China - Financial Sector Technical Assistance Project

Document of The World Bank Report No: 25455 IMPLEMENTATION COMPLETION REPORT (TF-27221; IDA-24230; SCL-45740) ON A CREDIT IN THE AMOUNT OF SDR42.1 MILLION & A SUPPLEMENTAL LOAN IN THE AMOUNT OF USS8 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A FINANCIAL SECTOR TECHNICAL ASSISTANCE PROJECT 03/31/2003 Poverty Reduction and Economic Management Unit East Asia and Pacific Region  CURRENCY EQUIVALENTS (Exchange Rate Effective 2/27/03) Currency Unit - Chinese Yuan (CNY) CNY1.OO = USS 0.120X73 USS 1.00 - CNY8.28 FISCAL YEAR January 1- December31 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank AIS Accounting Infonnation System BEPS Bulk Electronic Payment System BIS Bank for International Settlements BOCOM Bank of Communications BSGS Book-Entry System for Government Securities CAS Country Assistance Strategy CHAS Chinese Accounting Standards CNFN China National Financial Network CGSDTC China Government Securities Depository, Trust & Clearing Co. CIRC China Insurance Regulatory Corrunssion CNAO Chma National Audit Office CNAPS Chma National Payments System CNFN Chuia National Financial Network CSRC China Securities Regulatory Conimission DvP Delivery Versus Payment EASFS Financial Sector Unit, East Asia & the Pacific Region FMIS Financial Management Infonnation System FSAIS Financial Sector Accounting & Reporting System FSTA Fuiancial Sector Technical Assistance Project GAO General Accounting Office GDP Gross Domestic Product HVPS High Value Payment System HO Head Office IAP International Advisory Panel IAS Intemational Accounting Standards ICB Intemational Competitive Bidding ICR Implementation Completion Report IDA Intemational Development Association IMF Intemational Monetary Fund IT Information Technology LAN Local Area Network MOF Ministry of Finance NGO Non-Governmental Organization NPL Non-Performing Loan OMO Open Market Operations OSS Off-Site Surveillance OTC Over the Counter PBC People's Bank of China PW Price Waterhouse RTGS Real Time Gross Setlements SAR Staff Appraisal Report SCL Supplemental Loan SOE State-Owned Enterprise TA Technical Assistance TF Trust Fund TL Task Leader UK United Kingdom USA United States of America USD United States Dollar WB World Bank WTO World Trade Organization Vice President: Jemal-ud-din Kassum Country Manager/Director. Yukon Huang Sector Manager/Directors Homi Kharas Task Team LeadertTask Manager: Xiaofeng Hua  CHINA FINANCIAL SECTOR TECHNICAL ASSISTANCE CONTENTS Page No. 1. Project Data 1 2. Pnncipal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 9 5. Major Factors Affecting Implementation and Outcome 23 6. Sustainability 28 7. Bank and Borrower Performance 29 8. Lessons Learned 32 9. Partner Comments 34 10. Additional Information 40 Annex 1. Key Performance Indicators/Log Frame Matrix 42 Annex 2. Project Costs and Financing 43 Annex 3. Economic Costs and Benefits 45 Annex 4. Bank Inputs 46 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 48 Annex 6. Ratings of Bank and Borrower Performance 49 Annex 7. List of Supporting Documents 50   Project ID: P003623 Project Name FINANCIAL SECTOR T.A Team Leader Xiaofeng Hua TL Unit. EASFS ICR Type. Core ICR Report Date: March 31, 2003 1. Project Data Name: FINANCIAL SECTOR T.A L/C/TFNumber TF-27221; IDA-24230, SCL-45740 Country/Department. CHINA Region East Asia and Pacific Region Sector/subsector: Payment systems, securities clearance & settlement (68%); Banking (27%); Central government administration (5%) KEY DATES Original Revised/Actual PCD: 07/23/1990 Effective: 03/30/1993 09/17/1993 Appraisal: 09/10/1991 MTR: Approval. 09/29/1992 Closing: 09/30/1999 09/30/2002 Borrower/lmplementing Agency. PRC/PBC/MOF/CNAO Other Partners- Government of Japan STAFF Current At Appraisal Vice President. Jemal-ud-din Kassum Russell Cheetham Country Manager. Yukon Huang Shahid Javed Burki Sector Manager. Homi Kharas David Pearce Team Leader at ICR. Xiaofeng Hua Shigeo Katsu ICR Primary Author: Xiaofeng Hua; Nancy Chen; Robert Keppler 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=Hjgh, SU=Substantial, M=Modest, N=Negligible) Outcome S Sustainability. L Institutional Development Impact: SU Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entry: Project at Risk at Any Time: No  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: Context. In the early 1990s, China's financial sector was at a crossroads. After a decade of reforms, an increasingly larger portion of the economy was becoming market-oriented. The economy had registered an average annual growth of around 8 percent in the previous decade, and much of it was financed by bank loans. However, reforms in the financial sector failed to bring about a similar magnitude of change as did state-owned enterprise (SOE) reforms. A couple of Bank reports under the economic and sector work program, especially Financial Sector Policies and Institutional Development (December 1990) had identified major weaknesses of the financial sector. Banks suffered from a high level of NPLs, yet they all reported good profits. The accounting system was based on the Soviet model and focused primarily on tax related matters. The paper-based manual payments system was subject to considerable capacity and operating stresses, and inter-provincial transfers could take two weeks on average. The People's Bank of China (PBC) had been "reclassified" as the central bank about 10 years ago, but remained noticeably weak in bank regulation and supervision, monetary policy implementation, and a number of other key functions. While the PBC and the banks had been operating within a framework defined in several government circulars and preliminary regulations, there were no officially adopted laws governing their business activities. Fiscal authorities relied on administrative placement of debt, and capital markets were in embryo. The govermment was committed to the process of economic reform based on a gradual and careful introduction of market mechanisms to increase economic efficiency and a progressive opening up of the economy intemationally. It recognized that a successful implementation of this policy would require appropriate improvements in the financial sector infrastructure, and requested the Bank to provide technical assistance in two areas: modemization of the national payments system and the strengthening of the accounting framework. The Bank responded with the Project (FSTA), and during project preparation it was agreed that additional benefits would stem from broadening the scope to address other financial sector infrastructure issues. Development objectives. The project was designed to assist the Chinese government to create the foundations for continuing financial sector reform by strengthening financial sector infrastructure in selected key areas, including monetary policy execution, prudential supervision of banks, accounting and financial reporting framework, market-oriented government debt management and modem payments systems. Component objectives. The Project was comprised of more than a dozen components, including those in Part A implemented by the PBC; in Part B implemented by the Ministry of Finance (MOF); and in Part C implemented by China National Auditor's Office (CNAO). For ease of presentation, a summary of the component objectives is provided under the following four clusters of activity: central bank functions, accounting framework, government debt market and national payments system. Central bank functions. The specific objectives of these components focused on strengthening selected central bank functions and operational support tools as described below: (1) Develop a strong system of prudential regulation and supervision focusing on risk appraisal and management. (2) Support the development of open market operations and enhance the short-term reserve money forecasting capability. (3) Strengthen PBC's research and statistics function to provide a more robust foundation for policy decisions. -2 -  (4) Support the further development and dissemination of central bank and commercial bank legislation. (5) Facilitate a better use of office automation and computer-based tools within the PBC headquarters. (6) Strengthen the physical resources of, and the quality of education provided by the PBC Graduate School. Accounting framework The specific objectives of MOF accounting, PBC accounting and CNAO auditing components were as follows: (1) Advise and assist MOF in the design and drafting of 28-30 general accounting standards, chart of accounts and financial reporting formats. (2) Design and draft accounting standards for the financial sector including the central bank and prepare an action plan for implementing the standards. (3) Conduct an organizational study at PBC headquarters and selected branches and recommend the most effective organizational arrangement for the accounting department. (4) Design and implement a modem management information system which incorporates the new accounting standards and practices and prepare an accounting manual and chart of accounts for PBC and the financial institutions, respectively. (5) Draft auditing standards and outline of an audit manual. (6) Provide training to staff of the three agencies through workshops and study tours. Government debt market. This group of project components focused on government debt market development by providing assistance to both the MOF and the PBC to enhance their respective roles in this critical area. The original objectives included: a) improvement of debt instruments and issuing procedures and techniques; b) development of debt programming and Treasury cash management capabilities; c) development of money market and open market operations; and d) designing a computer-based book-entry system for government securities (BSGS). During project implementation, new developments in China's financial sector and the government's priorities resulted in some adjustments to these objectives. The scope of this component was modified as follows: (1) Design a core computer-based book-entry system to maintain records of ownership of a broad range of instruments, provide efficient clearance and settlement mechanisms, and provide essential information to market participants. (2) Conduct studies to identify sources of risk and other weaknesses in the inter-bank govemment bond market and recommend specific improvement strategies. (3) Provide comprehensive recommendations to the MOF on how best to develop the government bond market in the short and medium term to both reduce risk and lower the cost of government borrowing. (4) Provide advice to both the MOF and the PBC on opportunities to improve coordination on matters of mutual concern in both the primary and secondary markets. National payments system. The PBC recognized that China's payments, clearance and settlement systems required modernization to facilitate timely, cost-effective, safe and reliable settlement of monetary transactions. The specific objectives of this component were to: (1) Produce a Vision, Conceptual Design and Implementation Strategy for a China National Automated Payment System (CNAPS). (2) Develop, test and implement a CNAPS pilot based on elements of the vision approved for immediate implementation as a basis for developing a national roll-out strategy. The vision was expected to identify the payment, clearance and settlement mechanisms and the - 3-  priorities to be attached to different instruments (large value, low value, securities transfers, etc.). It would state the respective roles of PBC and other system participants in the development and operation of the payment system. It was also to provide the organizational, regulatory, financial, economic and technical design features that would underpin subsequent development and pilot implementation activities. Assessment. These objectives were appropriate and consistent with both the CAS and the government priorities for the reform and development of China's financial sector in the early 1990s. Most importantly, the objectives were directly supportive of the country's financial sector reforms and development, especially, in the areas of bank supervision, monetary policy operations, accounting framework, debt market development, and national payments system. 3.2 Revised Objective: The project helps to lay the foundations for continued financial sector reform by strengthening key elements of financial sector infrastructure, including legal and regulatory framework, prudential supervision, and payments and clearing system. The project also supports the government's effort in modernizing the overall accounting framework, strengthening its domestic debt management and modernizing the framework for extemal auditing. 3.3 Original Components: Central bank functions. This group included six components related to bank supervision, monetary policy, research and statistics, financial legislation, office automation and human resource development. These components were all implemented by the PBC. In the early 1990s, PBC's key functions such as bank supervision and monetary policy execution suffered from the legacy of a planned economy, under which political and social goals took precedence over economic and financial objectives. Supervision focused on checking whether banks complied with a variety of government rules. The objective of monetary policy execution was to ensure that the credit plan was strictly implemented, so that annual investment targets set by the State Planning Commission were sufficiently funded. The PBC's capacity in the other key functions covered by this group of components also needed substantial strengthening for it to become an effective and efficient central bank over time. Given these circumstances, these components focused on exposure of counterparts to best relevant international practices, designing of conceptual frameworks, development of principles to underpin future actions, and staff training. The components in this group had different levels of importance. However, for smooth project processing and implementation, the inclusion in the Project of less important components was appropriate, as they contributed to sought-after operational and organizational improvements. The components relating to monetary policy, banking legislation and research and statistics focused on a few specific key issues rather than on generic issues, and this is considered to have been an appropriate approach. The service delivery strategy, based on using separate consulting contracts, most of them with individual consultants rather than with consulting firms, worked well and resulted in successful outcomes. As noted below, the prudential supervision component was handled in a different manner. Prudential supervision. This is a substantial component and covered all major aspects of commercial bank supervision, from principles and procedures for on-site examination, through automated off-site system and prudential regulations, to organization of the supervisory function. The inclusion of pilot examinations played a particular role in convincing the PBC supervisors of the benefits associated with effective prudential supervision. Given the complexity of this component, using a well-regarded consulting firmn to deliver the outputs is considered to have been a correct approach, as it provided the - 4 -  required level of credibility. The design of this component could have been improved in the following two areas. The planned Key Monitoring Indicators did not allow sufficient time for project implementation. For policy changes of the magnitude envisaged under the Project, three years was too short a period for absorption. Some of the Momtorable Indicators were too optimistic. It became quite clear that the development of prudential regulations and their implementation could not be achieved within three years, as they were dependent on the pace of other reforms. The same can be said of the indicators for the organization study of the PBC supervision function. In addition to the difficulties associated with all large-scale reorganizations, adopting and acting on the recommendations would require a fundamental change from the principles and practices that prevailed at that time. In a transitional economy the size of China's, an elapsed time of two years was clearly insufficient. Accounting framework The FSTA project supported a three-pronged program of technical assistance for MOF, People's Bank of China (PBC) and China National Audit Office (CNAO) to modernize