projects and to improve its operations. Bank Group involvement will also enable ABC and the technical bureaus at the regional and local level to gain access to foreign expertise in new or specialized agricul- tural subsectors where such expertise would be particularly useful. II. AGRICULTURAL BANK OF CHINA 2.01 As part of the Government's program of economic reform; major changes have caken place in the structure of the banking system in recent years. Attention is also being paid to the role of the banks in mobilizing savings and Improving investment efficiency as well as to their more tradi- tional roles of channelling government budgetary funds and helping control state and collective enterprises. A separate agricultural bank was in exis- tence for short periods during the 1950s and 1960s but for most of the time the basic functions of a rural credit system were carried out by the large network of rural credit cooperatives (RCCs), while the more formal rural bank- ing activities were the responsibility of the Agricultural Finance Department of the People's Bank of China (PBC). PBC itself acted as an administrative organ for government financial management, as a central bank and as a commer- cial bank. In February 1979, however, the State Council restored the Agricultural Bank of China (ABC) and urged that it henceforth become the dom- inant institution in the mobilization of rural savings and the financing of agriculture and rural development. This newly-established ABC consists essentially of the staff, offices and other physical facilities of what had been the PBC's Agricultural Finance Department. In September 1983 the State Council changed the functions of PBC to being exclusively those of a central bank with powers to control the activities of specialized banks such as the ABC. Objectives, Organization, Staffing and Training 2.02 Objectives. ABC's general objective is to contribute to the effec- tive execution of Government economic policy throughout the rural areas of China. Its rctivities extend beyond agricultural lending to include the financing ot rural commercial and industrial activities which support agricul- ture and rural development. In addition to its main tasks of mobilizing rural financial resources, extending credit, and channeling public funds to rural areas, ABC supplies a wide range of banking services to the rural areas, and provides leadership to the RCCs and financial guidance to communes, brigades and teams. 2.03 O2ranization. The ABC is headed by a President who is assisted by six vice presidents. It has eight departments (planning, personnel, staff supervision, collective enterprises, accounting, rural credit cooperatives, state-owned enterprises, and general affairs). ABC also has a research insti- tute responsible for policy research and related matters. The planning department plays a major coordinating role in ABC's operations and is also responsible for the collection of statistics. A basically similar organiza- tional structure exists at ABC's provincial and regional branch offices.  - 5 - 2.04 At the end of 1982, ABC had 27 branch offices in the provincil capitals, municipalities (Shanghai and Tianjin) and autonomous,regions,- 288 central subbranches at the prefecture or district level, 86 business offices at major urban centers, 2,211 subbranches at county level, 24,803 offices at commune level and 403 offices on state farms. The bank is therefore represented at all administrative levels with more than 27,800 offices. In addition to the above network, there are about 59,000 RCCs which are effectively part of the ABC network. This means that virtually all of China's 53,000 communes and 2,000 state farms have at least one ABC office or RCC in their area. This extensive national coverage is a major strength ini ABC's total operations and reflects ABC's role as banker to the rural commu- nity as well as its responsibility as the financial agent of the central and local governments for the rural areas of China. 2.05 Staffing. ABC has a total staff of some 285,000. Of this total, nearly one-fourth are women. The staff at the head office in Beijing is small (about 300 persons) reflecting the decentralized character of the bank. In addition to the ABC employees, the RCCs employ some 250,000 staff on a full or part-time basis. A small proportion of the ABC stafZ, (less than 5%) are university graduates. Local office managers and department heads are usually graduates of middle-level schools. 