China Investment Bank

NUMBER 18 F -0 *ED Precis _ Operations Evaluation Department October 1991 China Investment Bank In 1981 the World Bank helped to the People's Construction Bank of More than 90 percent were owned by establish the China Investment Bank China (PCBC), to help increase the governments, mostly provincial and (CIB), a dezelopmnent finance company quantity and quality of production municipal; collectives owned the rest. zvlwichi has been instrulmental in with minimum investment and correct Some 46 percent were for moderniza- modernizing anid expanding small and the imbalance in capacity that existed tion and 39 percent for expansion; the mediutin-sized light indiustriazl enterprises between heavy and light industry. It rest were for new enterprises. in Chiina. CIB's creation grez out of was expected to organize the transfer Financial and economic rates of Clhina's nIew7 indutstrial priorities and the of foreign technology to investing Finan and econs re of desire to lhelp improve investment enterprises and to encourage the use of return on these subloans vwere gener- efficiencic in Clina's industrial sector. improved investment appraisal ally good. Available data show that on methodology ~~~~~average CIB I subprojects created According to a recent OED audit*, methodology. 132 new jobs each; CIB II, 195 new the Bank's first three industrial credit The goals of Bank assistance in the jobs; and CIB III, 96. (Because the projects int Chlina, totalling $345.6 million, three CIB projects audited were to: samples used consist of the largest have proved highly suiccessfuil. CIB, the h l f f subloans, these results may be recipient of these credits, has developed elp meet the need or oreign misleading.) into a souind and 6; . : institultion and exchange financing; ihas helped to introduice a new t project * improve CIB's ability to design, Suibproject design, appraisal: appraisal to i i.t,to Chi Many select, and appraise projects and to Throughout its life CIB has had much small and mediumlrw-si,ed Cthrprinsa. Many transfer foreign technology to the less influence on the design of benefited from access to nterprises have industrial enterprises involved; and subprojects than expected. Reflecting and better techrology; most are operating * help develop CIB as an autono- the typical project cvcle in China, quite successfiiiol es pite e oprecent mous and efficient financial intermedi- projects are normally prepared by the economic downturn, and can be expected ary in industrial finance. enterprises proposing them, or by local to continuie to do so. Results engineering and designing institu- tions. Even so, the selection of the Economic reforms All the three projects audited technology in subprojects has been achieved their main goals. quite good, with thorough consider- CIB's establishment coincided with ation of alternatives. CIB is beginning a program of economic reforms aimed As of mid-1990, CIB had approved to inject itself earlier in the project at administrative decentralization, 1,220 subloans; they amounted to about cvcle, and its influence on project greater efficiencv, and rapid moderniza- 7.8 billion won. Almost three-quarters design should grov. tion. Overall, these reforms were of these subloans, on a commitment successful. Over the 1980s, GDP growth basis, wvere in foreign currencv. CIB's Project Appraisal Manual averaged 9.5 percent a year. Investment has had an impact on project appraisal was high, and matched by a strong Suibloans linder the first three Bank out of proportion with CIB's size- savings performance which limited the projects amounted to about $341 CIB's vearlv lending for fixed assets need for external borrowing. Industrial million, for some 290 industrial has averaged only about 1 percent of modernization increased competitive- enterprises, mostly in light industry, total bank lending in China (see Box). mness tinforeigncmarkets. comper dise- textiles and clothing, and electronics. exports almost tripled in value. Adverse More than 70 percent of the subloans economic developments following the were for five years or less. Sizes varied widelv, but more than half the subloans * "Project Performance Audit Report: '- Tiananmen Square incident seem to' have been shortlived. were for less than $750,000. In all cases, China Invest ment Bank", Report No. ' new foreign technology was success- 9945, October 3,1991. OED reports Goals fully transferred to the enterprises. are available from the Internal . - CIB was established under the Most of the subprojects wvere in Docmntio i and from R aegis of the Ministry of Finance and the more developed coastal provinces. Information Services Centers.  