China's accounting and auditing framework. MOF accountine: The objective of this component was to be achieved through researchmng and writing accounting standards for consideration by the MOF. The project design is considered appropriate as China's economy was in the very early stages of transition from a planned economy to a socialist market economy. Before the 1980s, there was very little private ownership of business enterprises in China, and therefore no history of financial reporting to investors and creditors. During those decades, the accounting model was essentially the Soviet accounting model, which had a budgetary focus and was designed for a planned economy, with the government as the principal user of financial reports. In this context, the researching and writing approach taken by the Project starting in 1993 to develop China's own standards would be considered appropriate, taking into account that it was in the very early stages of an evolving market economy and there were numerous limitations, such as: a) continued controlling interests of the government in nearly all large- and medium-sized enterprises; b) lack of development of certain professions; and c) ineffective corporate governance, including oversight of the financial reporting system by the board of directors. The above having been said, the situation in China has changed rather dramatically in the past few years, suggesting that the time may have come for China to move from a research/writing approach to an adopt-IAS approach in establishing national accounting standards. Therefore, the government could focus more on implementation planning and preparation. Given the government concerns for short-term impact on government revenues and the limited institutional capacity, the adoption of IAS could be phased-in and timed with progress in other reforms. PBC accountine: The design attempted to address all key aspects of central bank accounting, but appeared to be too ambitious for a three-year implementation, especially for developing a complicated accounting information system. The implementation could have benefited from better sequencing of project components by carrying out the organizational study during the initial implementation stage. The organizational study revealed certain accounting information was generated by the Statistics Department, and the Accounting Department was more of an administrative unit for the PBC, as compared with the accounting function of other central banks. The project design would have benefited if a multi-department arrangement had been made to bring other relevant departments like the Statistics Department into the picture at the early stage. On the PBC accounting information systems sub-component, one major design weakness was the lack - 5-  of performance indicators. Key performance indicators, such as operational and functionality of the system, were not used. Delivery of systems report, Charts of Account/Manuals would not automatically indicate that the system is operating effectively. This component represented a first-ever attempt by the PBC with assistance by international experts, to: a) conduct an overall review of PBC accounting function; b) modernize PBC accounting information system; and c) make recommendations on the modernization of charts of accounts for the financial sector. Given the different understandings of the accounting function in China and the lack of outside knowledge about accounting practices in China's financial sector, these weaknesses could hardly be avoided at the design stage. However, if sufficient flexibility had been built into the consultant contract, better sequencing might have been achieved. It should also be noted that in the "Matrix of Monitorable Indicators" of the SAR, which was close to the timetable for output delivery, the organization study was scheduled to be completed in year one, while in the "Key Monitoring Indicators," which are similar to the milestones for implementation progress, the same study was scheduled to be completed in year three. CNAO component. This component was to assist preparation of auditing standards. As of January 2002, most CNAO officials involved under the Project were said to have left, and were difficult to locate. In addition, there were not many documents in the Bank files on the implementation of this component. Based on a review of the SAR, project design seemed appropriate. Government debt market. Originally there were five components to be implemented by the PBC and the MOF. During project implementation substantial changes were taking place, and the role played by government debt was continually increasing in importance. Modifications were made to ensure that the Project remained responsive to a changing environment. Book-entry system. This component was included at the outset of the project. The objective of this component was to be achieved through a design study conducted by a suitably qualified and experienced intemational consultant with active participation from key stakeholders. As with the payments system component, a steering committee and counterpart teams were established to guide and facilitate the work of the consultants. In addition, comprehensive inputs from local stakeholders and intemational experts were to be made available via active participation in advisory meetings to review both outline and final system specifications and agree on a suitable implementation strategy and action plan that took account of best intemational practice and local Chinese realities. An automated book-entry system is a key pillar of govermment debt markets. However, it is apparent that at the outset of the project the PBC counterpart did not fully understand the importance of such a system, and questioned its inclusion in the Project design. PBC thinking today is quite different, and the importance of a book-entry system as an essential component of the financial sector infrastructure is well-recognized. Inclusion of this component in the project is viewed by the PBC as having been visionary and clearly needed. Risk studies. While project implementation of the component on the book-entry system was completed by the PBC within the originally planned period, activities under the other components were delayed. By the mid-1990s, the MOF had used a mix of market auction, voluntary underwriting and administrative placement to issue debt. The Treasuries were traded in two separate markets, and individual investors could buy and redeem their holdings in medium-term savings bonds before maturity, with the interest rate risk borne by underwriters. As a result of the book-entry system component, by the mid 1990s a centralized depository, clearing and settlement system for the interbank government bond market was in operation and managed by the China Government Securities - 6 -  Depository, Trust and Clearing Co. (CGSDTC). CGSDTC was founded jointly by the PBC, the MOF and several banks as a direct result of the development of the book-entry system under the project. The company became wholly state-owned in 2002. To respond to the new developments and the government's need to better understand and manage risks in the interbank market, this component was added in 1997, to identify risks associated with the clearing and settlements arrangements at the interbank market, and recommend improvements in the way that settlement data could be used to improve overall market information, especially price transparency. MOF component. After the Asian financial crisis, the Chinese government implemented a fiscal stimulus program, and the further development of the government securities market became top priority. By then the PBC had long stopped issuing central bank bills, as inflation was first subdued and then reversed. It mainly used repurchase agreements of Treasuries in its open market operations (OMO). Against this backdrop, the Bank agreed with the MOF and the PBC that the design of the remaining components should be revised to assist the MOF to: (1) Conduct an in-depth analysis of the current market practices to identify weaknesses and other key differences based on a comparison of the ways in which such markets operate in a range of more developed and market-oriented economies. (2) Exposure to relevant best international practices and the lessons to be learned from understanding the key characteristics that underpin primary and secondary market development, including debt planning and risk management, issuing procedures and techniques, Treasury cash management, the role of institutional investors, and clearing and settlement systems in other countries. (3) Provide advice to both the MOF and the PBC on opportunities to improve coordination on matters of mutual concern in both the primary and secondary markets. (4) Provide comprehensive recommendations to the MOF on how best to develop the government bond market in the short and medium term to both reduce risk and lower the cost of government borrowing, with emphasis on the improvements that should be targeted within a three-year planning horizon. It was agreed that the MOF counterpart was to achieve these objectives with the assistance of skilled and experienced individual consultants-former debt management officials-from a wide range of developed countries. This arrangement is considered appropriate, especially given a MOF concern at the time that hiring a well-known investment bank as the consultant could have resulted in a potential real or apparent conflict of interest problem. The adjustments after 1996 to the design of this group of components were appropriate and represented timely responses to not only the client's stated needs, but also to the requirements that the client did not fully understand at that time. National payments system. The objective of this component was to be achieved through a Payments System Design Study followed by acquisition and pilot installation of those components of the Master Plan that were agreed for early implementation. The scope of the design study was comprehensive and included a range of sub-components including Stocktaking, Visioning the Future Business Needs, Conceptual Design, Role of PBC and System Participants, Regulatory and Accounting Framework, Computer Processing and Data Communications Architectures, Phased Implementation Schedule, Cost Estimates and Cost Recovery Strategy, and the preparation of Bidding Documents. Recogmzing the complexity of the work and the need to achieve buy-in from potential users, the PBC - 7 -  established a senior-level Project Steering Committee to ensure close coordination amongst the different agencies involved, as well as two Advisory Panels to facilitate the work of the project consultants and counterpart teams. It also established a Domestic Advisory Panel representative of all potential stakeholders including commercial banks, telecommunications department, and other primary users of the payments system to ensure that local views were actively presented to the consultants. In addition, an International Advisory Panel was established which consisted of recognized international experts from U.S. Federal Reserve, Bank of England, Swiss National Bank, Bank of Japan, the Bundesbank, and a specialist from the World Bank to provide advice and technical guidance to the PBC on all critical system design and acquisition aspects of the project. Detailed technical requirement specifications would be prepared using an interactive process involving representatives from all stakeholder institutions. These specifications would then be discussed with both Domestic and International Advisory Panels, and agreed upon for use in acquiring via a standard two-stage procurement process: (a) a modem application independent data communications capability called the China National Financial Network (CNFN); (b) the required computer processing equipment for the pilot installations; and (c) two custom-tailored payment application systems called the China National Automated Payment System (CNAPS). Careful pre-planning was also devoted to establishing a robust implementation organization to work with the selected vendor. The above arrangements confirm that careful attention was given to the design of this component and ensured that stakeholders had an opportunity for active involvement throughout the system design and procurement phase of the project, as well as access to the views and advice of the best possible intemational experts. Thus an appropriate blend of best intemational practice and local Chinese realities would be taken into account in developing the solutions. The monitoring indicators associated with this component were reasonably realistic with regard to all activities, up to and including the development of the Vision, Conceptual Design, and Technical Requirements Specifications for both the CNFN and CNAPS sub-components. However, the schedule proved to be very unrealistic with regard to the procurement and pilot implementation phases of this complex initiative. It should be noted that two complex sub-systems form the core of the CNAPS design: the real-time processing of interbank transactions and the central gross settlement system. At the time that CNAPS was designed there were only two fully operational real-time gross settlement systems (RTGS), i.e. Fedwire in the U.S.A. and SIC in Switzerland, although several systems were under development (e.g. in most E.U. countries, Australia, and Japan). In China at that time, there were only five participating banks and none of them had system-wide data communications networks or automated intra-bank payments systems, although preliminary work was ongoing. Three key factors thus influenced the realism of the project timescale: a) the potential vendor community had no direct experience developing and implementing such systems; b) the PBC and the five commercial banks had no direct relevant technical experience; and c) the PBC and the banks were the subject of continuous intemal changes, both from an organizational and a technical sophistication perspective. The last tumed out to be a critical major factor affecting the implementation schedule. In essence, although the component was well-designed and appropriate to the future needs anticipated by all participants and external experts at the time that the design was frozen for fixed-price international competitive bidding, it is apparent with hindsight that some system attributes would have been designed differently had the project started say, in 1998, when the characteristics of the Chinese banking industry were better known. Project implementation could have been improved if the scope of this component had been less broad, taking into consideration the institutional constraints in managing complex change programs, and the slow pace of central bank accounting reforms. A more modest but - 8 -  effective payments system development project of this nature could have used a phased-in approach, starting with education and expectations-setting, and tackling the development of RTGS and a Bulk Electronic Payment System (BEPS) in different stages. CGSDTC was founded jointly by the PBC, the MOF and several banks as a direct result of the development of the book-entry system under the project The company became wholly state-owned in 2002. 3.4 Revised Components: Component Cost (USD) Rating PBC (REGULATION AND SUPERVISION) 7,000,000.00 NR PBC (PAYMENT AND CLEARING SYSTEM) 40,400,000.00 S PBC (FINANCIAL ACCOUNTING) 4,900,000.00 NR PBC (RESEARCH AND STATISTICS) 1,800,000.00 NR PBC (FISCAL AGENCY/MONETARY POLICY) 1,900,000.00 NR PBC (LEGAL FRAMEWORK) 200,000.00 NR PBC (PBC GRADUATE SCHOOL) 600,000.00 NR PBC (AUTOMATION STRATEGY) 100,000.00 NR MOF (ACCOUNTING STANDARDS) 1,500,000.00 NR MOF (DOMESTIC DEBT MANAGEMENT) 1,200,000.00 S 3 5 Quality at Entry Quality at entry is considered satisfactory. The Project was a timely response to the client's request, and at the same time forward-looking. The design of the Project reflected government priorities and Bank CAS objectives, and was based on a comprehensive review which had identified the main weaknesses of China's financial sector. The project scope was quite challenging, and the project design attempted to take into account the risk that financial sector reforms in China would not proceed at a required pace for the expected changes to take place within the envisaged Project timescale. However, in the early 1990s, the Bank did not have much experience in large-scale, comprehensive technical assistance projects in transition economies. Therefore, the complexity of developing an automated national payments system, a modem bank supervision function, and an LAS-compatible accounting framework, was underestimated. So were the difficulties for government policy-makers and implementing agencies to change the mind-set, overcome obstacles related to reorganization and personnel moves, and achieve interagency consensus for overarching reforms. The original closing date of the Project (September 30, 1999) was extended three times, to September 30, 2002. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective The Project had an impact on the reform and development of China's financial sector. It helped to introduce new concepts and international practices, and proved to be a successful vehicle for substantial knowledge transfer and human capital development. The change of mind-set of government officials was visible through the process of project preparation and implementation. Today, the landscape of China's financial sector is quite different from that of the early 1990s, and the Project made modest contributions to these changes, as it facilitated acceptance by the government of the purpose, principles and benefits of improved prudential regulation and supervision, adoption of international accounting standards, indirect instruments for monetary policy execution, market-based -9-  government debt management, and modem payments systems. Some of the changes made by the authorities are direct outcomes of the Project. Central bank functions Prudential supervision. The component is regarded by the PBC counterpart at the bank supervision and management departments as a milestone in the joumey toward a framework of prudential supervision that is in compliance with the Basel Core Principles and intemational best practices. Most of the outputs brought about direct benefits and impact. Since the conclusion of this component in 1996, the PBC has continued to strengthen the prudential regulation framework and practices. It adopted and substantially enriched the on-site examination manual. A risk-based loan classification system based on incorporatmg the provisions of the draft regulations is in effect for all Chinese banks. Many PBC counterpart members now hold managerial positions in the central bank, the China Securities Regulatory Commission (CSRC), and the China Insurance Regulatory Commission (CIRC). The outcome of this component is satisfactory. Monetary policy function. This component was among the first group of technical assistance services the PBC departments in charge of monetary policy received with respect to the principles and the procedures of OMO. Shortly after the conclusion of the component, the central bank started limited OMOs within the interbank govemment bond market arrangements in 1996. At present, OMOs play an imnportant role in PBC's management of base money, and have direct impact on commercial bank liquidity and the interbank interest rate. The component also supported foreign exchange regime reformns in mid-1990s. The outcome is satisfactory. Legal function. The component, implemented by the Legal Department, contributed to the. drafting of the four basic banking laws, especially that of the Central Bank Law and the Commercial Bank Law, which were formalized and adopted by the People's Congress during the project implementation period. These laws form the foundation of the financial legal framework. The database for financial sector laws and regulations developed under the Project is accessible by the public and facilitates the dissemination and application of the laws and regulations. The outcome is considered as highly satisfactory. Research and statistics. Under this component, the Statistics Department worked with other central bank departments and intemational experts on the upgrading of staff with specialized knowledge in financial economics, the development of a time-series database, and the transparency of PBC statistics. The results of several key research projects, such as those on flow of funds, business cycles, savings behavior and economic modeling, provide the analytical basis for monetary policy decisions. The PBC Quarterly Bulletin provides monetary and banking information in accordance with the IMF definitions. The outcome is considered highly satisfactory. PBC office automation. This was a small component but the outcome is highly satisfactory in that it set a good example for the development of a cost-efficient and effective corporate IT strategy. Assisted by the intemational consultants, the PBC IT departments developed and adopted a five-year office automation strategy and implementation program. Within less than three years, all the targets embedded in the strategy were met, including implementation of a Local Area Network for PBC HQ and the standardization of basic office software products. PBC Graduate School. The outcome of this small component is also considered highly satisfactory, as - 10 -  it enabled the Graduate School to provide international-standard courses in finance and banking to full-time students as well as part-time graduates students and Ph.D. candidates. The component contributed to the hunan resource development of the financial sector, as the graduates of the school are in high demand by monetary and fiscal authorities, regulatory bodies and financial institutions. Accounting framework MOF Accounting. Assisted by the FSTA project, MOF worked to develop a body of Chinese Accounting Standards (CHAS) that are broadly in line with International Accounting Standards (IAS). While the original plan was to develop 30 standards, the number was reduced as some standards were merged. At present, 16 standards have been issued. Among the standards, the project design attached more importance to the adoption of those for the financial sector. However, a key standard for basic banking businesses which was developed under the Project is yet to be issued, although its principles were said to be incorporated in the MOF regulation on accounting practices for financial institutions. In addition, given the fact that the govemment will probably continue to promulgate its own accounting standards in the foreseeable future, the component helped the MOF to establish a due process for standards-setting. The accounting standards issued constitute the foundation of China's first modem accounting framework that complies with IAS. The adoption of these standards will help to minimize systemic risks as reliable financial information will become available to regulators, users of financial statements, management and the public at large. However, there are a number of differences between the Chinese AS and IAS. MOF supports IAS and is working to achieve convergence of CHAS with LAS. On the whole, the objective of this component was achieved. PBC Accounting. The impact of this component varied by subcomponents. Financial sector accounting standards. In an effort to bring Chinese accounting standards in line with international standards, the objective of this sub-component was to develop general banking accounting standards that are compatible with International Accounting Standards (IAS). After an estimated 274 staff-months of foreign and local consultants' work, an inventory of international accounting standards and practices for the financial sector had been developed under the project. The exposure draft of accounting standards for basic banking businesses was completed before the conclusion of the component. According to the Chinese Accounting Law, the MOF is the only authority for publishing accounting standards. As mentioned before, the draft exposure is yet to be issued, although the MOF issued the accounting regulation for financial institutions in early 2002, which is applicable only to listed and foreign investment banks, insurance companies, brokerages, leasing companies, and finance companies. Unlisted financial institutions such as state-owned banks continue to use the old accounting standards. Despite the delays in adopting accounting standards for financial institutions, there are two significant breakthroughs since the implementation of this component: (1) While Chinese banks used to follow a 1% rule on loan-loss provisioning, which was calculated based on 1% of the opening loan balance,' loan-loss provisioning is now based on the five category asset classification system. (2) In the past, banks were required to cease accrual of interest three years after a loan became delinquent. Over the years, PBC tightened the rule and gradually reduced it from three to two years, one year and now six months, which approximates international practice. Although the implementation of these key accounting prnciples were more of the derived results of the component on prudential supervision, the - 1 1 -  PBC accounting component helped the PBC counterpart to learn about the principles and the role they could play in bank risk management. The consultations between the PBC and the MOF under the prudential supervision component, the lessons leamed from the Asian financial crisis, and the govenmment commitment to open up the financial sector to foreign competition under WTO contributed to the adoption of these principles. Pressure from the public at large, including the other regulatory bodies, should be acknowledged. Given these circumstances, the objective of this subcomponent is considered achieved. PBC Accounting Organization Study. The organization study provided recommendations regarding modem central bank accounting and an implementation plan. In 1998, a new organizational infrastructure for PBC's Accounting Department was established at headquarters and selected branches. Later, a number of recommendations were adopted, such as separation of finance and accounting management of commercial banks from the responsibilities of the PBC accounting function; and the creation of a separate settlement function within PBC. The objective of this sub-component was achieved. Financial Accounting Information System. This sub-component comprised three sub-sets: PBC Accounting Information System (AIS); PBC System Analysis and Computer-based Systems; and Financial Sector Accounting and Financial Reporting System (FSAIS). The stated objective was to design a modem accounting, financial reporting and management information system which would incorporate the new accounting standards and practices. As described in 4.2 below, it could be said that the objective was achieved, as the financial accounting/management information system was delivered on schedule, pilot tested, and fully accepted by the govermment. However, the automated system is yet to be adopted by PBC because: (i) PBC has been standardizing the applications platforms used by various departments, and (ii) the adoption of the system also depends on the pace of the construction of the China Financial Network (CNFN). To date, the PBC chart of accounts and FSAIS chart of accounts have not been implemented, although the current accounting information system used certain information developed under the project. Given the circumstances, it can be argued that the outcome under this project sub-component has been marginal. MOF/PBC - Study Tours. The impact of these activities were quite limited, as most of the tours were in the form of seminars attended by large groups of MOF/PBC officials. Given the short time frame, it is questionable that detailed discussions on policy and technical issues could take place. Thus the long-term benefit, if any, would have been minimal. In addition, some of the staff who participated in the tour were about to retire, giving the impression that what was learned would have less of a chance of being applied. Detailed study tour information such as host organization, detailed progran/objectives, information about participants (title, reason for selection), was rarely provided. Post-study tour reporting was very general. CNAO Component. Technical assistance in drafting auditing standards facilitated the government's efforts to modernize the country's auditing framework. In total 38 standards were issued, which exceeded the target. Moreover, the National Audit Law enforces the implementation of auditing standards. The auditing standards will not only be utilized by the government auditors, but will also provide a useful model for private sector accounting firms in conducting external audits. The objective of this component was achieved. Government debt market - 12 -  Book-entrv system. Assisted by the international consultants, the PBC accounting and technology staff acquired detailed knowledge and understanding of the policy, organizational, technical and operational aspects of comprehensive security book-entry systems. Based on this exposure, CGSDTC has developed and installed-and progressively enhanced-a modem book-entry system that supports both the primary and secondary government securities markets. The system managed by CGSDTC operates smoothly, and provides the platform for OTC trading among a progressively increasing number of participating financial institutions. Clearing of the securities leg of agreed OTC trades takes place in real time on a gross basis on the settlement date. Recent improvements-based on CGSDTC membership in the national payments system allowing CGSDTC to initiate counterpart funds transactions-supports final settlement on a DvP basis. This linkage will be converted soon into an automatic linkage and will support DvP on a T+0 basis. The primary market sub-system supports electronic auctions and has enabled the MOF and financial institution issuers to issue debt more efficiently and at reduced issuance cost. The system has resulted in a substantial reduction in risks in secondary market trading and is also providing much improved information on pricing, which is now used to provide yield curve data for benchmark issues. The outcome is satisfactory. Risk studies. This is a small but successfully implemented component. The government counterpart team and the international advisors reviewed the stock and flow of information, and assessed the risks in the clearing and settlement arrangements. As a result of these studies information management and risk control at the interbank bond market were improved. The outcome of this component is considered highly satisfactory. MOF component. The specific objectives and scope of this component were modified in late 1999 and early 2000. A group of consultants worked closely with the MOF counterpart team and identified the major policy and structural problems in China's govemment bond markets, as compared with the more developed government securities markets. Recommendations were put forward regarding the future development of the markets. The MOF Treasury has confirmed that they more clearly understand what needs to be done to improve debt planning, issuance and risk management, and in the development of the primary and secondary markets. Through the study, the MOF improved its working relations with market participants and with the PBC. There has been recognition that the gaps between China's govermment securities market and the developed markets need to addressed as soon as possible for sustainable government funding and risk management, and for financial markets to play a pivotal role in overall financial sector reform and development. Pressure is building for further and more comprehensive change. The MOF counterpart, assisted by Bank's task team, is developing a medium-term strategy and implementation program for better government debt management and further market development. Once finalized and cleared by the State Council (the Cabinet), the program could set off changes with impacts not only on government debt management and market development, but also on monetary policy formation and implementation, bank and enterprise reforms, and development of other key financial markets. The component played a catalytic role in this process, and the outcome is satisfactory. National payments system. The specifics of the new payment mechanisms were designed to achieve specific policy objectives including: (i) strengthening PBC macro-economic management; (ii) reducing float, speeding up the circulation of funds and increasing the efficiency of funds transmission; (iii) improving convenience and service to users; (iv) achieving a reliable, secure, and integrated payment, clearing and settlement system that would satisfy the needs of a growing economy; and (v) becoming capable of expanding flexibly and modularly to suit evolving Chinese conditions. A number of guiding principles were established at the outset to underpin the overall system design and included: - 13 -  compliance with intemational standards (banking and technical), minimization of payment system risks, high integrity and reliability, cost efficiency and usage of modem technology. This was a pilot project with clear development objectives (outcomes), including knowledge acquisition, pilot system development as a basis for designing a sustainable national roll-out of a modem payment system that satisfies user needs, and agreement upon the specifics of an appropriate national roll-out strategy. While the specific outputs envisaged in early 1990s-pilot implementation in 20 major cities and 48 counties-were only partially delivered, the primary educational and business objectives of the pilot project were achieved. As mentioned previously, the PBC and the commercial banks underwent substantial changes in the mid- and late-1990s from both an organizational and technical perspective. These changes invalidated some of the design and policy characteristics that were embedded in the original CNAPS design. For example, there is no longer a need to support county-level processing sites, as commercial banks have implemented their own intrabank systems that eliminate the need for the interbank system to connect to bank branches at the county level. The PBC and commercial banks have agreed, fully tested and implemented the necessary software modifications in what is now called the Phase 2 software. A national roll-out strategy that fully satisfies current user needs has been agreed upon and is being progressively implemented. Therefore, the outcome of this component is considered satisfactory. The accounting system of this regulation is similar to the one for general business enterprises, but includes policies specific to financial institutions, such as loan-loss provisioning, recognition of interest, repurchase agreements and securities transactions, etc. Before the Project, there were no provisioning requirements for banks. The minimum 1% provisioning was included as a financial covenant of the Project. 