China - Mid-Yangtze Agricultural Development Project

Docum~ Of The World Bank FOROFFICIAL USE ONLY Report No. P-111-CHA ÅORAlUM AND REGOMEDATION- OF TRE PESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION S-TOTHE EXECUTIVE UIRECTORS ON A PROPOSEP CREDIT,, -OF SDR -48.6 MILLION (US$6,4 MILLION EQUIVALENT) O -THE PEOPLE'S REPUBLIC OF CHINA FOR A MID-YANGTZE AGRICULTIM DEVEOPMENT PROJECT JUL 17, 1990 Thisa doe bent has a restricted distribution and may be used by redpient* only In perfoa of d thefr offiial duytes. Is contents nhay not otherwse be disclosed witholi World Bank authorizaon 4 - - - - C¥rrency Unit - Yuan (Y) US$1.00 - Y4.72 Yl.00 U s$0.21 FISCAL YA January 1 tr becember 31 WEIGHTS AND MEASURES 1 meter (n) - ~2t feet (ft) 1 kiloxeter (km) - 0.62 miles 1 heciare (ha) 2.47 acres 1n4u -0.067 ha- 1 ton (t) 1,000 kg 7- 2,205 pounds (ibs) 1 kg 2.2 pounds (lbs) 'FDC - County Fruit Devälopment Corporation PFDC Provincial Frutt Development Corporation FOR OFFCIAL USE ONLY MIR-YANGTZE AGRICULTURAL DEVELOPMENT PROJECT Credit and Project Summary Borrover: People's Republic of China Beneficiarie: Sichuan and Hubel Provincial Governments and Chongqing Municipality &2nt: SDR 48 .6 million (US$64 million equivalent) 'eym-s: Standard, with 35 years maturity Onlendin Terms: From Government to the Provinces/Municipality: 17 years, including seven years of grace, with interest at 5.5% p.a. Onlending rates to final beneficiaries would be no less than Agricultural Bank of China charges on subloans for similar purposes with similar maturities. Financing Plan: Provincial and Municipal Governments US$ 7.5 million Prefecture Governments (Sichuan) US$ 2.5 million County Governments US$ 25.9 million Agricultural Bank of China US$ 13.0 million Final Beneficiaries US$ 24.0 million IDA US$ 64.0 million TOTAL US$136.9 million Economic Rate of Return: 34% Staff AppDraisal * Leort Report No.7990-CHA IBRD No. 21726 This document has a restricted distribution and may be used by recipients only in the perfor,ance of their official duties. Its contents may not otherwise be disclosed without World Bank authe ization. MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE PEOPLE'S REPUBLIC OF CHINA FOR THE MID-YANGTZE AGRICULTURAL DEVELOPMENT PROJECT 1. The following memorandum and recommendation on a proposed Credit for SDR 48.6 million (US$64 million equivalent) to the People's Republic of China is submitted for approval. The proposed credit would be on standard IDA terms with 35 years maturity and would help finance agricultural development in Sichuan and Hubei Provinces and Chongqing Municipality. 2. Rackaround. Agriculture in China, including crops, livestock, forestry and fisheries, provides sustenance for over one billion people; it is an important source of income for some 190 million farm families and accounts for about 30% of the country's GDP. Only about 137 million ha of China's land area of 960 million ha are arable. Farming systems are intensive with heavy inputs of labor, chemical and organic fertilizers, small machinery and water. Nearly half of the rropped area is irrigated. Foodgrains occupy about 70% of total cropland and account for about one-third of the agricultural output. Intensive farming has allowed China to meet the basic food requirements of its population, about 22% of the world's total, and to produce an increasingly sophisticated mix of cash and commercial crop from less than 11% of the world's arable land. China's decade-long rural reform program has revitalized the agricultural sector, provide an impressive growth and structural change through the introduction of the production responsibility system, increased producer prices and enlarged the role of the market. The gross value of agricultural output (GVAO) increased by 83% in real terms during 1978-88 at an average annual rate of 5%, substantially more than that of the previous 25-year period (3.2%). While significant growth has been achieved, the Government's central concern in recent years has been stagnating grain production, which peaked at 407 million tons in 1984. Production, thereafter ranged between 391-402 million tons. Major efforts have been made to bring the production back to the 1984 level and grain production rebounded in 1989 to reach 407.9 million tons an historical record. 3. Recent government strategies to increase grain production include diverse measures such as increasing state investment in agriculture, mainly in * irrigation expansion and rehabilitation, and introducing partial reforms in grain procurement, distribution, price and subsidies. Local governments in particular have placed high priority on investments in uplands, natural pastures, and water surfaces for expanding production and productivity of nonstaple food and commercial crops to meet growing demand for these commodities, increase local entity profits and farmer incomes, and help alleviate the pressure on the demand for grains. Unlike in the past, government policy increasingly emphasizes that cropping must be commercially oriented and match with local agro-ecological conditions. This has enabled China to achieve significant increases in the sown area, productivity and output of major industrial crops and fruits. 4. The Government's long-term objectives for the agricultural sector are to increase the production of food, feed, industrial crops and animal products to meet the requirements created by population and income growth, and i.v -2- increase income and employment opportunities in rural areas. Given China's shortage of arable land (0.1 ha per capita), development planners have focused on the need to increase the productivity of presently cropped areas and to efficiently develop the few remaining areas of unutilized lands. Steps are also being taken to stabilize grain outputs and to raise the the value-added in the farm sector - by increasing the production and quality of food crops, animal feed, livestock, fruit, fish and industrial crops - and also in agro- processing, which is undergoing rapid expansion. 5. The Bank Group's strategy for lending to China's agricultural sector has been to support the Government's objectives outlined above. Leading to date has included 25 operations involving a total assistance of about US$2.5 billion for land development; irrigation and drainage; support services, including agricultural education, training, research, credit and seed production; development of specialized product subsectors, including rubber, forestry and fisheries; and area development projects combining crop and livestock production, agro-processing and support services. Implementation of most ongoing Bank Group financed projects in the agriculture sector is on schedule. Future Bank Group lending would continue to support projects in large and diverse subsectors, e.g., water resources development, agro- processing, rural credit and forestry. 6. Rationale for IDA Involvement. Bank Group participation would support the Government's objectives of increasing fruit production for domestic consumption and exports, alleviating poverty by increasing farmers' incomes and making productive use of hilly land unsuitable for grain cultivation. Bank Group involvement would introduce important additional reforms to the development of the already liberalized fruit markets. In particular, it would (a) design financially independent, well-managed marketing corporations that would have to compete for farmers' supply; (b) introduce a joint stock company concept with shareholders and Boards of Directors, and encourage producers' participation as shareholders; and (c) give farmers autonomy in managing production by having a choice to sell fruit to the highest bidder, and to repay loans in either fruit or cash, thus preserving a market relationship with marketing corporations. Bank Group involvement would also give direct access to international fruit industry experience and technology. It would have an impact on fruit propagation techniques by establishing technical standards through introducing modern virus indexing and plant certification programs. It would introduce new technology by strengthening research and extension facilities, by training farmers, researchers and extension agents and by providing technical assistance. Bank assistance in the design of the project includes soil conservation measures, e.g., terracing, contour planting, use of green cover crops and efficient utilization of available water resources, and would contribute to improved environmental conditions. The introduction of efficient irrigation technology through Bank assistance would minimize the effects of drought and stablilize production. Bank involvement in the project would also assist in the introduction of modern post-harvest technology and facilities for grading, fruit treatment and packing to improve the marketability of the products and to extend the consumption season. 