2.06 Training. Most ABC and RCC staff at the local level have had many years of experience in rural finance and ABC is able to select suitable new staff from middle school leavers. At a higher level only a very small number of university graduates are being assigned to ABC and in general it relies on either the graduates of the banking schools (two years of training after middle school) or in-house training and part time courses at local colleges or universities. Established and fully funded by the PBC, the banking schools, of which there is one in each province, provide training for the staff of PBC, ABC and the Bank of China. The major emphasis of both formal and in-house training is on accounting. ABC staff are generally not trained in project appraisal methodology. To help address this issue the Economic Development Institute (EDI) gave a two month rural credit course in Shanghai in September/ October 1983 and plans similar courses in 1984 and 1985. But this will meet only a small proportion of ABC's needs. A .raining program in appraisal methodology is now being developed (see para. 4.10) and is expected to pay attractive returns in terms of increased efficiency in the use of ABC's financial resources. Operating Policies and Procedures 2.07 ABC is in charge of banking and financial administration in rural areas nationwide. It mobilizes deposits and undertakes seasonal as well as development lending. Since the mid-1970s ABC (and its predecessor department in the People's Bank) has moved substantially from a position as a simple financing channel of the Government to that of a semi-independent bank. ABC /1 The ABC has no branch offices in Beijing or Xizang Autonomous Region, where agricultural lending is the responsibility of the PBC.  - 6 - now has considerably more atuthority regarding individual investment decisions at the local level than did its predecessor several years ago and is playing an increasingly important role in rural investment finaxacing with the switch in emphasis from grarnt to loan financing of rural development projects. 2.08 Project Appraisal. In recent years ABC has been attempting to improve the quality of its project appraisal work. Particular emphasis has been placed on ensuring that projects conform to the state plan and overall government policy, that the necessary supplies and materials are available and that there are markets for the project output. However, project proposals are still not reviewed in much detail; there is little examination of issues of scale, technology, location and timing of proposed projects; and no formal financial or economic analysis using discounting techniques is carried out, although pay-back periods are calculated and used as supplementary criteria for investment decisions. Subprojects that will be financed under the pro- posed rural credit project will be subject to much more detailed technical, financial and economic analysis using criteria and procedures set down in a project appraisal manual (see para. 5.05). Based on the experience gained with the appraisal of these subprojects ABC expects to use such techniques much more widely in its project appraisal work. 2.09 Pro ect Approval. Sound project appraisal by ARC has become more important as the autonomy granted to ABC has increased. Laige projects requiring funds from ABC and especially those in industry and commerce still require approval by local government planning committees and relevant line agencies as well as by ABC. But in the case of smaller projects and almost all agricultural projects the planning committee decides only on the total amount of loans to be made (taking into account available materials and supplies and other sources of finance). The ABC then approves the allocation of those resources among different types of projecte and different areas and c,ommunes. Procedures for loan approval by the ABC have been established by ABC Beijing and are uniform throughout the country. At present ABC and RCC offices at the commune level and on state farms have authority to approve agricultural loans of up to Y10,000 to individuals/households and up to Y 30,000 to collective units and other borrowers. Loans in excess of these limits and up to Y 100,000 require the approval of ABC's county offices. Loans larger than this amouint require approval by ABC's provincial offices. 2.10 Project Supervision and Evaluation. ABC is placing increased emphasls on project supervision and evaluation. It enters into a formal con- tractual arrangement with the borrowing unit. The loan contracc stipulates loan amounts and disbursement schedules, specifies the type, quality, quantity and delivery times for the equipment, indicates the -epayment schedule for the borrower, and requires the timely repayment of the loan. The contract also provides for remedies in the event of default such as suspension of loan dis- bursements, acceleration of loan maturity and penalty lntereit. ABC uses these contracts as the basis for project supervision. On completion of a project ABC compares the actual use of funds with stated intent and production qchievements are measured against targets. Efforts are also made by ABC to assess the lending experience gained as a guide to future loan operations.  -7- Interest Rates 2.11 Lending Rates. Recent economic reforms, including banking system reforms, have increased the potential roLe of interest rates in the Chinese economy and lending and deposit rates hava been raised significantly. In the case of lendirig rates, thte pattern is still one of lower rates for medium- and longer-term (mostly equipment) loans than for short-term production expense loans. At the beginning of 1982 ABC increase(d its rate on short-term agricul- tural louns fromt 4.32% to 5.76% p.a. Rates on medium- and longer-term agri- cultural loans were also increased from 2.16% to 4.32% for individual farmers and collectives and from 4.32% to 5.04% for state enterprises. The rates were further increased at the beginning of 1984 from 5.76% to 7.2% p.a. for short- term agricultural loans, and from 4.32% to 5.04% for medium and longer-term agricultural loans to individual farmers and collectives to match the rate for state enterprises. Given the current domest:Lc inflation rate of 2% p.a. this implies that ABC's lending rates are now significantly positive in real terms except for relief loans (a small element in ABC's loan portfolio) which are provided at zero interest. ABC expects its Lending rates to remain positive. 2.12 Deposit Rates. During the last thres' years there have been a series of increases in the interest rates payable by ABC on individual deposits. Individual demand deposits now earn interest at a rate of 2.88% p.a. and rates on individual time deposits range from 4.32% p.a. for a six-month deposit to 9.00% p.a. for an eight-year deposit. Iuterest rates payable by ABC on depo- sits of organizations range from 1.8% p.a. for demand deposits to 5.04% p.a. for a three-year time deposit. China has had a history of geaerally positive real interest rates on deposits and this has probably contributed to the good performance of savings in rural areas. ABC incurs a small loss on some of its fixe.l term deposits paying as much as 9% p.a. while charging only 7.2% p.a. for short-term agricultural loans and 5.04% for longer-term agricultural loans. However, this loss is more than offset by profits on other aspects of its operations. Sources and Uses of Funds 2.13 ABC's sources of funds comprise mainly deposits and capital contri- butions from the central government. The capital contribution from the central government totalled Y 22 billion at the end oL 1982 (up from Y 20 bil- lion at the end of 1980). Major deposits (both demand and time) as of December 31, 1982 were those of the RCCs (Y 30.3 billion), individuals (Y 5.4 billion), state-owned agricultural enterprises (Y 5.1 billion), rural ccmmercial enterprises (Y 4.8 billion), local governments (Y 3.6 billion) and other (mostly PBC) deposits (Y 1.1 billion). Sources of RCC financing include deposits from individuals, conmunes, brigades and teams, operating profits, member subscriptions and loans from ABC. At the end of 1982 the RCCo had total deposits of Y 39.0 billion and loans from ABC of Y 1.1 billion. In general RCC deposits with ABC exceed ABC loans to the RCCs i.e., they are net suppliers of funds to ABC. Deposit policy of both the ABC and the RCCs empha- sizes voluntarism in deposits and withdrawals, confidentiality, and payment of interest on all deposits by individuals and collective units.  - 8 - 2.14 ABC's iotal loans outstanding as of the end of 1982 amounted to Y 61.8 billion - (about US$ 30.9 billion). About 80% of the portfolio are short-term loans. Loans to commercial organizations (mostly short term loans to supply and marketing cooperatives) accounted for 65% of the portfolio, loans to communes, brigades and teams 27%, loans to state-owned agricultural enterprises 4%, loans to the RCCs 2%, loans to individuals 1%, and loans for crop advances 1%. In addition to lending its own funds, ABC acts as an agent for the People's Bank in a number of fields, of which the most important have been loans to the commercial departments of the Ministry of Food and Commerce for the purchase of agricultural commodities from producing units. These amounts, which are generally on-lent by ABC on a commission basis, are substantial (Y 14.8 billion at the end of 1982). 2.15 The RCC loan portfolio has grown rapidly - more than doubling (103%) between 1979 and 1981 - largely reflecting sharp increases in loans to commune and brigade enterprises and to individuals. By the end of 1981, loans to individuals were 71% as large in total volume as all agricultural loans to communes and brigades. It was 48% at the end of 1979. As production on pri- vate plots increases and as the production responsibility system expands, RCCs are likely to become increasingly important in generating deposits and mak4.ng loans. Loans to individuaL8 could become the fastest growing element in the RCC loan portfolio. The continuing rapid growth in RCC lending is reflected in its year-end _;al loans outstanding of Y12.12 billion in 1982 compared with Y9.64 billion in 1981, an increase of 26%. 