4.2 Outputs by components: Central bank functions Prudential supervision. Key outputs included: (a) Pilot bank examination of Bank of Communications (BOCOM). (b) Special assets review of selected banks. (c) Drafting of prudential regulations and planning of their implementation. (d) Development of onsite examination procedures focusing on prudential concerns. (e) Development of an automated offsite surveillance capability. (f) An organization study of bank supervision function. (g) Development of course curricula, lesson plans, and training materials. (h) Workshops, training sessions and study tours. These outputs were delivered by joint task teams of Price Waterhouse (PW) as the consultant and PBC counterpart groups in 1993-96. The first three outputs yielded immediate benefits during and after the component implementation period. Pilot bank examination. At the beginning of the pilot examination the PW consultants provided training and took the lead in the on-site examination. Toward the latter part of the process, the counterpart teams did the bulk of the work, with PW experts acting as technical advisors. After the completion of on-site examinations, the consultants worked with and trained PBC staff in sununarizing their findings, analyzing examination data, preparing examination reports, and on the presentation of overall examination conclusions to BOCOM management. The reviews included BOCOM's - 14 -  regulatory compliance, HO and branch operating policies and practices, credit policy statements, credit file reviews, monitoring and reporting procedures, internal audit functions and internal controls. The pilot on-site examination was the first time the PBC allowed, and a Chinese bank accepted, systematic review and assessment by a group of external specialists. When the pilot examination revealed serious problems in financial position and performance of the bank, it was an eye-opener for the supervision authorities, who had focused on supervision for rule compliance. Special assets reviews. Several state bank branches participated in the reviews, which adopted a similar approach as that used under BOCOM examination. The objectives of these reviews were to determine the overall quality of assets and each branch's loan portfolio and to relate that determination to the overall financial condition and soundness of the provincial branches; determine the level of provisioning necessary to establish adequate reserves; assess each bank's policies and procedures for managing and administering its loan portfolio and other risk assets; and expose bank supervision staff to modem asset evaluation techniques, credit principles, and loan review skills. Three reports of examnination and one summary memo provided reasonable assessments of the asset quality found at each site. Key deliverables included: training/reference manuals; credit status reports; credit review control sheets, and special assets review reports. Onsite examination procedures. The main objective was to develop examination methodologies and documenting written examination procedures. A draft version of the Comprehensive Examination Procedures Handbook, including verification procedures and internal control questionnaires, was prepared in 1995 and discussed with representatives of selected banks. The Handbook was successfully utilized during the special asset quality reviews. Key deliverables included: examination procedure handbook; model comprehensive report of examination; model asset quality report of examination; and examination request letter. Once it became clear what could be achieved by applying prudential procedures and methodologies, the PBC developed and issued its on-site examination manual, which has standardized procedures and methodologies. Drafting of prudential regulations. The drafing of prudential regulations was completed in 1996. The draft regulations, divided into 20 chapters, incorporated international prudential supervision standards and requirements derived from other jurisdictions, including the Basel Committee on Banking Supervision. There wvere a number of appendices which provided detailed regulatory guidance in such prudential supervision areas as internal controls over branch operations, lending authority and administration, and the contents of credit files. Each regulation contained a section explaining the legal authority for the regulation, its-purpose and its scope. Where appropriate it provided a suggested plan for the phase-in of the regulation to afford banks a reasonable time to adapt. These drafts were designed to: (i) strengthen the PBC's ability to license, regulate, and supervise banks and financial institutions; establish prudential controls and limits; and enforce corrective measures through legal sanctions and other remedies; and deal with troubled institutions; (ii) a law manual that explains and interprets the legal framework; and (iii) where appropriate a plan for phasing the implementation of prudential regulations. While the regulations were not immediately adopted by the authorities, they contributed to better understanding of prudential regulation principles and more realistic assessment of banking risks. Armed with experience and insights gained through pilot bank exam and special assets review, the PBC formulated its own risk-based assets classification regulation incorporating the provisions of the draft regulations. The PBC regulation was tested on a pilot basis in 1998 and is in effect now. The central bank also incorporated the chapter on bank intemal control in its guidelines. As the output was delivered at the end of 1997 when the Basel Core Principles were issued and the PBC shifted its focus - 15 -  on the latter, the implementation plan of the draft regulations was not followed. The direct benefits of this output were not fully achieved. At present, there is still need to adopt a set of prudential regulations, as those in effect are yet not yet in full compliance with prudential regulation principles, and sometimes conflict with each other. Automated off-site surveillance (OSS) capability. The final products delivered by the consultants included a high-level OSS strategic business plan, a data requirements matrix, a report on key ratios, a report on the database and reporting functionality and recommendations on data management, process flow diagrams, system gap analysis, a management infrastructure required to support these systems, and an implementation plan to support the short- and long-term strategies. No final decision was made at the conclusion of the sub-component, as the recommended changes would require substantial organizational changes for which PBC was not ready. In addition, an effective OSS depended on the pace of the development of PBC accounting information system and database consolidation, as well as on the data processing reforms in the financial sector, which was yet to become a top priority in the authorities' reform agenda. In the 1998 PBC reorganization, the off-site surveillance function was split and assumed by line departments. The benefits of this output were not fully achieved. Organization Study. Given PBC's wide responsibilities, the organization study proposed a substantial reordering of the PBC supervision organization by establishing centers for the development of sector expertise and creating within each sector department a complete process of organization that, integrates critical supervision functions. It was the consultants' view that together, these components of organizational design would help build sector expertise, practices and procedures, eliminate redundancies, raise the analytical and risk-management capability of the central bank, and develop a more customer-oriented management approach for working with extemal institutions. The four formal deliverables included: a report on an intemational model of bank supervision, a report on determining PBC's new organization charter and supervision structure, a report of recommendations on future work processes, and an organization study final report. However, the implementation of the recommendations posed significant problems, given its sensitive nature that required building support throughout the PBC organization and at the senior government level. In the PBC reorganization of the supervision function following the conclusion of the component, the principles provided in the organization study were not given sufficient attention. The benefits of this output were not fully achieved. Training program. The objective was to develop an in-house training program and coordination of training activities. PW conducted a survey on the training needs of PBC supervision staff, and prepared a report on the Training Needs Analysis. They also developed a comprehensive in-house training curriculum consisting of instructor manuals, participant materials and slide presentations for ten core bank examination training courses. The training program developed by the PW consultants was not implemented, partly due to PBC's desire to compare the proposed program with other supervisor training programs. The need to accommodate the current central bank personnel policies and the practices for professional education could be another reason. In addition, PBC staff participated in several workshops, study tours, secondments, seminars, training crews and specialized technical training, which were coordinated by the PW consultant. These activities were well-received by the participants. Monetary policy function. Key outputs included: (a) A review of the structure, regulations and institutional arrangements of money markets in China - 16 -  and making recommendations for improvements. (b) Recommendations on PBC open market operations and short-term reserve forecasting. (c) Workshops and study tours. These outputs were satisfactorily delivered in 1993-95. Under agreement with the Bank, IMF staff conducted the study on money markets. The output related to OMOs and short-term forecasting was delivered mainly through a series of executive and technical workshops conducted jointly with IMF, and short-term overseas training courses and study tours. These activities helped to prepare for PBC open market operations which started on a pilot basis in April 1996. Legal function. Key outputs included: (a) Contribution to the drafting of central bank and banking laws. (b) Development of a database for financial sector laws and regulations with publicly available access. These outputs were satisfactorily delivered in 1993-96. Expert advice was provided in 1993-94 to the drafting and revision of the Law of the People's Bank of China, the Commercial Banking Law, the Law of Negotiable Instruments, and the Insurance Law. The scope of the assistance included provision of a broad range of comparative legislation and legal practice, and reviewing and recommending revisions to the drafts. The laws were promulgated by the National People's Congress in 1995. The objective of the financial legal database was to provide access to all relevant laws and regulations for regulatory authorities and financial institutions. The designing of the system took about 6 months in 1995-96. After three months of test run, the system was evaluated as high-quality and low-cost, and put into operation. At present the database is also available to the public through the PBC website. Research and statistics. Key outputs included: (a) Five research projects. (b) Network and database. (c) Publishing of monetary and banking statistics (d) Intermediate courses on financial economics, secondments and study tours. The implementation of this component spanned three years from 1994-97. The first three outputs were satisfactorily delivered. The PBC task teams, assisted by Bank staff and intemational experts, conducted the five research projects on survey techniques, flow of funds, business cycle modeling, analysis of savings behavior, and economic modeling. The local area network (LAN) for the Statistics Department had a demonstration effect on the automation of the central bank as the first LAN within PBC. The time-series database was completed in late 1998 and improved the PBC data processing and management capability. The Central Bank Quarterly Bulletin became an important part of the central bank's regular information release system.