7. Prolect Objectives. The project objectives would be to increase production, productivity and marketability of fruit in low income areas and, thus, increase income and alleviate poverty. It would do this by structuring -3- the production side so as to atiefy domesic and export demand for quality, variety and seasonality and by stimulating the development of effective marketing institutions. The project would (a) establish new smal1holder orchards on presently uncultivated hilly slopes and rehabilitate existing ones; (b) strengthen research and extension services to implement sound virus indexing and budwood registration programs; (c) improve fruit quality and increase fruit value at the orchard level by providing furmers with healthy, disease-free seedlings of marketable varieties, helping them to improve their cultural and post-harvest practices, and introducing clear price incentives for graded, quality fruit production; and (d) improve fruit marketing by establishing commercially effective county corporations to market quality fruit in local, distant and export markets, introducing modern post-harvest - techniques, and providing investment in packing and storage facilities. 8. Proiect Description. The project consists of three major componentst (a) The nroduction component would develop marginal hilly lands in poor mountainous areas and finance investment in model fruit nurseries (77.5 ha), budwood mother-tree orchards (120 ha), new production orchards (11,986 ha), and rehabilitated orchards (2,473 ha). (b) The vost-harvest and marketing component would establish and strengthen Provincial and County Fruit Development Corporations (PFDCs and CFDCs) so that they would effectively market quality fruit in local, distant and export markets by providing training in modern management and post-harvest techniques, ensuring management autonomy, subjecting them to market discipline by allowing farmers to sell to other buyers, and providing investment in packing and storage facilities. (c) The institutional sUMoort comoonent would strengthen the Provincial Agriculture Bureaus, capabilities to identify, propagate and distribute disease-free planting materials, would provide technical assistance to institutionalize virus indexing and budwood registration programs, and would train research and extension staff in all aspects of fruit development. The project, to be carried out over 5 years, provides funds for worke; vehicles, machinery and equipment; fertilizer, pesticides and materials; office furniture and supplies; training and technical assistance. The total cost of the project is estimated at US$136.9 million equivalent, with a foreign exchange component of US$63.8 million (47%). Retroactive financing of up to US$6 million is being recommended for expenditures made after June 15, 1989. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in China are given in Schedules C and D, respectively and a map is attached. The country strategy statement for China is attached as Schedule H. The Staff Appraisal Report, No. 7990-CRA dated July 17, 1990, is also attached. 9. Agreed Actions: To ensure effective implementation of the project, the national and local governments have agreed to the following: (a) adequate counterpart funds would be provided in a timely fashion; (b) the training components would be carried out in accordance with a schedule acceptable to IDA; (c) CFDCs would have the authority to make independent and responsible production and marketing decisions; (d) project funds onlent to beneficiaries would be at interest rates no less than ABC charges on subloans for similar purposes and with similar maturities and such rates would be reviewed from time to.time with IDA; and (e) all effluents from packing lines would be treated and -4 the Provincial Environmental Bureaus would clear the final arrangements for waste disposal and set up and maintain a system to monitor effluent quality throughout the life of the project. 10. Benefits and Justification. At full development, new orchards developed under the project would produce annually 260,000 tons of citrus valued at US$61.5 million and 48,000 tons of other fruits valued at US$15.3 million. Incremental production from rehabilitated orchards would be 42,000 tons valued at US$10.8 million. The economic rate of return for the project as a whole is 34%. Per capita incomes would increase by an average of 180% for 130,000 poor small farm families who presently are cultivating an average of only 0.4 ha and have an average per capita income of between US$50-S0 per annum. This income increase would be significant in alleviating poverty in some of the poorest areas in China. Beyond this, significant employment would be created in all three project areas. The develcopment of hilly areas with contouring and terracing would improve environmental conditions, and the project would provide a replicable model for other fruit production areas. 11. Bisks. The project faces no major organizational or technical risks. The risks that do exist are either small initially or have been effectively minimized. The risk of inadequate management capability in project entities is minimized because management is essentially in place and would be strenghthened under the project. There are no obvious agronomic risks. Fruit production has been carried out in this region for thousands of years, and farmers already have basic knowledge of production techniques. The small risk of frost damage in the eastern part of Hubei is minimized by planting of cold tolerant varieties and the use of sprinkler irrigation financed under the project. Marketing risk is small since domestic demand is rising rapidly. The major risks are that price differentials for high-quality grades may not be as large as expected and that rail transportation may not be adequate to handle the increased production. The former would be minimized by the grading system introduced under the project, the autonomy of the CFDCs to set price differentials and the ability of farmers to sell to alternative buyers. The latter would be minimized by the extension of the consumption (and shipping) season, due to the project's emphasis on early and late maturing varieties and on storage facilities, and by setting up a liaison unit in the provincial Bureaus of Transportation to work closely witA railway planners to effectively manage and get priority for fruit transportation. 12. Recommendation. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed Credit. Barber B. Conable President Attachments Washington, D.C. July 17, 1990. -5- SCHEDUEM 0IN MID-YANTZE AGRICULTURAL DEVE=PENT PROJECT ESTIMATED COSTS AND INANCING PLAN Estimated Costs IAIal Faeign Total -----------(US$ million)------ Nurseries and Mother Tree Gardens 1.1 0.9 2.0 Orchard Establishment 50.8 39.3 90.1 Orchard Rehabilitation 5.3 6.8 12.1 Marketing Facilities 5.3 6.2 11.5 Institutional Support 2.1 3.0 5.1 Base Cost a/ 64.6 56.2 120.8 Physical Contingencies 1.4 1.6 3.0 Price Contingencies 7.1 6.0 13.1 Total Project Costs 73.1 63.8 136.9 Financing Plan: Local Forei n Total . ------ (US$ million)------ IDA 0.2 63.8 64.0 Provincial/Municipal Governments 7.5 - 7.5 Prefecture Governments (Sichuan) 2.5 - 2.5 - County Governments 25.9 - 25.9 Agricultural Bank of China 13.0 - 13.0 Beneficiaries 24.0 - 2A& Total .1 L. 136.9 a/ Project is exempt from taxes and duties. 6- -6-SCHEDULE B Page 1 of 2 MID-XANGTZE AGRICULTURAL DEVELOPMENT PROJECT PROCUREMENT METHODS AND DISBURSEMENTS Procurement Method Total Project Element ICB LIB. LCB Other NA a/ Cost (US$ million) Land Acquisition 0.6 0.6 (0.0) (0.0) Works 40.6 40.6 (16.2) (16.2) Land Prep. Materials 10.8 10.8 (3.3) (3.3) Planting Materials 2.3 2.3 (0.9) (0.9) Organic Fertilizer 11.0 11.0 (0.0) (0.0) Machinery & equipment 19.7 0.8 2.2 22.7 (17.0) (0.8) (0.9) (18.7) Vehicles & Boats& 8.3 0.2 - 8.5 - (7.5) (0.0) (7.5) Fertilizer & Pesticides 15.2- 15.2 (13.7) (13.7) Srail. Amendients &Bordeaux Mixture (Fungicide) 6.1 6.1 (2.3) (2.3) Office Furniture & Supplies 0.4 --0.4 (0.2) (0.2) Training & Tech. Assistance 1.2 1l.2 (1.2) (1.2) Labor& - - 17.5 17.5 Working Capital (0.0) (0.0) Total 43.2 0.8 62.0 12.8 18.1 136.9 (38.2) (0.8) (23.6) (1.14) (0.0) (64.0) Notes: Figures in parentheses are the respective amounts financed by IDA Credit. All imounts include contingencies. a/ Not applicable. -7- . SCHDULE B Page 2 of 2 Disbursements % of Expenditures Amount of Credit to be financed (US$) Works 16,200,000 40% Machinery and Equipment 18,700,000) 100% of foreign ) expenditures: 100% Vehicles and Boats 7,500,000) of local expend- ) tures (ex-factory Fertilizer and Pesticides 13,700,000) Zosts) and 75% of ) other items procured Materials & Supplies 6,700,000) locally. Training and Technical Assis ance 1,200,000 100% IduiL 64,000,000_ Estimated IDA Disbursemnts 1221 122 1993 1994 1995 -----------(US$ million)in)----------- Annual 13.0 19.0 21.0 8.0 3.0 Cumulative 13.0 32.0 53.0 61.0 64.0 -8- SLIEDUL C CHIM TIMETABLE OF KEY PROJECT PROCESSING EVENTS (a) Time taken to prepare: 20 months (b) Project prepared by: Government with IDA assistance (c) First presentation to IDA mission: October 1987 (4) Appraisal mission departure: may 1989 (e) Negotiations: March 1990 (f) Planned date of effectiveness October 1990 (g) List of relevant PCRs and PPARs None 9 Schedule D Pelof 3 STATUS 09 BANK 0t0UP OPEATZIhNS IN TIE PIOPLE'S REPUILIC 01 CNZINA A. STATRNRNT O 1ANK LOAMS AND IMA CREDITS al (as of March 31, 1990) Loeal Amount USi ilion) Credit ftscal (fet of cancellatione) umber Teav Borrower Purpose Banh IDA Undisbursed b/ . ive lom*e and ten cridits have been fully disbursed 433.7 525.9 - Of,'hic SCAL: 296711932 88 MC Rural Sector Adl. 200.0 100.0 2231 85 Pm Petroleum i (Daqing) 162.4 - 2.5 2252 -» - MC Petroleum II (2hongyaaun-eiu> 190.8 - 16.0 1411 84 MC Polytechnie/Tv University - 15.0 17.3 1417 14 PRC Rubber Developnt - 100.0 5.1 2382 04 PR Lubuge Bydroelectric 145.4 - 30.2 2394 14 PC Railway 220.0 - 8.3 1472 84 PRC Rural mealth 8 Nødical duc. - 85.0 15.9 2426 84 MC Petroleum III (Karamy) 92.5 - 7.5 243411491 84 mC Industrial Credit il (CIs II) 105.0 70.0 7.8 2444/1500 84 MC Agri~ultural Education II 45.3 (2.5) ci 8.2 1516 85 PRC Aricultural Research II - 25.0 8.8 1551 85 MC University Develop~sst II - 143.0 42.1 2493 85 PaC Power II 117.0 - 19.1 2501 85 ZNRC Cha un (Luan) Coal Minin 120.5 - 99.5 1577 85 mC See - 40.0 1.8 1578. 