2.16 ABC reported a profit of Y 1,153 million in 1982. Revenues were derived from interest earnings (Y 2,791 million), and agency fees and interest from deposits (Y 1,892 million). Expenditures were mainly for interest paid (Y 2,303 million), administration, including salaries (Y 689 million), and compensation to lower-level units for negative interest rate spreads (Y 126 million). Administration costs of less than 2% of total resources employed are relatively low by international standards and reflect generally low salaries. The consolidated balance sheet and income statement of ABC for 1982 reflecting its summarized financial operations and performance are given in Annex 1. 2.17 ABC does not have detailed information on its loan overdues which are generally rolled over and kept nominally current. Bad debt losses are not accounted for separately and a separate allowance for bad debts is not provid- ed in ABC's consolidated accounts. However, ABC estimates that bad debts currently are less than 1% of loans outstanding and that recoveries of sort- term agricultural loans in 1981 were over 92% of loans made in the same year. To help maintain and improve its loan recovery performance ABC places considerable emphasis on full and timely repayment of its loans (para. 2.10). /2 This does not include loans by the RCCs.  - 9- Accounting Systems and Auditing 2.18 In most provitLces ABC has an adequate number of accounting and statistical staff at all levels. Few of these are experienced in compre- hensive financial analysis, but they prepare timely, consistent and detailed records. ABC requires the financial accounts to be balanced daily at each office. Summary details are reported by commune-level offices every two weeks by telephone to the county office and commune-level accountants come to the county once per month to reconcile accounts. County offices report monthly to provincial offices which in turn send det.iled accounts to headquarters every s'x months. Statistics on loan operations, which vary from province to pro- vince but which always compare actual operations with loan targets in the cre- dit plan, are sent forward to provincial levels on a similar schedule. These statistics are quite detailed with reference to types of investments financed, geographic location of subprojects, expected incremental production, etc. 2.19 The accounts of ABC headquarters are audited by the Ministry of Finance, elthough the auditing appears to be only a fairly cursory check. Recent moves to restore auditing in China; especially the establishment in September 1983 of the State Audit Agency (SAA), and emphasis on financial accountability are expected to lead in the future to a satisfactory external auditing of ABC's accounts and improvement of its internal auditing. Directly accountable to the State Council, the SAA has indicated that it is expected to audit all Bank-financed projects but that its capability of carrying this out can only be built up gradually and over an extended period because of its lack of experienced auditing staff. In this connection, the Bank has recently conducted a seminar on auditing for lhe SAM staff and is planning to further assist the SAA in the training of suitably qualified auditing staff. III. PROJECT AREA AND BENEFICIARIES 3.01 Given that its staff have generally not been trained in project appraisal methodology and to facilitate the preparation and implementation of its initial credit project with IDA financing, ABC in consultation with IDA has decided that it would be prudent to limit, the geographical scope of the project to Guangxi Zhuang Autonomous Region.- Selection of Guangxi for the proposed project has been determined by: (a) Guangxi is a poor area and alleviation of rural poverty in such an area is a priority objective of the Govermment. (b) The climatic conditions and soils in Guangxi are suitable for growing a wide range of crops. 3/ It should be pointed out that ABC had in fact decided to have two credit projects, one covering Guangxi province financed by IDA and the other covering Hubei province financed by IFAD. The projects are to be implemented at about the same time.  - 10 - (c) The leadership in Guangxi has expressed strong support for the project and the proposed subprojects are to be included in the development plan of the Region. This would ensure the adequate and timely provision of local funds and other inputs required by the project. (d) The ABC offices and government technical bureaus (agriculture, live- stock, fisheries, eLc.) in the Region are keenly interested in and have initiated steps to participate in the project, including determination of the proposed subprojects and training of staff. 3.02 Guangxi is located in Southeast China bordering Vietnam and due West of Guangdong province (attached Map IBRD 17483R1). It has a population of about 37 million. In terms of per capita distributive collective income, Guangxi was the eighth poorest of all the 29 provinces and autonomous regions in 1981. The agricultural situation and the operations of the ABC in Guangxi are described below and further details are given in Annexes 2 and 3. Agricultural Situation 3.03 Most of Guangxi is subtropical or tropical with average temperatures ranging from 13