- Training activities included overseas study tours and training sessions, and one series of classroom courses. At the project appraisal stage, secondments were planned subject to the absorptive capacity of host central banks and the language skills of the PBC staff. Local intensive language training was provided, but it seemed no secondments took place. PBC office automation. Key outputs included: - 17 -  (a) Recommendations on PBC office automation strategy and a standardized common desktop technical platform. (b) A training program designed to equip PBC personnel with essential skills based on standardized software such as Lotus Notes, Statistical Software, and Graphics Software. These outputs were satisfactorily delivered in 1996-97. The project consultants-from IMF Bureau of Computer Services and the U.S. General Accounting Office-assisted the PBC IT staff to determiine how Information Technology (IT) was being used and to analyze the future needs of the HQ based departments. Careful attention was given to the content and thrust of the preliminary IT strategy that had been already prepared by the PBC. Overseas visits were made to IMF headquarters, the General Accounting Office and the New York Federal Reserve in the U.S.A. and to the Central Bank in Korea. In addition selected PBC staff spent one month at IMF headquarters to study specific technical topics including the options for satisfying wiring requirements for local area networks (LANs). These exposures to relevant organizations and their approaches to using IT were of benefit to relevant PBC staff. Strategic recommendations were made covering: strategic content (future applications and database requirements); the implementation of an appropriate LAN; and the organization structure & resources required to deliver the strategy. A workshop, which was attended by a number of intemational specialists from IMF, GAO, U.S. Federal Reserve, BIS, and the Central Bank of Malaysia, provided an excellent opportunity for the further exchange of views and infortnation. Based on the consultants' recommendations, the wiring of the Headquarters main building and the standardization of the desktop technical platform were completed in the second half of 1997 and the OA network was set up in 1998. PBC Graduate School. Key outputs included: (a) Curricula development and delivery. (b) Upgrading of language laboratory. (c) Purchasing of books and other training materials. These outputs were satisfactorily delivered in 1994-97. A study of how to reform the Graduate School's curriculum/teaching program/training activities was conducted by the City University of Hong Kong, and recommendations contained therein were instrumental in reforning the Graduate School's teaching program to resemble acclaimed similar programs provided in overseas universities. The reforms were implemented and foreign professors and guest lecturers were invited to deliver twelve courses each semester. As a result of the component, the Graduate School was able to establish exchange programs with accredited universities including McGill University and the City University of Hong Kong. Moreover, the Graduate School undertook the translation of twelve foreign language finance-related text books into Chinese that are now being used by universities throughout China. Accounting framework MOF accounting. Specific outputs included: (a) Promulgation of general and special topic accounting standards and certain industry sector standards. (b) Transfer of knowledge and techniques from consultants to the MOF counterpart teams to enable the latter to continue to develop, maintain, and modify a body of accounting standards appropriate and responsive to the growing and changing market economy. (c) Development of a plan to inform accountants in China on the use of the new standards through - 18-  seminars, publicity and training activities. (d) Workshops and study tours. These outputs were delivered. Research was carried out on 7-8 country cases for each standard, although the MOF realized later that this was too much research, and has since asked the consultant to focus on 2-3 countries. A due process for drafting standards was formalized from drafting first versions by the Accounting Department staff, through intemal review by a core group of Accounting Department management, to public discussion and review by the members of National Accounting Standards Committee. PBC accounting. Key specific outputs included: (a) Inventory of international accounting standards and practices for the financial sector. (b) Preparation of accounting standards for the financial sector. (c) Accounting information system (AIS). (d) Financial sector financial reporting system (FSAIS). (e) Standardized accounting and management reports for major components of the financial sector. (f) Organization study final report. (g) Four two-week overseas' study tours, and training courses and on-the-job training. These outputs were delivered. A uniform chart of accounts was revised, and accounting manuals and reporting formats for banking, securities and financial institutions were prepared. Accounting and financial reporting was standardized under the FSAIS for banking, insurance, securities and finance companies. FSAIS was piloted at two banks and three non-bank financial institutions. The Organization Study comprised of a study of organization and staffing of the Accounting Department functions at PBC Headquarters and branches, and an analysis of strengths and weaknesses, as well as recommendations regarding the most effective organizational arrangements for the accounting functions. The consultants delivered the final organization study report, which includes: a) Mission statement for PBC Accounting Department; b) Strategic objectives; c) Organization structure; d) Recommended staff and skill levels; e) Improvements to infornation process and control; and f) Implementation plan. CNAO component. Key outputs included: (a) A framework of auditing standards. (b) 25-30 generally accepted auditing standards. (c) Training programs, materials and course curricula and training courses. These outputs were delivered. The project activities carried out contributed to the issuing of 38 auditing standards which have been implemented at both the national and provincial levels. However, project implementation could have been improved if there were better communication between CNAO task team and the Bank task team, and if relevant documentation had been appropriately filed. Government debt market Book-entrv system. The output was the design, evaluation and implementation of an automated book-entry system for government securities. This output was satisfactorily delivered in 1994-97. A comprehensive project structure was established and comprised of the Steering Committee, chaired by 19 -  a deputy govemor of PBC, the domestic and international advisory panels, the project management group, the consultants (PA Consulting), and the four working groups on business processes, research and statistics, standards and regulations, and computers and telecommunications. PA Consulting was hired to conduct a design study and exposure of PBC staff was realized through a combination of "study tours" and "top level seminars." The detailed system design activities and the resulting system technical specifications and bidding documents were discussed in detail at two significant International Advisory Panel (LAP) meetings. While the scope of the original system design produced by the consulting team was not fully adopted in the first versions of the book-entry system due to policy constraints and the status of the govemment bond market, the PBC counterparts confirmed that they acquired substantial knowledge of intemationally accepted principles and practices that enabled them to develop a system that is flexible in its design and capable of progressive development. They also confirned that they gained experience in complex project management. The PBC counterpart team applied the concepts and principles of the PA design in the evolutionary development of the current book-entry system, especially the design principles associated with ownership account structures. The book-entry system went into operation in 1997 and the component also contributed to the establishment of GGSDTC. Risk studies. The key outputs included three studies on secondary markets, risk management of the clearing and settlement system, and information management, respectively. These studies addressed: a) relevance, transparency and dissemination of statistical and financial information; b) market uncertainties and institutional arrangements between the issuer, the central bank and the other regulators to manage the risks; c) development of an over-the-counter (OTC) market and commercial bank risk management with regard to their participation of the OTC market; and d) market infrastructure and clearing and settlement risk management. The outputs were satisfactorily delivered within six months in 1997 by three individual consultants who worked closely with the CGSDTC task team. The final products were discussed at an intemational seminar, and the policy recommendations as summarized by the counterparts were well received by the MOF and PBC management. The studies are still referred to by the PBC operatives involved in the interbank market supervision and OMOs. MOF component. Key outputs included: (a) A study on government securities markets (b) Workshops and seminars (c) Procurement of software and equipment for debt enhanced debt management capability. (d) Short-term overseas training activities. The first two outputs were satisfactorily delivered in 2000-2001. Five highly qualified international experts from Ireland, New Zealand, Spain, Sweden and U.S.A. were hired as consultants, and a group of government debt mangers from Denmark, France, Portugal and U.S.A. were invited as advisors. This arrangement was made to accommodate the MOF counterpart's desire to get exposed to wider international experience. Supported by the counterpart team, the consultants conducted two rounds of field interviews with issuers, regulators and financial institutions. During this process the MOF counterpart organized two international seminars and a number of informal workshops attended by all the stakeholders and the consultants. These seminars and workshops provided the forum for open exchanges of views on important policy and institutional development issues, such as market integration, appropriate size of government debt, role of derivatives in risk management and institutional investors. The finalized report was delivered in December 2001 and the MOF counterpart found it satisfactory. - 20 -  Procurement of software for the Treasury website and database were completed before the closing of the Project, and the MOF counterpart team is working on the further development of a database for debt management. A short-term overseas training program was prepared which included classroom sessions on the theory and practices of government debt management and fixed income markets, as well as secondmnent at securities industiy firms. However, the program was not implemented due to a couple of factors. As project implementation of this component started in the last two years of the implementation period, and the MOF counterpart rightly focused on the study first, there was not sufficient time to implement the training program before the closing of the Project. More importantly, the Treasury Department, which is the MOF counterpart, was short-staffed for its regular responsibilities, and could not send staff on overseas training which was estimated to amount to 12 man/months. The counterpart team made two studies tours and found them informative. National payments system. Key outputs included: (a) Design of a processing systems framework-computer processing equipment and a range of application systems-called the China National Automated Payment Systems (CNAPS). (b) Design of an underlying application independent nationwide telecommunications network called the China National Financial Network (CNFN). (c) Pilot installation of the large value and low value application systems. (d) Procurement of telecommunications capabilities, hardware, and software to support development and operation of two national payments centers and a number of local payments centers. CNFN and CNAPS were designed to support the following range.of application systems: a) a High Value Payment System (HVPS) based on real time gross settlement principles to process credit transfers;-b) a Bulk Electronic Payment System (BEPS) to processlow value debit and credit payment transactions; c) the payments leg of Government Securities secondary market transactions; d) a Bank Card Authorization System; e) a Financial Management Information System (FMIS); and f) a system to settle the net clearing balances from Local Clearing Houses. For the delivery of these outputs, a consortium of Japanese companies led by NTT Data was selected as the supplier through a two-stage Intemational Competitive Bidding (ICB) process. The PBC, with the support of the Intemational Advisory Panel members, developed the Bidding Documents, including the system specifications broadly in line with the envisaged schedule. Due to the difficulties during the ICB and negotiations, project implementation was seriously delayed. During contract implementation, the number of local pilots was reduced from the original 80 to 48, as it became clear that system testing did not require that many pilots. Sections 5 and 7 provide detailed discussions on the issues related to procurement and contracting. Despite the difficulties, the PBC counterpart teams and the supplier managed to deliver the following outputs by mid-2001: (a) Data communications and processing equipment was installed as per agreed plan in the two national processing centers (Huairou and Wuxi), and a number of pilot cities. (b) The primary and back-up central processing and network management sites were established successfully. (c) Application systems were completed and tested m the testbed environment that simulated the real-life operational environment. -21 -  However, implementation of the pilots in all city (20) and county-level (48) sites was not achieved, as sufficient real-life experience was obtained from the limited implementations to allow PBC and participating banks to specify the application system functionality changes that are required to best satisfy current and future user needs. In addition, rigorous real-life operational testing indicated that although the basic software worked from a functional perspective, its underlying technical programming characteristics prevented the system from satisfying the essential business performance and user interface requirements in a manner acceptable to current PBC and Commercial Bank operational requirements. This was particularly true for the low-value Bulk Electronic Payments System (BEPS). Given these considerations, the PBC management decided in October 2000, not to immediately rollout the systems developed by NIT Data at the conclusion of the pilot program. After consultation with the Bank task team, the contract with NTT Data was terminated in a manner acceptable to both parties. Although the envisaged project outputs were only partially delivered, the component did result in major benefits. Both PBC and Commercial Bank personnel acquired substantial new knowledge relating to all policy, organizational, technical, and operational aspects of modem payments system mechanisms and the critical success factors that must be addressed for successful implementation in a modem market-based economy. This knowledge has facilitated a continuing joint PBC-Commercial Bank initiative that has resulted in the successful implementation of a Real Time Gross Settlement system that uses the original CNFN and CNAPS communications and processing architectures. The upgraded application software (Phase 2 software), has been successfully tested and is operating in Beijing and Wuhan. It fully satisfies the needs of both PBC and Commercial Banks for settling large-value and other time-critical transactions, including the funds transfer leg of secondary market trading in government securities across centrally rmaintained settlement accounts. The Phase 2 RTGS will be rolled-out to an additional 11 provincial capitals by the end of April 2003, and to a further 19 major cities by late September 2003. The bulk of the equipment acquired as a result of the project will be used by PBC in the national roll-out. The final Phase 2 RTGS application system is more efficient and user-friendly than the interim Phase I output provided by NTT Data. Most importantly, it can be supported and maintained on a local basis. Payments systems services, especially the real-time gross settlement system, are critical to the PBC mission. Therefore, the Phase 2 version is a substantial additional improvement, as it eliminates the risk of dependence on a foreign supplier. The PBC will work on the upgrading of the application system for BEPS towards the end of the conclusion of RTGS rollout. With the benefit of hindsight, project implementation of the component would have been irnproved if the development of RTGS and BEPS were phased in sequentially, and procurement of hardware and applications systems were conducted under separate contracts. A more balanced allocation of funding should have been adopted, with a larger amount allocated to the development of software, as this is the key determinant to the success of a payments system. The tumrkey approach-implementation of a complete system based on frozen specifications for the telecommunications, computer processing and payments application software-was not appropriate for the procurement of this complex IT system, when large-scale changes in the Chinese banking environment were taking place in parallel with system development As mentioned above, an evolutionary sequential approach would have been more appropriate. 4.3 Net Present Value/Economic rate of return: - 22 -  Not applicable. 4.4 Financial rate of retzrn: Not applicable. 