85 PRC Rural Vater Supply - 80.0 18.4 2539/1594 85 C HighPay 42.6 (30.0) g 14.4 2540 85 PRC Railway il 235.0 - 149.8 2541 85 PMC ertiliser Re~abilitation & 97.0 - 5.2 ~sergy Saving 1605 85 PR Forestry Developmnt - 47.3 ly.6 257911606 85 mC PiShilang-Cbaou Area Development 17.0 75.0 26.6 2580 85 PRC Meiyuan Gag Field Technical 25.0 - 9.2 Assistance 1642 86 PRC Rurs) Credit II - 90.0 1.7 2659/1663 86 mC Indust-ial Credit IZI (CIS III) 75.0 25.0 12.0 1664 86 PRC Technical Cooperation Credit II - 20.0 20.1 1671 86 PR Provincial Universities - 120.0 18.0 2678/1680 86 PaC Tird Railway 160.0 70.0 155.8 2689 86 mC Tianjin Port 130.0 - 98.6 1689 86 MC Freshwater Pisheries - 60.0 1.8 2706 86 PRC Bellungang Themal Power 225.0 - 63.2 2707 86 PRC Y*ntan flydroelectric 52.0 - 23.6 2708 86 PRC Liaodong Say Petroleum Appraisal 15.0 - 0.9 2723/1713 86 PRC Rural Health & Preventive Med. 15.0 65.0 65.4 1733 87 PaC Red Sølil - 40.0 5.3 2775 87 PRC Shulkou Hydroelectric 140.0 - 66.6 2783/1763 87 PRC Industrial Credit IV (CIS IV) 250.0 50.? 1*0.5 2784 87 PR -Shhål Machine Tools 100.0 - 84.9 . 10 - Schedule D Page 2 0f3 Loan/ Amount (US$ million) Crodit Plocal (net of cancellation ) Nuøber Tear sorrowver Purpos ank - IDA UdlSbe4 tl 1764 87 MC XIjiang Agricultural Developmnt - 70.0 37.7 2794/1779 87 MC Shanghai Severag 45.0 100.0 122.8 2811l1792 87 PaC ftijing-Tianjin-Tanggu Epressway 25.0 125.0 85.2 2812/1793 87 MC Ganeu Provincial Developsant 20.0 150.5 121.2 1835 87 PMC Planing Support & Special Studies - 20.7 17.6 2838 87 PaC Pørtiliserr Rationalisation 97.4 - 86.3 2852 87 MC liajlag Thermal Pover 190.0 - 155.3 1871 88 PIC Rural Credit III - 170.0 35.3 2877/1845 88 Pac Rungpau Port 63.0 25.0 76.2 2907/1875 88 mC Dalian Port 71.0 25.0 79.5 1885 88 PRC Northern Irrigation - 103.0 62.8 2924/1887 88 PRC Coastal Lands Developmnt 40.0 60.0 50.7 1908 -88 PRC Teachør Training - 50.0 29.0 2943 88 PRC Pharmaceuticale 127.0 - 114.1 2951/1917 88 PRm -sichuan eighay 75.0 50.0 115.2 2952 88 PRC Sha ni fighvay 50.0 - 41.2 1918 88 PC Dazifg An Ling Porestry - 56.9 39.0 2955 88 PRC Beilungang II 16.0 - 119.2 2958 88 PBC Phosphate Development 62.7 - 61.6 2968 88 Pm Railway IV 200.0 - 179.8 1984 89 PRC Jiang Proviucial 8ighay - 61.0 49.5 1997 89 PRC Shas I Agricultural Døv. - 106.0 96.0 2006 89 M1C Textboo Deveont - 57.0 50.4 2009 89 PRC Integrated Reg. ealth - 52.0 47.0 3006 89 PRM Nngbo & Shanghai Porte 76.4 • 65.1 3007 89 mC xismn Port 36.0 - 36.0 3022 89 PRC Tieajla Light Industry 154.0 - 152.0 3060/2014 89 PRC ~nner Yngolia Railway 70.0 80.0 145.7 2017 89 MC Shandong Agriculture Dev. - 109.0 106.6 3066 89 PRC Rubei Phosphate 137.0 - 137.0 3073/2025 89 PRc Shandong Prov. ELghway 60.0 50.0 110.2 3075 89 PRC Fifth Industrial Credit 300.0 - 267.0 2091 90 PRC N.China Earthquake Reconstr. - 30.0 30.0 2097 90 PRC Jiangi Agric. Dev. - 60.0 59.7 2114 90 PRC Vocational & Tech. Educ. dl - 50.0 49.8 Total 5,185.7 3,477.3 of which has been repaid 158.6 - Total now held by Bak and IDA 5.027.1 3,477.3 Amount sold* Of which repaid - - Total Undisbursed 2.872.1 1.409.3 4282&4 ~/ Thøeftates of the pJe" e u aid in Paft A le dsselbed In Q ~*stt øe en all mak/IDA fI p"Jdc"s la exsemtlø, hia le udsted te~s a aend eIrehlated t* the 9e 9~e eee a April 80 and 0 a. Al A eredite se desesated "In aft (019e L:pleølkmen$ VI), ndlsbusd 8 ~ e %di belaeces ur renveuted to del øes *b the eusere~ mga usle b*~usse the del ler ad he SM. in sme sse, ~heraf erM ths edlsberssd beimmce lødlea~s * deller amel guem~er thea the riglna$ prismipal ~r4dil assue6 espressed l dellars. % CedI ftily dIelmruud. s 8ie. 11 - Schedule D Page 3 of 3 B. STATEMENT OF IFC INVESTMENTS (as of March 31, 1990) Invest- Fiscal Type of Loan Equity Total ment no. year Obligor business -- (US$ million) -- 813 1905 Guangzhou and Peugeot Automobile 15.00 3.03 18.03 974 1987 China Investment Co. Investment 3.00 -0.04 3.04 1020 1987 Shenshen China Bicycle 5.00 - 5.00 Bicycles Co. Ltd. Manufacture 1086 1988 Crown Electronics Electronics 15.00 - 15.00 1119 1989 Shenshen Chronar Solar Solar 2.00 1.00 3.00 Energy Energy Total Gross Comitments 40.00 4.07 44.07 Less cancellations, terminations repayment and sales 0.65 - 0.65 Total Commitments now Held by IFC 39.35 4.07 43.42 Total Disbursed 37.35 4.07 41.42 Total Undisburse§ 2.00 0.00 2.00 04116/90 AS30 - 12 - Schedule E Page 1 of 13 CHINA: Country Policies and Bank Group Assistance Strategy 1. This annex discusses China's development problems and prospects, the key reform priorities at the macroeconomic and sector levels, and the Bank Group's assistance strategy. It draws upon a country economic report entitled "Chinaz Country Economic Memorandumt Between Plan and Market, (No. 8440-CHA), which was distributed to the Executive Directors on May 9, 1990. Background. 2. Beginning in 1978, China initiated economic reforms, first in rural areas, followed by reforms in urban areas and in the external sector. These reform policies have contributed significantly to China's rapid GDP growth, averaging about 9.5 percent per annum over the last decade. High investment rates (over 35 percent of GDP since 1985) and a strong domestic savings performance, which contained the need for external borrowing, also contributed. Industrial modernization increased the competitiveness of China's manufactures in the international market and total merchandise exports grew from $18.3 billion in 1980 to $52.5 billion in 1989, to reach almost 13 percent of GDP. China's share of international trade rose from 1.0 percent to 1.7 percent during the same period. The average incomes of China's 800 million rural population more than doubled and absolute poverty receded nationwide. In 1988, some 13 percent of rural households fell below the poverty line, compared with 17 percent in 1981. Infant and child mortality declined, the rate of population growth was slowed and universal five-year primary education was achieved. 3. The economic system reforms introduced (some on an incremental basis, some on an experimental basis) after periods of local and regional experimen- tation have served to magnify the growth impulse derived from China's high rate of capital accumulation. In the state enterprise sector, industrial, commercial and transport enterprises now have greater freedom to determine the composition and pricing of output, to retain after-tax profits and decide on the disposition of retained earnings. Fiscal reforms have, in turn, allowed resources previously annexed by the government to be retained by enterprises and this, together with a large degree of fiscal decentralization, has given provincial authorities more discretion in taxation and resource allocation. Administrative decentralization has also transferred more authority to plan and manage economic activity from the central government to provincial and local bodies, more responsive to local conditions and strongly motivated to promote development, although in some cases with very short-run or limited horizons. Central control over the economy has been scaled back by reducing the number of commodities subject to mandatory plan targets and the share of key products distributed through state-controlled channels. 4. Although China remains an economy where public ownership is dominant, the government has permitted other forms of ownership (e.g., private, coopera- tive, foreign joint venture, etc.). Product markets have been created, first in the rural areas and then in the urban sector, which allowed producers to trade their above-plan output at freely determined prices. Financial reforms have dismantled the old monobanking system and increased the variety of finan- - 13 - Schedule E Page 2 of 13 cial institutions, as well as the volume and scope of financial transactions and instruments. The pronounced shift away from budgetary support of invest- ment has reinforced the importance of the financial sector in mobilizing and allocating resources. Lastly, external trade and exchange rate reforms have had a significant impact, and the creation of several Special Economic Zones and legislation governing foreign investment and the rights of overseas busi- nesses, paralleled by fiscal and wage incentives and now infrastructure, has helped attract an increasingly large volume of foreign capital. . 