CIB's usefulness would be in doubt. Project Appraisal Manual Were it to cease to exist in its present form, a very dynamic part of China's The government selected CIB to pilot had a major impact all over China and is growing financial sector would be lost. the introduction of internationally being used by many other financial With the same level of Bank attention accepted methods of project appraisal, institutions and planning authorities, as as in the past, CIB's independence adapted for Chinese circumstances. CIB well as by the design institutions that would probablv continue to grow, and staff and other Chinese officials and carry out feasibility studies for enter- researchers, with help from the Bank, prises. Its success perhaps reflects the its future to become more secure. drafted a Project Appraisal Manual, the move in recent years, as part of the Lessons first such in China. Its formal issuance to economic reforms in China, away from CIB's branches, with instructions for use, financing larger projects with grants and Continuitil of Bank support: A major was a condition of effectiveness of the toward the use of loans, with the factor in CIB's success has been the first Bank loan. The Manual was to make financial institutions being responsible sustained and visible support, techni- appraisals more comprehensive and for loan repayments. cal as well as financial, that the Bank systematic and, more innovatively, to has provided through a series of introduce cost/benefit analysis based on Showing the value of the methodol- projects. Because institution building is shadow prices. The latter was especially ogy, projects that had been appraised a continuing process, such a series of important given the lack of a market using shadow exchange rates subse- economy and the highly distorted prices. quently (after the yuan was devalued) projects IS often necessary to ensure experienced fewer problems than other the successful establishment of a new The Manual, now in its second projects. financial institution. revision and including case studies, has Resource diversification: A danger with such a visible series of Bank projects is that the institution will be CIB's appraisals, especially June 1989, when international lenders become too closely associated with the those prepared by the older better- ceased operations in China. With an Bank. To prevent this it is important to established branches, are up to improvement in the political situation, diversify sources of foreign exchange international standards. Regular CIB's external financing situation as early as possible. review by Bank missions of early CIB should improve. Supervision by the Banik: A major subproject appraisals was very helpful Autonomy: CIB can only lend to reason for the smooth implementation to CIB in establishing and improving projects that have been approved by of these projects was the unusually the Chinese planning authorities, frequent and intense Bank supervision, Finances: CIB's financial position though it does reject unsound projects. including technical help with is reasonablv sound. Arrears in its loan Bv Chinese standards CIB is extremely subprojects. portfolio appear to be more the result independent. It has gained more Supervision of suibprojects: CIB has of macroeconomic changes than of independence since its establishment, put increased stress on supervision faulty project appraisals. Loans in but from the Bank's perspective it work, including frequent visits to arrears dropped from 4.6 percent of lacks freedom of action in a number of borrower enterprises. Supervision is the total portfolio at end-1988 to areas. boroer entrps Supervisioi 2.8 percent by mid-1990. Stgil,tnifl:CBicesdis guided by a fairly comprehensive 2.8 percent by mid-1990. Staffin',g, training: CIB increased its supervisi-on manual prepared with CIB has recorded a profit for staff from 50 in 1982 to 1,515 by mid- Bank help and issued by CIB in 1983. everv year of its operation. Profits 1990. More than 85 percent of the staff CIB staff will, however, need more have grown dramatically as operations are professional level. With govern- experience and training to become have expanded, exceeding the Bank's ment encouragement, CIB has changed really proficient in identifving and forecasts. As a percentage of total its earlier practice of simply accepting managing problems in subprojects. assets, however, profit before tax staff assigned to it bv the authorities. Supervision is a particularly weak peaked in 1986 and has been declining From the outset, CIB has made point in many DFCs, especially newer since, reflecting increases in expenses, substantial investments in staff ones where the early focus is on especially financial expenses. training. establishing sound appraisal standards and procedures. The Bank needs to Starting in 1986, CIB substantially Sustainabilitil: CIB has emerged as remind DFCs constantly of the impor- diversified its foreign resources. It a sound, competently staffed institu- tance of this aspect of their work. raised $259 million from foreign tion, with government support and a financial institutions and a first loan of good national and international Local COmmIZ1itmnClt: Commitment by $100 million equivalent from the Asian reputation. Nonetheless, many in the DFC to the validity and practicality Development Bank. However, all China still express the view that CIB's of the Bank's project appraisal progress in this regard ceased with the main function is to attract Bank funds, methodology is necessary for it to be Tiananmen Square incident of and that if such funding were to stop, accepted and promulgated. F~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ OED PrtPcis is designed to help inform Bank managers and staff of new evaluation findings and recommendations for the Bank's current and future work programs. It is produced by the Operations Evaluation Department of the World Bank for distribution to the Bank's executive directors and staff. The views here are those of the Operations Evaluation staff and should not be attributed to the World Bank or its affiliated organizations. Please address comments or enquiries to the managing editor, Rachel Weaving, T7-015, World Bank, ext. 31719. October 1991