4.5 Institutional development impact: Central bank functions. The impact on institutional development of key PBC functions is considered substantial, especially in terms of the effectiveness of knowledge transfer. Accounting framework. The institutional development irnpact is substantial in accounting standard-setting under the MOF component. For the PBC component, the impact is considered moderate, as much of the resources were devoted to the development of the information system, which is yet to be adopted by the PBC. Government debt market. The impact on institutional development for the MOF, the PBC and the CGSDTC are considered substantial, as the staff not only acquired technical knowledge and the confidence to use this knowledge in a practical and evolutionary manner, but also gained better understanding of the direction of further government debt market development. In addition, the CGSDT has developed in-house capability of system enhancement on a routine basis, to satisfy the evolving functional requirements of the PBC and an expanding group of active participants in the interbank markets. National payments system. The impact on human resource development is considered substantial. That on the use of financial resources is considered moderate, as the weaknesses in project design discussed in Section 4 affected the effective use of the Credit proceeds and counterpart funding. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: In general, when the Project was designed in the late 1980s and early 1990s, there was insufficient appreciation in both the public and the private sectors of the importance of the financial infrastructure, including legal and regulatory framework, accounting and financial reporting framework and clearing and settlement systems, for the development of a sound and efficient financial sector. Although there was recognition in policy notes and research papers of the importance of the key areas covered by the Project in resource allocation, price discovery, risk management and corporate govemance, the complexity and risks involved in turning the best practices summarized in literature into Chinese realities called for a cautious and pragmatic approach. While the Project was subject to these general constraints, further reforms in the financial sector, especially after the Asia financial crisis and China's WTO accession, facilitated the achievement of project objectives. Central bank functions. The broader policy and institutional changes envisaged under this group of project components depend on developments in the economy and on progress in other reforms. The component of prudential supervision is a good example. While the outputs of this component convinced the PBC counterparts and some of their managers within the central bank of the need to adopt a prudential supervision framework in China's banking sector, the Asian financial crisis in 1997-98 drove home for the PBC management as a whole and for the central government the costs of weak regulation and supervision. Since then the development of a prudential supervision framework - 23 -  has been accelerated, although changes will come gradually, given their implications for government revenues and financial stability. The timing of change also depends on the pace of parallel reforms related to state-owned banks, state-owned enterprises, fiscal and tax management, and financial accounting and reporting framework. The expected opening up of China's financial sector to foreign competition within five years after China's accession to the World Trade Organization (WTO) was another positive factor for the satisfactory outcome of this component. Accounting framework As under the components on central bank functions, the pace of adopting the new accounting framework including the standards and systems developed under this group was dependent on progress in other reforms. A visible change in the understanding by the society of accounting's role in the economy has been observed only in the last two to three years. These factors were out of the control of the MOF and the PBC as the executive arms of the government. PBC accounting. This was a pioneering investment when China opened up in the early 1990s. It was an icebreaker for the government. There was a huge culture gap at that time between PBC and the foreign consultants. USD3.1 million was considered a large amount for the implementing agency, which expected that everything could be accomplished with this amount. In the early 1990s, public sector accounting was less developed, even in developed economies. Given the pioneering nature of the project, there was a lack of familiarity on the part of the government agencies with the "norm," and a lack of familiarity on the part of the international consultants with Chinese thinking and realities. In addition, in the early 1990s the PBC was not a real central bank, but rather a giant administrative mechanism for the government, using an enormous manual bookkeeping system. Its accounting and data processing functions were administrative in culture, not policy- or change-oriented. As key sector-wide policies were made outside of PBC, it was not an agent for such changes as the adoption throughout of the banking system of the financial sector accounting and reporting system. Government debt market. No particular externalities materially affected the implementation of the components regarding the development of a book-entry system and the risk studies. However, those related to the MOF component are worth mentioning. Project implementation under this component was postponed twice. The first postponement in 1995-96 was due to the closing of a Hong Kong-based, small securities firm which was hired by the MOF as the consultant. The second postponement in 1997-98 was because of a lack of consensus within the central government regarding the direction and pace of government debt market development. The fiscal stimulus program adopted in late 1990s put the development of market-based debt management back on the top of the MOF agenda, and was a main factor for the revitalization of the component. National payments system. Rapid changes in the banking and telecommunications environment had major unanticipated impacts on the design and implementation of this component. At the design stage in 1991-92, flow of funds through the banking system were subject to the PBC credit plan, and the treasury function of commercial banks was highly decentralized. To ensure compliance with the credit plan, the PBC built into the pilot program a large number of county-level payments centers. Toward the second half of the 1990s, the credit plan was abolished, and the commercial banks started to centralize their treasury function. The number of financial institutions, as well as the variety of their businesses increased. Electronic payment instruments were gaining in popularity. Commercial banks were also continuously upgrading their intrabank systems. The combined impact of these changes made it quite clear that the scope of the envisaged pilot program could be reduced, and that the original technical and operational requirements could and should be adjusted to satisfy the current needs of users. -24 -  5 2 Factors generally subject to government control: The design and implementation of the Project benefited from a strong commitment by the government to market-based financial sector reforms. While some of the specific outputs were not Immediately adopted, the pace of the Project-related changes was not inconsistent with the gradualist approach of the Chinese government toward reforms. 5.3 Factors generally subject to implementing agency control. Central bank functions. In general, the commitment and the dedication of the PBC departments responsible for project implementation of the components in this group contributed to the satisfactory outcome and outputs. The prudential supervision component is worth mentioning, as it could well be a stand-alone'project. It was a courageous decision by the PBC and BOCOM to let the PW experts conduct pilot bank examinations and draft regulations and manuals, as it could have been perceived as caving in to attempted interference by western countries in the early 1990s. The PBC assigned large counterpart teams composed of young and senior staff from different levels of the central bank organization to work shoulder-to-shoulder with the consultant team in pilot bank examinations. This participatory approach contributed to the success of the component. In the latter part of project implementation, the PBC management team in charge of bank supervision gained better understanding of the concept and procedures of prudential supervision. This helped to turn the reports prepared under the Project into specific PBC policies and actions. The impact of the Project would have been enhanced if improvements were made in effective communication between the joint task teams and the PBC senior management. While the Bank should have paid more attention to assisting the PBC counterparts to improve their upward communication, the PBC could have provided the consultants and the Bank more of such opportunities. Accounting framework. MOF accounting. The MOF program for the scope of application of new accounting standards adopted a gradual approach, limited at first to listed companies and enterprises with overseas investment. Given the fact that PBC was ready to adopt the new risk-based assets classification system in 1998, the publishing of the new accounting standards for the financial sector would have accelerated change in the sector. PBC accounting. While accounting system reform is inherently difficult in any large organization, PBC's case was particularly difficult due to the fragmented reporting structure, where line authorities are combined only at the ultimate level, the Govemor. Although the Accounting Department made an effort to collect all the necessary information, it needed to have full cooperation from all departments that generate financial transactions. Otherwise, the objectives to integrate PBC's accounts in a comprehensive manner would be difficult to attain. While the Accountmg Department worked hard in project implementation, it encountered difficulties in mobilizing an interest and understanding from those other departments. The change of project leadership and staff of the task team during the three-year implementation overshadowed the implementation to a certain extent. Government debt market. The commitment and dedication of the project implementation units contributed to the satisfactory results of the components in this group. The MOF counterpart team worked closely with the Bank task team to revitalize the MOF component, as it was about to be dropped by late-1999 due to inaction. The component was also benefited from strong support of the department management, despite heavy work load and staffing limits of the Treasury. However, delays in project implementation before the end of 1999 affected the achievement of specific results of this - 25 -  component. If given more time, the international experts could have assisted the MOF in detailing the roadmap for further market development and the training program could have been implemented, as there was sufficient funding for these activities at the closing of the Project. The impact of the component could have been greater if the MOF Treasury Department were sufficiently staffed for project implementation without serious interruption of its responsibility for managing a debt portfolio that amounts to over 26 percent of China's GDP. National payments system. The senior management member of the PBC in charge of payments system development provided strong support to the component, especially at the planning and needs-analysis stage. The use of sound participatory project management processes, an expert LAP, suitably experienced project consultants, and dedicated PBC task teams resulted in smooth execution up to the beginning of procurement stage. The establishment of the CHIBO company staffed with full-time employees as the executive armi of the PBC task teams provided a focal point for all project-related activities and provided a well-defined counterpart for the procurement and implementation phases. The PBC continued to provide significant resources during project implementation stage, and the perseverance of the task management team contributed to the overcoming of difficulties at the stages of procurement, negotiations, and contract implementation. 5.4 Costs andfinancing: Funding. The original financing arrangements for the components other than that of the national payments system are considered appropriate, and the objectives of the components were achieved more or less within the limits of allocated funding. National payments system. The original financing plan for this component fell short of the actual needs. There were two sources of the funding gap. First, there was a difference of USD6,330,000 between the cost of the system estimated at the time of project appraisal in September 1991, and the value of the contract signed in November 1996, by the PBC and NTT Data (Japan) the lowest evaluated bidder. Second, the 1998 PBC reorganization and a rapid upgrading of the intrabank systems and the information technology used by the major Chinese banks resulted in the need to make additional changes to the NTT Data solutions. The additional cost caused by these later developments added up to about USD1,300,000, leading to a funding gap of USD7,630,000 in the aggregate. In August 2000 the Bank approved a Supplemental Loan of USD8 million to cover the funding gap. While in projects of this nature and with this degree of complexity higher expenditures than that originally planned are not atypical, a major cause of the funding gap was the scope of the pilot program. The implementation program required the development, installation and testing of both RTGS and BEPS at the same time in two national payments centers, 20 city payments centers and 80 county payments centers. This turned out to be too ambitious, even though the number of local county payments centers was reduced to 48 in 1998-99. As the results of the phase II pilot testing show, efficiency could have been gained if a phased-in approach were adopted to develop the high-value system first. The provision for a large number of pilots, was, in a way, due to PBC's desire to equip as many as possible PBC branches as payments centers with imported hardware facilities. The Phase 11 testing results also prove that pilot testing of application systems do not require large numbers of participating same-level payments centers. The additional cost incurred by the need to make the NTT Data technical proposal compatible with the IBM operation systems that were widely used by Chinese financial institutions was another factor that led to the gap between the original Credit allocation and the contract value. Implementatio.L The implementation and disbursement of Credit proceeds were concluded as planned -26 -  under most of the components, except for the components on the national payments system and the MOF government debt market. The three major contracts under prudential supervision, PBC accounting and MOF accounting all had three-year implementation durations. This is considered too short, as it affected the achievement of some of the outputs under these components. Due to the delays in project implementation under the national payments system and the MOF government debt market, the closing date of the Project was extended three times, from September 1999 to September 2002. National pavments system. The system design and preparation of the bidding documents were concluded without delay in 1992-93. Given the degree of complexity, a two-phase ICB process was applied, which took about one year. Much of the time was spent on dealing with a complaint by a company which was not short-listed, and the associated communication between the Bank and the PBC, as well as within the Bank on this matter. Negotiations with the NTT Data (Japan) Group, which was the lowest evaluated bidder, started in 1995, but could not be concluded until November 1996. After the bid award, the central bank found out that the operation system used by HITACHI equipment to be provided by the supplier was not compatible with the IBM systems already installed in the HQ sites of the major commercial banks, and requested the supplier to modify its technical proposal. After a long period of communication and many meetings between the NTT Data Group, IBM China, and the PBC, a sub-contract was signed between NTT Data and IBM for the supply of the operations systems. Due to these delays, disbursement under the component did not pick up until 1999-2000. With the benefit of hindsight, the delays could have been alleviated if equipment and system development had been procured separately, and