5. Since the inception of the reforms, the government has emphasized the role of incentives and market forces, especially prices, in improving economic efficiency. In agriculture, a large proportion of output is sold at prices . that are free. In the industrial sector, the government has allowed a growing proportion of products to be sold at market prices outside the plan, and it has raised the prices of major industrial inputs, including energy. This has meant that, at the margin, most decisions are being based on prices which reflect relative scarcities. This is especially true of the collectives and the township and village enterprises (TVEs). This liberalization of prices has contributed significantly to the rapid growth of the agricultural and industrial sectors in the post-reform period. Economic Growth and Recent Developments. 6. In recent years, the government has experienced difficulties in combining its growth and reform objectives with maintenance of economic stability. China's success in achieving growth targets was accompanied by emerging structural imbalances, but as long as fiscal and monetary policies remained under control, rapid growth coexisted with stable prices. However, industrial decentralization, accompanied by "investment hunger," credit policies responsive to local demands, and a decentralized revenue policy beginning in the mid-1980s, weakened the center's ability to control monetary aggregates and began to erode the government's revenue base. 7. More generally, the attempts at transforming such a complex economy in fairly short span of time have inevitably resulted in macroeconomic, sectoral as well as institutiowal imbalances. During the course of the 1980s, China experienced cycles in economic activity of increasing severity, associated with the transition from a centrally planned system to one where plan and market coexist. First, the lag between administrative decentralization and the creation of an institutionalized capacity for macromanagement gave rise to excessive monetary expansion over the 1985-88 period that stoked inflation. In the absence of new fiscal measures to offset the decline in traditional revenue sources, revenues as a percentage of GNP fell, and the budget deficit gradually widened from 0.5 percent of GNP in 1985 to 2.5 percent in 1987 and has remained at about that level during 1988/89. The decisions to increase agricultural procurement prices an4 the larger state subsidies to urban consumers, combined with rising enterprise losses, are important ingredients in explaining the worsening budgetary picture. Second, the dual pricing system that has evolved with the emergence of free markets has led to distortions which reinforce the propenaity towards negotiation and the possibility of corruption, and shelter enterprises from competition by virtue of bureaucratic connections and advantages that *soften" their budget constraint. Third, slow progress towards more competitive markets that discipline enterprise behavior has allowed decentralized provincial - 14 - Schedule E Page 3 of 13 bureaucracies to push ahead with unsustainable rates of expansion. As yet, China has been unable to enforce financial accountability on the state enterprises so that the effects of market forces to rationalize capacity or achieve efficient resource allocation have been blunted. 8. Finally, industrial and economic development in China has been constrained by inadequate infrastructure. Investments in transportation, telecommunications and energy have lagged behind those in industry. As a result, serious bottlenecks in these key sectors have emerged, which threaten to impede rapid future growth if not addressed. 9. It was against this background of partial reforms that demand pres- sures became pronounced in the first half of 1988, pushing the economy to the limits of its productive potential. (For 1988 as a whole, GDP grew by 11.2 percent, led by industrial growth of 20.7 percent, and the consumer price index rose 20.7 percent. See Economic Indicators Tables attached.) When, under these overheated conditions, the authorities announced, in June 1988, plans for a major price reform, inflation worsened as consumers switched in panic from financial assets into durable consumer goods. Prices that had been rising at annualized monthly rates of 10-15 percent in early 1988 soared to an (annualized) monthly rate approaching 80 percent, in August. Faced with this crisis, the government postponed further price liberalization and, in late 1988, adopted a series of stabilization measures, with inflation control becoming the most important policy goal for 1989. The main elements of a medium-term stabilization strategy began in late 1988 and policies were being translated into actions by early 1989. 10. The stabilization package included, first, administrative guidelines to cut state investment by some 20 percent, to reduce the level of excess demand. A contractionary monetary policy, relying mainly on the administra- tive allocation of credit was also imposed, along with higher interest rates and increased reserve requirements. There was also some tightening of state control over price setting, and an increasing use of income policies to con- tain the emerging wage and bonus spiral. This policy response is consistent with recommendations in the World Bank's earlier 1989 Country Economic Memo- randum (7483-CHA), which emphasized the need for a credible stabilization policy but cautioned against a hard and prolonged application of austerity measures that, in the Chinese context, could result in much dislocation and large production losses, threaten economic vitality and risk stagflation. 11. Evidence to mid-1990 suggests these measures have been successful in stabilizing the economy but at the cost of a larger-than-necessary sacrifice in growth. While inflation in the first quarter of 1990 has been brought down to the low single-digit level (3.9 percent year on year), there was also a marked slackening in the rate of industrial growth throughout 1989, which became negative in the last quarter of 1989. By the first quarter of 1990, industrial output had regained some lost ground, and recouped its level of a year earlier. Urban registered unemployment worsened, although much of the shock has been absorbed by the return of the large transient population to the countryside. 12. On the external front, there have been some positive developments. The trade deficit widened significantly by June 1989 to $6.6 billion, and the reduction in service income, especially tourism receipts and the abrupt - 15 - Schedule E Page 4 of 13 cessation of foreign direct investment commitments following the June incident, threatened to become major burdens on the external accounts. However, by year-end, administrative controls on imports and dampened domestic demand, together with good export growth led tc a current account deficit for the year as a whole of $4.6 billion (about 1.1 percent of GNP). The first quarter of 1990 showed a surplus in the trade account of about $1.6 billion; for the year as a whole the current account is expected to be in slight surplus, aided by the 21 percent devaluation of the renminbi in December 1989. . 13. Since early 1989, Chin.a has concentrated its efforts on regaining control over macroeconomic developments, following the overheating of the economy and rapid inflation of 1988189. In 1990, stabilization remains at the . forefront of domestic policy concerns; however, the government's reliance on administrative measures to control the economy has significantly reduced China's growth rate and overall efficiency. In the most recent stabilization effort, however, the mix of instruments employed was different from those used during earlier episodes of rapid price increases, with greater emphasis on the use of indirect levers. The sustainability of maintaining acceptable rates of economic growth in the coming decade hinges upon China's commitment to further reform and the openness of its economy, as discussed in the recent CEM. 14. As a result, while recent political and economic developments have affected China's credit rating and have raised borrowing margins, China's debt indicators have not been significantly affected, as both GNP and exports have risen rapidly. The debt service-to-exports ratio has remained at about 9 percent, well below China's official policy ceiling for this ratio of 15 percent. Under a base case scenario, China's current account deficit could average just under $3 billion per annum over the next five years, significantly under 1% of GNP. Debt-to-GDP ratios are expected to remain in the 10 percent range, while the total debt-to-exports ratio is about 75 percent. If China's exports grow more slowly than projected in the base case, import growth would probably also be constrained by the authorities, because a higher borrowing target, although feasible in market terms, might not be comfortable in terms of the aforementioned debt service indicators. Current estimates show China's total debt outstanding at end-1989 to be about $43.8 billion. Currency and gold reserves were equal to $17.5 billion, or about 3.5 months of imports, at end-1989. Past trends and the current assessment suggest that the country's growth as well as export potential are substantial, and that savings behavior is likely to remain stable. The projected current account trends described above, even in a low case scenario, do not portend payment difficulties in the foreseeable future. China's creditworthiness for international lending should not therefore be in question. 15. For the future, with continued incremental reforms and macro- stability, China's growth prospects are good. While growth in 1990 will be a modest 2-32 because of the austerity program, the government's intention is to achieve a growth rate of 62 p.a. in the next few years. At this rate of expansion, China should be able to experience single digit inflation, and, assuming domestic savings remain high, have only modest current account deficits. This rapid income growth would be reflected in higher living standards for the general population, as economic gains will not be eroded by population growth. Projections based on current assessments of external trends suggest the exports can grow at some 6-8% p.a. over the 1990-96 period, with imports growing at about the same rate as GNP -- 62. The current account under this base scenario would remain well below 12 of GNP. - 16 - Schedule E Page 5 of 13 The Reform Experience. 16. It is widely recognized that China's rapid growth over the past decade is attributable largely to the economic reform policies initiated in 1979 and the resulting improvements in overall allocative efficiency. There is also consensus that its future prospects will depend critically on continued reform and openness to the outside world. Chinese leaders have repeatedly reaffirmed, in the Fifth Plenum of the Central Committee Meeting of November 1989 and more recently in the leadership speeches to the National People's Congress in April, 1990 as well as in their meetings with the Bank's senior management, that these policies remain the core of China's long-term development strategy. There are indications that these pronouncements are being translated into action. For instance, the NPC approved a new law for Sino-foreign joint ventures, and new price adjustments have been announced for cotton, and for rail and water transport freight tariffs. 17. Commitment also remains to further reforms in the areas of enterprise contract responsibility systems, taxation, and social security. Among the reform achievements to date has been the broadening and delineating the decision-making authority of firms through enterprise reform. Virtually all state-owned industrial and nonindustrial enterprises in sectors such as trans- port, commerce, and construction are now subject to a profit tax system, which replaces the earlier system of remittance of profits to the government budget. While further reforms are required in enterprise taxation, these fiscal reforms have given enterprises and provinces significantly more autonomy. Urban collective and individual enterprises, as well as TVEs, have also been expanded, although very recent policies curtailed their growth (these have experienced the highest growth rates in the economy over the past few years) while the excess demand situation is brought under control. 18. With respect to investment and financial policies, new banks have been established, and a variety of financial instruments are emerging, broad- ening the range of financing available to enterprises, beyond only bank credit. Reforms were also introduced in the trade and payments regime, which reduced the government monopoly on trade and foreign exchange, and a second round of reforms in agriculture (including land tenure contracts and leases) was initiated in 1989. Finally, the dual price system has left a shrinking share of goods subject to mandatory plan allocation and administrative pric- ing; above-quota sales of the same goods take place at flexible or free-market prices. Although in 1989, the list of state-distributed commodities was slightly increased, the Government has indicated its commitment to further narrowing the scope of physical allocation and administered pricing over time. There is clear awareness that the dual pricing system risks becoming a barrier to further economic progress: while initially boosting incentives and produc- tivity especially in agriculture and light industry where most prices were freed early on, the system now increasingly gives rise to distortions, since key inputs such as steel, energy, cement and fertilizers remain controlled. 19. As is inevitable, the reforms and the manner in which they have been implemented have, in spite of their benefits, have had some unsettling effects. For 30 years, China sought, and to a lrge degree achieved, price stability and distributional equity. Since 1979, the status quo has been - 17 - Schedule E Page 6 of 13 undermined in many wayst by freeing of agricultural and other prices, by the growth of the collectives sector and by the larger autonomy of industrial firms. Reforms have weakened monetary policy, on the one hand, as local gov- ernments have been able to circumvent administrative credit controls, and on the other, the tax system--only partially reformed--is unable to effectively implement an effective revenue policy. Rigidities in enterprises continue to put pressure on the fiscal accounts for ongoing subsidies. If China is to resume its ascent to prosperous modernity, some of the problems that have arrived with reforms must be settled. Longer-Term Issues and Priorities. 20. The criteria against which China's performance will need to be assessed consist of a series of measures at the macroeconomic and sectoral levels to promote growth, alleviate poverty and maintain stability. China's continued growth performance is predicated on the success of macroeconomic management, and the reconciliation of growth and stabilization objectives. In this context, maintaining an adequate saving rate and avoiding inflation and deep cyclical downturns will be major goals, but not the only ones. China has tackled a serious macroeconomic crisis; whether inflation is being temporarily repressed and will again become a threat when the economy revives in the post- austerity period depends very much on how far the authorities are prepared to go in developing indirect monetary instruments and engage in fiscal, enterprise and price reforms. Indeed, the impact of recent administrative measures on output growth has already led to pressures for a relaxation of policy, particularly bank credit. Thus, unless steps are taken to develop indirect instruments of economic policy -- instruments which do not rely on administrative measures -- to enhance the effectiveness of stabilization policies and strengthen the role of market forces, inflation and excess demand could well resume when restraints are relaxed. The effectiveness with which this is done will need to be monitored closely. 21. To raise efficiency and to achieve the growth rates that are being sought over the course of the Eighth Five Year Plan (1991-96) and beyond, policy actions will be needed in several areas. Reform priorities include continued strengthening of macro-economic institutions and of macro-economic management and a rationalization of government finances and of the banking system. Continued reforms in price adjustments and further emphasis on the development of competitive markets are fundamental to the improvement of resource allocation in China. Trade reforms are another vital element of productivity enhancing reforms and refinements to external reforms already initiated should be pursued to ensure continuing competitiveness. 22. The environment of austerity and restrained demand during 1990191 should make price reform easier to implement. However, other reforms in the real sector, such as enterprise reforms, which are necessary to improve resource allocation and ease supply constraints, should also be adopted. Priorities for the 1990s also include strategies for sectoral development,- liberalization and further progress with ownership reform. The first will have a major influence on growth of the real economy, whereas the latter together with price reforms will determine the gains in efficiency and stability to be derived from the market system. If the balance between planning and markets could be shifted towards the latter, the problems arising from decentralized administration could be lessened, and the government would be able to pursue firm macroeconomic policies. - 18 - Schedule E Page 7 of 13 23. Assuring an adequate minimum standard of living for the rural population and an appropriate level of social services will also remain a major challenge, as enterprise and rural communal responsibilities in these areas are reduced. China's recent rapid income growth has led to a decline in the proportion of absolute poor: in 1988, some 132 of rural households fell below the poverty line, compared to 17% in 1981; this proportion is projected to decline further still. The problem of poor and backward rural areas in various parts of the country will continue to require attention. Redistributing financial resources to these areas through the fiscal system and easing restrictions on migration out of the poorest areas are some options for alleviating poverty. With respect to labor policies, inefficient utilization of labor in the state sector of the economy also continues to be a major problem and requires coordinated reforms in labor allocation, the wage system, enterprise management, and social services. Reforms in the system of education and training to further develop China's 'human capital" potential are also crucial. And efforts to further modernize the industrial sector must include greater efforts--in line with Chinese environmental policy and regulations--to improve energy and resource efficiency and thus protect the natural environment. 