if the component had first focused on the development of the RTGS system. Bank .procurement requirements. In the early 1990s Bank procurement procedures were not custom-tailored to the acquisition of complex software-based systems and lacked the flexibility necessary to place sufficient emphasis on the software component in a turnkey project. For instance, the Bank insisted on the use of a sample contract that was for large-scale fixed investment projects, while the primary contributor to a successful outcome was the application software under this Project. The Bank procurement group also insisted that the financial and technical proposals of the bidders should be given equal weighting, although the PBC counterpart, supported by the Bank task team, suggested that the technical proposal should be given higher weighting. These weaknesses were partly due to the lack of experience in complex, large-scale IT projects. It should be noted that procurement requirements for this type of operation have been improved in recent years. MOF govenmuent debt market component. There were two rounds of delays in initiating project implementation under this component. In the first round (1995-96), the approval of consultant selection took a while, as the Bank found that the selected consultant, which was a Hong Kong-based small securities firm, did not have a sufficient track record either as a full-fledged investment bank with well-established specialty in government debt markets, or as an experienced consultant in the related areas. Eventually the Hong Kong firm teamed up with a Wall Street investment bank, but the team had to be dissolved and the contract canceled because the Hong Kong firm was closed by its owner in 1996. In 1997-98, the MOF was again ready to start project implementation. However, due to the lack of consensus on the direction and pace of government market development within the government at that time, the component was shelved. Disbursement under the component was smooth after 1999-2000, when the component was revitalized. Despite the earlier delays, the component achieved its objectives, and most of the Credit allocation was disbursed by the closing of the Project. -27 -  6. Sustainability 6.1 Rationale for sustainability rating: The overall sustainability of the Project is considered as likely. The Chinese government remains committed to the developmental objectives of the Project. A number of the project outputs have resulted in visible outcome and benefits. The pace of change in China's financial sector is expected to accelerate, with continuous financial deepening and gradual integration of financial markets with the international markets. Central bank functions. The outcome and the benefits of these components are likely to be sustained. The PBC has been collaborating with the IFISs (e.g. the Bank, IMF and BIS) and other central banks in the area of bank supervision, although the development of an international standard framework of prudential supervision may not be achieved in the near future. Similar collaborations are continuing on monetary policy operation. While it will take time for the financial markets to become the basis for monetary policy and its execution, the PBC is moving toward this goal. Accounting framework MOF accounting. The outcome and benefits of this component are likely to be sustained, evidenced by the fact that 16 accounting standards issued have been implemented by the private sector. PBC accounting. The output of Accounting Information System seems unlikely to be sustainable. Although the system was piloted and accepted by the PBC, it has not been adopted to-date. As stated in 4.1, neither the PBC nor FSAIS chart of accounts have been implemented. The output of PBC Organization Study is considered sustainable, as recommendations derived from the PBC Organization Study appear to have been implemented by the PBC. CNAO component. The outcome and benefits of this component are likely to be sustained, evidenced by the fact that 30 auditing standards have been issued. Government debt market. The refonns and development supported by these components are likely to continue. There is increasing recognition of the role of market forces in government debt management, financial institution strengthening and financial markets development. The MOF has requested further Bank assistance in the development and implementation of a medium-term strategy. National payments system. The outcome of this component is likely to be sustainable. This rating is based on the following facts. The Phase 2 RTGS application software addresses the needs of PBC and commercial banks in an acceptable and cost-effective manner. Clear plans exist for rolling out the RTGS to some 300-plus cities by the end of 2004. Local support and maintenance of the new mechanisms are not dependent on a foreign supplier. Development plans for further system upgrades-for example to provide a DVP capability for government securities transactions-are in place and appropriate resources are available. In addition, the Phase 2 RTGS system is becoming an essential ingredient of the Chinese financial sector infrastructure, and thus will and must be supported. This system is similar to corresponding systems such as Fedwire in the U.S.A., CHAPS in the U.K. and quickly becomes indispensable not only as a funds transfer vehicle, but also as a mechanism for the rapid transmission of monetary policy decisions into the financial sector. -28 -  To enhance sustainability, the PBC needs to initiate similar efforts to upgrade the low-value BEPS. The PBC may also consider seeking technical advice to evaluate whether there is a need for further improvement, in view of the Bank for International Settlements (BIS) published payments system standards embodied in the Lamfalussy Report on Interbank Netting Schemes (1990), and the Report on the Core Principles for Systemically Importance Payments Systems (2000). 6.2 Transition arrangement to regular operations: Not applicable. 7. Bank and Borrower Performance Bank 7. ILending: Bank performance is considered satisfactory. The Bank assisted project preparation by conducting a comprehensive sector review in 1989-90, which identified the main weaknesses that would benefit from substantial technical assistance. Throughout the lending phase of the Project, Bank country management stayed on top of the issues, and the task team worked closely with the government and the implementing agencies. The design of the Project was based on intemational best practices, and the Bank was able to convince the counterparts of the merits of the design, who in the early 1990s did not understand fully the benefits of combining international practice with Chinese realities in a number of the areas covered by the Project. These efforts contributed to the overall satisfactory design of the project objectives and scope. However, the broad coverage of the Project was a challenge for both the government absorptive capacity, and Bank project management. As discussed in the preceding sections, the design of the Project in terms of irnplementation durations and monitoring indicators could have been improved, if the Bank had understood better the difficulties involved in implementing policy changes of the magnitude envisaged under the Project for a transition economy of China's size. 7.2 Supervision: Bank performance is considered satisfactory, but with substantial room for improvement. While the Bank Board approved the Project in 1992, the Credit did not become effective until September 1993. During this period, the Bank endeavored to assist the PBC and the MOF to solve some internal problems for project effectiveness. In 1993-95, the Bank team closely monitored project implementation, especially under those components which did not use the "turnkey" contracting approach. For the "big contract" components, including prudential supervision, PBC accounting, national payments system and MOF accounting, Bank supervision relied more on progress reports provided by consultants and project offices, and was supplemented by meetings with counterpart representatives during supervision missions. These reports by design, focused on progress made per the agreed time-schedule, and did not provide good insight into the substantive issues. Toward the middle of the project implementation period (1995-97), much of the Bank team's energy were consumed by the issues related to procurement and contract negotiations under the national payments system component, and its supervision (see Section 4.2 and 5.4 for details). Direct involvement in project implementation of the rest of the components was weakened. This weakness in supervision was particularly noticeable under prudential supervision, PBC accounting and MOF accounting. Due to the differences in political, economic, social and cultural backgrounds between the government counterparts teams and the international consultant teams, coordination problems came up from time to time and required a more hands-on approach by the Bank. The Bank did intervene in a few cases, but according to feedback from the government counterparts and consultants, the Bank could have done more. Bank supervision improved in the last phase of project implementation period (1998-2002), -29 -  partly because most of the components by then were concluded and partly due to the efforts by the task team to focus on timely responses to the emergence of issues that could materially affect the achievement of project objectives. Throughout the supervision phase, especially when project implementation was in full swing, limited budget had been a perennial constraint Due to this constraint, the task team could not get the skill mix required for supervising a project that covered almost every aspect of the financial sector. While project implementation coincided with a period of large budget cuts throughout the Bank, the reduced attention by Bank management after the Project was approved could also be another factor. In 1995-96 the task management responsibility was transferred from an operations-oriented Bank unit to a program-oriented Bank unit. As the new managing unit and its staff did not have sufficient experience in Bank operations, the effectiveness of Bank supervision was affected. The reduced management involvement under the Project also affected Bank access to the government for the exchange of views on the broader policy and institutional issues of China's financial sector. To substantiate the rating for Bank performance in supervision, below are a few cases. Accounting framework Under PBC component, the Bank did not closely follow the development, live production, and acceptance of the financial information. PBC might have been too quick to "accept," since little interest was shown, while the consultants might have been eager to wrap up the project given the excessive expenses incurred. There appeared to be a missing link in quality control by the Bank. On the other hand, the Bank addressed in a timely manner the potential personality conflicts between PBC and the consultant team's system expert. WB notified the firm of PBC's concern and requested that mitigating steps be taken. Under CNAO component, the Bank took the initiative in obtaining progress reports and suggested that more emphasis be placed on in-country seminars, which would allow a larger number of participants than the overseas study tours. Government debt market. The Bank team acted promptly by adding a small, albeit important component of risk studies, when the PBC and MOF counterparts requested assistance in information management and risk control of the interbank government bond market. Under the MOF component, the Bank team tried hard to ensure that a qualified consultant would be hired in 1995-96. Later, the task team appropriately assessed the new developments in government's policy stance, and worked closely with the MOF counterpart to restart project implementation. National payments system. While the Bank task team's efforts in monitoring the PBC-NTT Data negotiation process and helping the two sides to better communicate should be acknowledged, supervision would have been strengthened if in-house, commercial contract management skills were available to the team, to assist the PBC in the long negotiation process. Toward the conclusion of the component, when it became clear that the proposed ADB payments system loan would not materialize, the task team prepared the Supplemental Loan to help the PBC finance the funding gap of the contract, and the additional costs incurred due to the required modifications to the NTT Data's technical proposal. At this stage Bank supervision did not limit its support to simple progress-checking during mission visits. Technical advice was provided on a responsive basis to counterpart requests and included software system attributes, management of complex system testing, and management of the contract. - 30 -  7.3 Overall Bankperformance: Overall, Bank performance is considered satisfactory. Borrower 74 Preparation: Borrower performance during project preparation is considered satisfactory. As mentioned in the preceding sections, it was a courageous and forward-looking decision for the Chinese government to work with the Bank to prepare the Project, given the strong doubts in some corners of the society regarding the direction and the pace of the financial sector reforms in 1991-92. The government implementing agencies allocated sufficient resources to project preparation including the establishment of large counterpart teams, and helped the Bank task tearn and international consultants to better understand the Chinese situations. 7.5 Government implementation performance: Overall, government performance during project implementation is considered satisfactory. Financial sector reforms continued, although at a more cautious pace in 1993-96, and have been accelerated since 1997. This generally favorable environment allowed the implementing agencies to proceed with project implementation, and contributed to the achievement of project objectives. The government complied with the Credit covenants, including that which required minimum provisioning of 0.5 percent against a financial institution's loan portfolio by the end of 1992. While this appears as far from sufficient, the change was a hard-won victory at that time. The government was in compliance with the covenant that required annual reviews of key financial sector reform issues with the Bank, although such reviews took place mostly between the Bank task team members and counterparts at departmental management level. 7.6 ImplementingAgency, Part A (the PBC). The PBC performance is considered satisfactory. Task teams composed of staff from different headquarter departments and branches Were established when project implementation started. Given the size and duration, some of them represented a substantial withdrawal of limited department resources. The PBC also established a World Bank Project Office in its Intemational Department, which did a good job in project financial management, compliance with Bank procurement procedures, and provision of support to the PBC, Bank and consultant task teams. The Project Office also played an important role in communication. Senior management commitment was strong in 1993-95. It showed a strong interest in the project and was directly involved in technical discussions. This commitment was reduced after 1995. The PBC accounting component was affected by frequent changes of task team leaders and members. The busy program of the Accounting Department's regular responsibilities could be a reason. Different understanding regarding the required staff commitment for project implementation could be another reason. The personnel policy could be a third reason. If staff performance in the task team was not fully appreciated for promotion, staff would have less incentive to stay several years in the task team. No similar problem was reported under the other components. On the contrary, the PBC maintained a highly competent management team under the national pavments system component for more than 8 years from the project preparation stage onward. Part B (the MOF). Overall, the MOF performance is considered satisfactory. The Accounting Department, which was the implementing unit for the MOF accounting component, worked closely with the international consultants and sent the Bank team progress reports on a regular basis. The Treasury Department, which started to implement the MOF government debt market component after it - 31 -  was established in the spring of 2000, assigned top priority to the Project. The department managers engaged actively in the technical discussions with the financial institutions, the intemational consultants and the Bank task team. Despite the limited time, and the complex task of managing a large number of individual consultants, the Treasury Department brought project implementation to a satisfactory conclusion. Part C (the CNAO). Documentation on project implementation in Bank files was limited. One Bank report dated October 1995 indicating that it was the first time the bank heard from CNAO since the project had become effective in September 1993, although it could be possible that some documents on the CNAO component were misplaced. In addition, there were quite a few personnel changes after the conclusion of the component, and no official involved in the Project was available for ICR interviewing purposes. Under these circumstances, it is difficult to rate CNAO performance. However, the current Director-General of the Legal System Department reported that project implementation was satisfactory. 