24. Hitherto, China's rapid growth has relied heavily on high capital- intensive investment; however, if growth is to be accompanied by parallel improvements in standards of living, a decline in the share of investment over the longer term and, above all, significant improvements in its allocation are necessary. Continued investment in energy, transport and agriculture are also necessary, as without new infrastructural investments and improved efficiency, economic growth will lag. In mobilizing resources in all these areas, China will require foreign resources and assistance. Finally, technological back- wardness and inefficiency must be addressed by reforms that facilitate transfer of advanced foreign technology. 25. As incomes rise, there will be major structural changes over the next decade, including a reduction in the share of agriculture, a rise in the share of light industry. The rising income levels will also call for greater development of the service sector (whose share of GDP at present is unusually low), best achieved through removing restrictions on collective and individual activity. Finally, the rapid aging of China's population and the concolhitant demographic shifts related to the slowdown in population growth will take place, and resources will have to be devoted to them, especially in the decades after 2000. Finally, with respect to the environment, continued action is called for. Continued progress on price reforms is among the more effective means to reduce environment degradation; this approach also has the advantage of encouraging a better balance between command-and-control regulatory measures and economic incentives to encourage efficiency and discourage pollution or unsustainable resource utilization. 26. Finally, to mobilize the external resources needed fcr growth, China will have to emphasize export growth and attract foreign investment and the transfer of technology in an at least temporarily more adverse environment. Continued borrowing on work4 capital markets, including increased but cautious commercial borrowing, will be needed through the end of the decade. This highlights the need for China to continue to emphasize export growth and - 19 - Schedule E Page 8 of 13 reform of the foreign exchange and trade systems in order to meet its economic objectives and the role that flexible use of exchange rate and pricing policies and trade reform can play in encouraging export growth. 27. In sum. how China's economy fares in the 1990s depends substantially on the institutional changes that are put in train and on the steady implementation of reform already identified and of others to be introduced. The explicit content, phasing and direction of these reforms remains to be explicated and the preparation of this agenda for inclusion in the Eighth Five Year Plan has been given the highest priority. 28. Next Steps and Priorities. The transition from centralized planning to an effective integration of plan and market is a difficult process. Expectations, both within China and abroad, have been pitched very high and may have to be moderated in the next few years while China attempts to develop appropriate indirect monetary and fiscal instruments, and implement the reform program. China will continue to require external support in its development efforts. Even with continued external reforms and good export performance, China will require external capital to finance the current account through the 1990s, and access to concessional and official capital will continue to play an important role in sustaining China's growth. China is still one of the poorest countries of the world, and its access to concessional capital for financing development and modernization is limited. 29. In the short-term, the Government's success at keeping inflation under control, while proceeding with the market, price and management reforms that are key to stimulating efficiency and growth in the economy, will be the main indicators of China's ability to pursue the reforms it has been successfully carrying out for more than a decade. Paralleling its reaffirmation of the need to rectify the economy and to deepen reform to ensure *stable and Oharmonious" development, the Fifth Plenum's call for some augmentation of the center's authority, particularly in selected areas of macroeconomic management, is a prudent one, provided that it gives an enlarged role to indirect policy instruments that can be employed more flexibly than administrative measures. 30. Now that inflation has been reduced, the most urgent task facing the government is to prepare an agenda of actions that will establish a sound . basis for strengthening macroeconomic policies and institutions to prevent a recurrence of demand and price pressures, and for advancing towards the next stage of price and market liberalization. To support and sustain these efforts, China will need to continue to strengthen the agencies responsible for macroeconomic policy and management, while decentralizing further many planning and administrative decisions. Looking further ahead, longer-term structural changes, including a reduction in the share of agricultural employment, greater urbanization and the associated rise in income levels, will challenge China to develop and encourage the service sector, an area which China's dynamic township and village enterprises, largely collective and individual entities, have taken up with considerable success. China's prosperity also depends on continuation of its remarkable success at controlling population growth, while at the same time putting in place efficient health and social services needed by an increasingly aging population, with the resources to fund them adequately, and on improving the management of China's natural environment. - 20 - Schedule E Page 9 of 13 Bank Group Operations in China. 31. Throughout this past decade, the fundamental objective of the Bank's lending activities, economic and sector work and associated technical assistance has been to provide support--materially and analytically--to China's economic reform and modernization process. The policies the Bank has supported have been a significant force in integrating China's economy with the rest of the world; and, within China, the Bank's international experience and perspective have made important contributions to both the design and implementation of the country's reform and development efforts. 32. The main elements of our country assistance strategy to date have beent to support the implementation by the Government of its economic reform program to analyze the options for, and the consequences of proposed reforms, their implementation, and the policy choices that confront the authorities during the transition; to facilitate the modernization and rationalization of the productive sectors of China's economy; and to assist in the further development of the country's rural and urban infrastructure, specifically in the priority agriculture, energy and transport sectors. While these strategic objectives remain both sound and relevant, there is nevertheless a need to strengthen the links between Bank activities and government reform priorities; to help eliminate infrastructure bottlenecks that currently impede full supply responses and stabilization; to support China's broader efforts to alleviate poverty; and to help the country overcome severe environmental problems. 33. Lending Operations. Since China's change of representation in the Bank Group in 1980, 83 projects involving lending of $9.1 billion have been approved. As of June 30, 1990, $2.4 billion of IBRD and $2.3 billion of IDA has been disbursed. Eleven projects have been completed and fully disbursed and two Project Performance Audit Reports have been distributed to the Executive Directors. Project implementation is generally proceeding well. Most project agencies, as well as the Ministry of Finance and the State Planning Commission, have established and staffed offices to handle Bank projects. IFC has made five investments in China for a total of $44.0 milliont in automobile and bicycle manufacturing, in an investment company, an electronics company, and a solar energy company. 34. The sectoral distribution of Bank lending to date has been broad based and is consistent with China's economic and social development priorities and with the resource transfer needs of the sectors concerned (see table below). Over 40 percent of total Bank Group lending to date has been in the transport and energy sectors, to alleviate the serious infrastructure bottlenecks which must be overcome to sustain economic growth, and about 25 percent to increase and rationalize agricultural production. Industry has absorbed about 19 percent of lending, and Bank operations have focussed on improving financial analysis and investment planning through support of financial intermediaries providing credit to state and collective enterprises, and on strengthening important subsectors such as fertilizer and machine tools. In total, the social sectors have accounted for about 14 percent of Bank lending. The shortage of skilled manpower has been addressed through investments in education. In public health, the Bank has supported programs to improve the quality of care and efficiency of service delivery, and 21 - Schedule E Page 10 of 13 projects in rural and urban areas to improve water supply and sanitation. A small share of lending has been allocated to technical assistance credits which support investment planning-and project preparation. Table ls Chinas Distribution of Lending, FY8I-90 (US$ Million) Sector Amount % No. of Projects Agriculture 2,360.0 26.31 23 General Agriculture 2,257.0 25.17 22 Irrigation 103.0 1.15 1 Industry and Finance 1,720.7 19.19 12 Dev. Finance 945.6 10.54 5 Other Industry 775.1 8.64 7 Transport & Energy 3,514.2 39.18 30 Transport 2,098.0 23.39 17 Power 1,034.4 11.53 7 Oil and Gas 302.3 3.37 5 Coal 79.5 0.89 1 Population and Human Res. 1,293.2 14.42 14 Urban and Water 225.0 2.51 2 Education 851.2 9.49 9 Population, Health & Nutr. 217.0 2.42 3 Other 80.7 0.90 4 TOTAL 8,968.8 100.00 83 35. Future country lending strategy and priorities are expected to give more explicit emphasis to operarions.designed to support or reinforce the implementation of specific policy and institutional reforms and to support operations with specific environmental, human resource development and poverty alleviation goals. In addition, the Bank's lending priorities are intended to reflect the sectoral priorities which underpin China's plans to improve t4e economic efficiency of basic sectors and to undertakelthe restructuring-needed to meet its growth targets. An adequate pipeline of social proje9ts is desirable in light of the changes taking place as a result of reforms, and social sectors will continue to receive signifiant Ban* support; nonetheless the bLlk of the Bank's commitments are planned'for the basic sectors including agriculture, industrial restructuring, energy and transport. - 22 - Schedule E Page 11 of 13 36. With respect to adjustment lending, one such operation -- Rural Sector Adjustment Loan JRSAL) -- a Bank loan of $200.0 million and an IDA credit in the amount of SDR 72.24 million -- was approved in FY88 and has been fully disbursed. There are, at present, no plans for further sector adjustment operations in China. 37. Major issues in sectoral management will be addressed through the orientation of the Bank's lending. The specific reform objectives and the criteria by which progress would be judged will of course vazy by sector. In agriculture, lending would be linked to, and designed to support overall sector objectives including reforms aimed at strengthening the overall incentive system, marketing institutions and the rehabilitation of the irrigation infrastructure built up beginning in the 1950s and 1960s. Operations are also planned in a variety of subsectors. Land and water resource conservation and development would be assisted through interregional and on-farm management and development, including a major irrigated agriculture program soon to be appraised. The shift from grant to loan finance and the increased autonomy of the rural banking system would continue to be supported through rural credit projects. Lending to provinces is expected to include multicomponent projects which incorporate specific market possibilities as well as efforts to generate off-farm employment and alleviate poverty. 38. In energy, lending would assist expansion and modernization of both production and distribution systems. Continuation of reforms which enhance energy planning are key to the success of Bank involvement. In the power subsector, the Bank would assist China in increasing generating capacity and improving utility planning and management (including environmental assessment and pollution control) through technology transfer, system planning, staff training and institution building. Tariff reform in the power sector is also a major focus of our sector strategy. 39. In transport, operations would be linked to continued improvements in long-term stretegic planning of the transport system to better utilize existing capacity, take advantage of new transport technologies and move toward a more efficient balance among the various transport modes. Improved transport is key to the reform and further integration of China's domestic markets. Increasingly, projects in transport are being undertaken directly with provincial governments to support planning and development of integrated regional systems. In roads, networks need to be expanded and major reforms in organization and financing will be required, which the Bank would support. The Bank has recently completed screening of several major highway projects that wcould be important investments in the next Plan. In railways, the Bank would not only help modernize railway lines, but will also focus on system planning and management, as well as technologies to improve domestic production of railway equipment and materials. 40. Operations in industry would continue to support China's enterprise reform efforts, particularly the development of new corporate structures to enhance more diversified ownership, as well as assist financial intermediaries providing credit to state and collective enterprises. Our focus also includes support of key reform experiments and enterprise restructuring. Operations would be linked to much needed ongoing reforms in investment planning and the development of subsectoral investment strategies consistent with comparative advantage. Following recent sector work on long-term structural options for - 23 - Schedule E Page 12 of 13 the industrial sector, direct, subsector and provincial operations would help upgrade technology, conserve energy, reform enterprise organization and management, while supporting environmental assessment and pollution control. In the financial sector, we aim to support reforms first through a program of technical assistance to the central bank, a key institution for the implementation of financial sector reforms and also through technical assistance to financial intermediaries. 41. Lending in education would be linked to China's ongoing efforts to expand and improve the quality of higher education and advanced research in science and technology, and raise the quality of teaching, school administration, planning and finance at the provincial level, particularly in poorer provinces. Bank support in the health sector would emphasize appropriate local technologies and improved operational efficiency and financial management for both chronic noncommunicable diseases and infectious diseases in poor areas. 42. In the urban sector, Bank assistance is now expanding to address urgent issues of resource mobilization, urban infrastructure, municipal planning and environmental management. A project with components in several subsectors would assist urban reforms and support development in three medium- sized cities. A major program of assistance would address urban management reforms in Shanghai municipality, while urban transport, water and environmental projects are under preparation in Liaoning, Zhejiang and Jilin provinces, as well as Tianjin. The Bank is planning several free-standing environment projects to help address China's priority to improve its air and water quality, including in Beijing and in southern Jiangsu province, as well as technical assistance to environmental bureaus at the local, provincial and national levels. 43. An important aspect of Bank support for China is the environment. Attention will focus on environmental projects, including one for urban infrastructure in Beijing, which supports strategies for air, water and solid waste management, together with an industrial component to combat pollution. A second project supports industrial retrofitting, efficiency and modernization in an industrially advanced, but environmentally degraded province. Technical assistance to improve environmental and ecological issues is also envisaged. 44. In the technical assistance area, an FY87 IDA credit provided technical assistance to government agencies working on background studies to aid in preparation of the Eighth Five-Year Plan (1991-95), and, building on long-time close collaboration with the IMF, preparation has begun on a free- standing technical assistance for China's central bank. In addition, the Bank will continue its close association with UNDP, particularly through its role as executing agency for a second UNDP umbrella project in China and for a project with the State Commission for the Reform of the Economic Systems. EDI activities remain an important element of the Bank's program. In coming years, EDI will increase training of trainers in sector-specific networks of training agencies. 45. Economic and Sector Work. The Bank's economic and sector work in China provides a basis for Bank lending and for dialogue with the Government on development options and reform policies. The state of the policy dialogue is active and open despite recent events in China. Officials At high as well - 24 - Schedule E Page 13 of 13 as technical levels continue to seek out the Bank's advice on preparing policy alternatives for implementing reforms. In consequence, the Bank's ESW has moved away from the earlier large-scale studies of the Chinese economy to more targetted, reform and issue-oriented studies. 46. An important aspect of the Bank's Economic and Sector Work consists of studies aimed at providing timely advice on macrosystemic elements of economic refoLm. Recently concluded work includes a country economic memorandum focused on macroeconomic management and emphasizing the need for productivity-enhancing reforms as a basis for continued growth; a study to identify options for tax reform; a study of alternative approaches towaras the reforming the system of provision of social security; and a study of the financial sector policy and institutional reform options. Forthcoming studies include a review of labor market reforms and wage policies and a reform- oriented review of a provincial economy. A second major area is sector analysis to provide support to the reform process at the sectoral and micro levels, to strengthen government sector planning and to underpin development of the Bank's lending program. Emphasis is being given to sector work on industry, transport, agriculture, energy, and housing reform issues. A third area is continued collaborative economic study with Chinese research institutions, including the Chinese Academy of Social Sciences.l/ The fourth area of ESW is preparation of "think pieces' on important reform-related issues to help the authorities formulate their reform program for the Eighth Five Year Plan. 47. Aid Coordination and Relationships with the IMF. With respect to aid coordination with other multilateral and bilateral agencies, the Bank has frequent exchanges of views with Japan and other bilateral funding sources. Collaboration with the Asian Development Bank has been increasingly strengthened, with sharing of project and economic information and exchanges on appraisal methodology. Close collaboration with the Fund has been a long- time feature of the Bank's relations with China, particularly on fiscal and financial sector issues and technical assistance to assist China in reforms in these areas. Beginning in 1984, there has been frequent cross-mission support, and Bank staff participated in the first (1986) IMF Standby Arrangement for China. Bank staff have also participated in the Fund's Article IV Consultations to China since 1987. Similarly, the Bank's economic and sector work has benefitted from IMF cross-support: most recently, two IMF staff participated in a Bank study of options for tax reform; IMF staff also participated in the Bank's recent financial sector study and country economic mission. There has also been collaboration in the technical assistance area. (Sch. E-Mid-Yangtze(#64)) July 16, 1990 1! A study of rural financial systems, currently ongoing, complements work completed earlier in 1988 on rural,township and village collective and private enterprises, which have become increasingly important industrial organizations in the reformed system. 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S�i'� 186�it 20�15 211/0 2511'S tatst tnpoгtt CiP .. ,. .. .. .. .. 199�1у r� 62Qрк г.�3б SS2S1 S4� - G, lkгdsaгecite тltxri ot Nяdt 14о1'j t9o� t98b t9� 148д 198! � ...... . .... ............ . . ... ... .• - •-• ••..и. . . .... ..... ....... .... нмек. 9,�оги рмев trdrп ��т.2 �ос,2 v2.a зоо.о ioi.o зоl.4 �. tnpoгts Ргiм спАвк 43.2 . tG3.0 t02.2 t00.0 105.9 101.2 .�. тегтt м Тгмдв t2l.0 101.2 91.3 t00.0 S'f.1 10б.1 ust ад и i a+. сп ev� ог+еан . ..... ............. ..-- -..... ._ .....и----•-вв- и. ваtт+м of Раlавпа t4e0 19т t40b 19lй► 14� t9o9 .ивв•...•ввиивии•вв•ивви и .••в . - •в•е • . Ехра'ts of боод/ i мfS /99ц 299ST �б 62�t 5190! SЫ82 м�+дiи ctCO� t8�70 гЛS0 30Яс0 ]�ц0 67lб0 цiаб t1a+-iaetaг sцvias tбai 240>' 29�д1 3t9t г►1д9 36А4' Мsг'дsтгдl� �� 1ЯiТ 3�3 39l4а ,�62i S06b� S42l3 мarfaewг 8мvioa 16?3 3S0T 3iб2 3SH6 r.Sd6 49W . ; Rаао�в'tв tNa1'iов 40t -1t24S -8!!t •27ci .3S4S ,Z999 моК lаеtаг� tпеаав -tp0 932 t7ё •fбб •fIO •1i21 t intuat рхг Од2? 3tT 3аб б�б 1417 139! 2ц3' �ас ам�rк тгомtвrs бW 4>4 2� ц9 •334 •2з1 tноесомв nдккааU 0 1Ф 20д /66 ц4 t3o Q�гг цС 9at бNагв Of�. trentt 962 -11190 •8'�5�3 •19f •38о: •4S9! гигк tнtieist тгагstвгs •7о TS t2t -2S 3 tгt � • Сиег цС 9а1 аfквг pft. тranst 8Т2 •1i119 -8R19 •216 •379о -4541 lon�•Тегт Cяpiqt tпftax 17б0 G� 70� �57qp 1�б 3�3 Оiгеу! tг'иг�tттlг�t ST 1W0 1+G23 166tO i3ц 1й00 , гпк �т tахг+в c�CS еlпа3 19аб �i0� �it б23б бТЛ 328� ., Otheг �т tпlсом tмвк4 •223 -6� 1ot •2t1t yZ09i -t301 тоаl оааг си�. спк4 •г.ц0 2rs -i9б -п�7 -и4а -tп и.с впогк т.м Са�к� -воо4 4aso -1ои таs Я •t0 capiat �tоьв м.Е.t. !�.�t t�о о `рΡо �t �о МΡо[ ���уΡо i!'+Я7 � fв11.�4�� 4W � 9Я 7W •fв7У '�4У7� �'.Yi � qиrg�s iп мп RмМгмв •37т бб3о 1941 •г�S2 •22Jб 1бт • , Nп Сгвдit tгое q+e iiM 0 0 7!1 0 0 Я Ок1�г �чв f�en0es •3Т2 �63б 126о -�aS2 -М36 lSi1 b Shагв of� Фh 0*,ouгo.9tcs+w � o.t, •`.3 -3.� -о.1 -0.9 -о.7 fпteмst Рв� 0.'t 0.2 0.2 О.б o.i O.S агг.п кооие�асаме. о.з -3.в � •3.о -о.1 -t.0 -1.t , �r1Olа� ctant2 жtiвs daRt. QoiO tMt.1JS>� 2�ц цТffi 11t4Si 1Ь3оS 18цt . 17460 r .saмlt iнet. liotat taicl. U�+q 10091 t62Q1 1бt17 �J.'LS3 237�1 2� � ' otttыia х-ми ttac.lым� t.SO 2.9t 3.zi 3.1z 3. гZ 3.в1 � ind�c хед Etf. х•R �в 1960 100.00 63.ot гй.9.t I9.8S о;.37 So.36 ФР O�ilitans о1 енггмм t1Фо� 2Яоi9б 29� 281t9Q 30613t 31'ц1о 413+�3t �" � ь.ви евиввввввиммвивевиввввввввмввиввв•ив.Lиввввивввsьв.нви.мввиЧвиииввиииввsвЧNвiвввеввиииелsивлмв е.о � , • J � ялоиал о�г���о 27 CHINA - CCYCWC !NDICXTVS ........................... "Ge 3 7 1 ....................................... .......................................................................................... -are ,it MP ;3*es w ~.95 -.86 .;39 :;57 7% ;ag .............. I ................ ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... crrent Recciats 29.4 26.7 25.1 22.6 20.7 7.9 7.0 4.9 11.9 C.rrent Exmmitures 22.2 119.7 19.4 18.0 17.3 9.9 11.9 6.7 1?.3 5.8 4.6 3.4 .rrent gudpe götame 71.3 7.0 Capita( Recesats capitat EAMMItures .,3:; ?3 7:ý 6:i s.' 9 OJ 17:a 23 5:ý Adius~ tg .0 .. . .. OveföLl C.Oficit -3.3 -0.5 -2,0 -2.2 -2.5 -2.3 Official capita( Grant* ut*rmot sorrawirg (not> 0.3 0.3 0.6 0.6 0.8 0 ic ~-m* Finwcfno 0.0 0.7 0.6 1.0 1.1 0~ tic UM Fimcire 2.8 -0.2 0.8 - 0.6 0.6 mt Disbj~ ts itiocittfcm) 0~ duutodire 01~ ud ~ ffifttfons> . ............................................. ............................................. Rati*4 198 190 1986 1987 198 1989 498 198 19% 190 198 199 ........... ................... .. . .. - .... .... .... .... .... .... .... .. . .... .... ^Wc I ~ OLY a~. L? 1927 4006 4851 622 6M 3M 4UK 9963 16M 2~ 32196 U211 Official ergoit&S 194 *cm 1174 73 14" 1109 446 "75 6M 9M 1~ 1~ Mcitaterat 0 599 618 6n tåsj ion 0 9M 310 m 3M (.768 of Jsich lm 0 354 324 209 514 %2 0 498 965 14V 102 Zffl of Jlich IDA 0 212 282 399 557 486 0 431 774 1330 1819 2275 sitatemt 194 48 5s6 96 363 37 4U 3493 490 6413 6" 6128 Privat* Creditom 17n 2917 367? 5313 5W 2174 4M %0 9%3 1677? 21790 M23 s~ fers 377 -211 48 -247 317 629 107 130 1W 1613 1849 2397 Ffr~ at Markm .4 Privata ~ quan ad 0 0 0 0 0 0 0 0 8 0 0 0 Total F.1 1927 40CI6 401 6= 6771 3= 4M 9%3 16398 2651 32196 34211 Im# crodit 0 0 665 .81 .83 -79 0 340 10n 1153 1013 908 mat ~ -Tom capitat -4M 2270 -WQ 43? -25 -10 0 6419 6076 8W' =6 875 Tota( inct. f#F & Mt $f -2132 6276 3474 6593 MM 3194 ~ 16M 23~ 35M 4X13 438" ,4* ard IDA Rattm 190 19e5 1986 198? 198 199 ................... .... . .. .... .... .... .... 9~ of Total LawTo* 00 4~3 1. lev as of Total O.W S.M 5.82 5.48 5.69 6.81 2. 104 a of roat 0.00 4.33 4.66 5.10 5.63 6.63 Dua m [~ Iniffeators t*tea 3. 1~ 18A a t at fotot 0.00 9.B 10.48 10.58 11.34 13.46 ~ 4 föllow the deffnitione and the cm~ of &4 It~ T&Mes ad 9~ of LT ~ Semce stw~ Attad 0 9 , Th* irdieatom 1. im ag % of Totc& 0.00 1.35 2.43 6.M 4.46 5.08 ~ inct~ Mo th~ the amt L IDA m % of rotat 0.0 0.23 0.33 0.40 0.41 0.31 remitty «Wetcd entadm your 0r 3. 1~ 10A as % of Tont 0.00 1.56 2.97 7.24 4.86 3.40 f Iscat ~ In tho me of f IWAL ~ camrics). Stoff ostinato* my t* ~ OM-to-Exports ftatios if finst ar omtiffånuy octuftts are not ..................... ytt ~ Lahl*. The usa of egtimtet önd 1. Law rem Deb~ * 22.01 33.41 53.73 64.62 68.26 M.99 prat fmingry f igures ~ Id tm irdicaced 2. Imp Creditlt~ s 0.00 1.14 3.47 2.87 2.15 1.56 bo 3. "art-rem ~ c~ t% 0.00 21.53 19.67 20.39 18.67 13.04 4. JNIMMT ~ ~ 22.01 56.08 76.87 87.86 89.05 75.60 9 o esti~ <äta OcD-temp R*flos p a pretimir~ data ................. 1. LawTom Dowep 1.31 3.43 3.90 8.34 8.65 8.2? 2. Imp ermt/OP 0.0 0.12 8.38 0.38 0.27 0.22 3. ~ Tem MWOP 0.00 2.21 2.16 2.69 2.37 2.11 4. L,~ MIMP 1.51 3.75 8.44 11.61 11.26 10.60 ~ umeg 19~ ..................... 1. P&Mie & Gwantood IT 4.54 6.31 8.19 7.55 7.a 7.36 2. Privata imnmgurem~ LT O.OD 0.w 0.03 0.00 0.w 0.00 3. Total L~ Tem *dn kmice 4.34 6.31 8.13 7.53 7.42 7.% 4. MF Repärdmes~ . Chp. 0.0 0.01 0.12 0.32 0.21 0.25 9. Intormt onty w W Dd* 0.00 LÅ 1.35 1.59 1.13 1.35 6. rotat <LT+XMF+w Int.) 4.54 8.31 10.74 9.46 9.24 9.30 .................................................................. ................................................................. 擠