7.7 Overall Borrower performance: Overall Borrower performance is considered satisfactory. 8. Lessons Learned Lessons leamed arise from a combination of factors that existed at point of entry and during the implementation. There are some general lessons leamed under the Project that could be of help to similar technical assistance operations: (1) Good analysis to identify major weaknesses is the foundation for good project design. (2) Well-defined outputs with specific benefits that were clearly understood by the government and implementing agencies are the key for the acceptance of project design and achievement of project objectives. (3) The conceptual and policy challenges to the govenmment and implementing agencies of initiating and managing fundamental changes should be fully appreciated and more time be built in to allow the changes to take place and take root. (4) The institutional constraints of the government implementing agencies in managing complex programs of fundamental changes should be fully appreciated at project design stage, and adjustments be made, if necessary, to the original implementation arrangements during project implementation. (5) There should be continuity of decision-makers of the project implementing agencies who should actively participate at critical points of the project. (6) Selection of appropriate consultants and dedicated task teams were very important to project success. (7) A well-staffed project office greatly helped coordination, monitoring, and communication. (8) For this type of operation, sustained Bank management involvement is required, and sufficient resources should be allocated for more intensive supervision. (9) For the '"urkey" type of large consultant contracts, the Bank task team should closely monitor implementation progress, intervene promptly if necessary, and actively engage in major policy and technical discussions. Prudential supervision component: (a) Joint PBC/PW working teams for pilot examinations and special assets review contributed to effective knowledge transfer. - 32 -  (b) Selection of a project manager and an immediate supervisor who were open-minded with strong professional backgrounds and access to senior management, was the key to turn the documents produced under the component into policy and institutional changes. (c) For change with a broader impact, such as the adoption of a comprehensive set of prudential regulations, and the reorganization of the bank supervision function in China, the international experts could have played a better role in communicating with the staff and management regarding the basic principles and concepts, rather than drafting reports. (d) PBC task teams should have paid more attention to how to communicate with their managers about the main findings and recommendations. (e) The project implementation period should take into consideration the time required for bigger policy/institutional changes. (f) The Bank team should have engaged more in the substantive issues and assisted the PBC counterparts in their upward communications. MOF & PBC accounting components: (a) Familiarity of the governnent agencies with the intemational "norm," and of international consultants with the Chinese realities, would have greatly irnproved project design and facilitated communication between the two sides. (b) More effective coordination between the government agencies was the key to smooth project implementation. (c) Institutional commitment to the accounting systems component was important, as frequent turnover of the senior- and mid-level management impacted the effectiveness of project implementation. (d) Looking forward, adopting international standards versus a research and writing approach will provide important benefits to China, as Chinese accounting standards will be similar (or identical) to globally-accepted standards. MOF govemment debt market component: (a) A phased-in approach focusing on one set of issues at a time (e.g. first, debt planning and primary market issues; then, secondary .market issues; and finally, fiscal and monetary policy coordination) would have enhanced project outcomes. (b) Hiring a local consultant for project administration would have alleviated the MOF staffs burden. National payments system component: (a) The need for procurement documents custom-tailored to the specifics of complex software-related acquisitions became evident during this project and are now available for use on similar Bank-supported projects. (b) The need to permit and support more flexible implementation arrangements also became evident and are supported by the Bank For example, acquiring application -software quite separately from equipment has now become a standard option. (c) The evident lack of technical expertise on the part of PBC should have been addressed by the Bank in a more proactive manner, such as providing a well-qualified Technical Adviser with contract design and contract management expertise. (d) Changes in task team leadership, especially during the contract negotiation phase of the Project, also contributed to reduced attention being placed on the technical content of the implementation contract. Continuity of key personnel is a well-accepted project success factor, and care should be taken to make senior-level changes at times when project risk is low. - 33 -  9. Partner Comments (a) Borrower/implementing agency: The full text of PBC and MOF evaluations can be provided upon request. CNAO did not provide an official evaluation, as there is limited institutional memory regarding the CNAO component, which was completed more than six years ago. The minutes of a meeting with CNAO regarding project implementation can also be provided upon request. Summary evaluation by PBC Background. The PBC has exclusively exercised the function of the central bank of China since 1984. To reinforce its functions, the central bank needs to undertake, among other things, the restructuring of financial legislation, banking supervision and regulation, treasury management, and payment and clearing system, as well as draw on advanced international experience and introduce practices prevailing abroad. The FSTA Project aimed at strengthening the PBC's functions of regulation, accounting and fiscal agent, enhance the ability of statistical analysis, policy research and formulation of financial rules and regulations, build and develop the capital market, gradually establish a multi-functional and automated payment and clearing system, and reinforce the personnel training of the PBC. Evaluation - Financial Prudential Supervision & Regulation. The main outputs of this component are as follows: (1) the compilation of the PBC Manual of On-site Examinations, the PBC Pre-Examination Questionnaire, the PBC On-site Examination Report Format and the Regulation on PBC On-site Examinations; (2) the introduction of the concept of the CAMEL system among supervisory staff, clarifying the key points and the risk areas in commercial banks to which inspectors need to pay attention during on-site inspections, and introducing the concepts of prudential regulation and risk-based supervision; (3) a study on how to set up the organizational structure of the PBC's supervisory department, presenting two models of the supervisory organization: institutional supervision model and function supervision model; (4) a comparative study of the Chinese and advanced countries' frameworks of prudential supervision and regulation; (5) a study on off-site surveillance system; and (6) the relevant parts of the off-site study used for drafting the Guiding Principles of Internal Control for Financial Institutions, promulgated by the PBC in 1997. The documents developed under the project have played an important role in raising the quality of PBC's supervisory staff. They have also laid the foundation for the standardization of PBC's supervisory work. The results of the Project have played a certain sustamied role in promoting and affecting the updating of the bank's supervision concept and improving the ways and means of supervision. Moreover, it enabled, for the first time, a large number of supervisory staff to be trained in loan risk classification, introducing the advanced practice of credit risk management to the state-owned commercial banks, and laying the foundation for the PBC to promulgate the Guidance Principles of Loan Risk Classification in March 1999. Evaluation - Fiscal Agent/Monetary Policy. As the inception and implementation of the component coincided with the initial stage of the liberalization of China's government bond market as well as the transitional period from direct macro-economic regulation to indirect regulation, the benefits were remarkable. Valuable experience was acquired for the development of China's bond market and personnel training, including enlarging the number of institutional investors, establishing the trading system of government bonds, reducing issuance cost, developing intermediaries, and strengthening the management of underwriters and the management of the use of the proceeds of national debt. This -34-  Project has gained substantial results in building and developing the open market operation, restructuring the government bond market and promoting the infrastructure reconstruction of the national debt market. As a technical assistance project, it has been a success. Evaluation - Accounting. The Project provided guidance and reference for accounting reform of the PBC and other financial institutions: (1) the MOF and the PBC consulted the study of the bank accounting standards when drafting the Accounting Standards of Basic Bank Business; (2) the MOF and the PBC consulted the study of the accounting information system, and applied it to the financial industry, when designing the accounting item and accounting statement of the Accounting Regulation of Financial Enterprise; (3) the PBC consulted the study of the accounting informnation system when the Accounting Item of the PBC was revised and the Accounting Statement System of the PBC and Financial Information System of the PBC were amended; and (4) the PBC consulted the research findings on organizational structure of accounting when restructuring the management system of the PBC. Evaluation - Automation Strategy Study. On the basis of the five-year plan proposed by the expert team, the PBC started the wiring layout project of its headquarters building network in 1997. The construction of headquarters network was completed and connection with branches was established in 1998. In 1999, the head office automation software was developed, and the nationwide email system was established. The PBC launched its intemet website, standardized the platform for users, and implemented data and resources sharing. The types of processing software in use were also reduced from more than ten to only one or two. By 2000, the five-year plan was fully implemented, and a number of the results exceeded our expectations of the original plan. Evaluation - Legal Component. The establishment of the data retrieval system of financial laws and regulations was instrumental to the acceleration of the construction of China's financial legal system, and provided a data platform for the PBC staff to leam laws and apply laws. The financial laws and regulation data retrieval system has improved the speed of data input and improved the effective data use through regular updating of the database. Since 1998, the PBC has self-financed the upgrading of the data-retrieval system, basically ensuring the parallel upgrading of its data base with the publication of financial laws, regulations and rules. At present, in addition to this data base of financial laws operating in the PBC office automation system, information and data concerning fnancial laws have been added to the PBC website. Evaluation - PBC Graduate School. The implementation of this Project has helped the School update courses, raise the level of instruction and teaching conditions. The new teaching program has kept in place the original teaching characteristics of the School, namely attaching great importance to basic theory and techniques, combining theory and practice all at the samne time, adopting prevailing international teaching methods, so as to enable students to master the latest knowledge and technique on the sound basis of economic theory. Evaluation - Payment and Clearing System. The prescribed project objectives for CNAPS are good guidance for developers of payment systems, putting forward positive and constructive recommendations on how to proceed in building a well-managed banking system for transitional economies. The objectives were valid at the time of project preparation and were consistent with PBC needs. It was also consistent with the policies pursued and services provided by central banks in major developed economies. The project design was appropriate in terns of both project processes and components. The design was also appropriate from the technical and financial perspectives. Although the envisaged project outputs were only partially delivered, the primary development objective has - 35 -  been, generally speaking, achieved. The PBC and commercial banks have now put in place a national system roll-out strategy that builds upon the pilot experience and takes into account the current banking system reform and improvement of technological environment. The upgraded versions of CNAPS application software (Phase 2) fully satisfy user needs and will be rolled-out to 43 major cities by the end of 2003. The most important improvement is the application software is not dependent on a foreign supplier and has been developed locally, based on the concepts embedded in the original application software. This is beneficial to the risk reduction of the payment system. Moreover, the bulk of the IT equipment acquired as a result of the pilot will continue to be used by the PBC in the national roll-out. Overall FSTA/Part A Evaluation. In general, FSTA was successfully implemented with positive results: (1) introducing internationally-advanced concepts, technology and experience. The advanced ideas, technology and experience have been invaluable in promoting the restructuring of China's fnancial system. (2) Introducing advanced technology and experience of project management. This played a positive role in improving management. To date, project pre-qualification, competitive bidding and various standard contract texts have become widely popularized and commonly adopted in China. A number of professional personnel were trained, while an understanding of internationally standardized practice and procedures and methods of project management was gained. (3) Partially resolving the problem of shortage of foreign exchange. The Project provided the PrUs with financing support in the form of foreign exchange. Evan today, compared with commercial loans in foreign exchange, the financing extended by the World Bank is still advantageous because of its long maturity. Major Factors Affecting Proiect Outputs. (1) Economic and financial reforms have deepened in China, resulting in the change of function and management system of the PBC. This had an impact, to various extents, on the progress and outcome of the Project. (2) The extent to which the leading group of the PIUs understood and supported the Project affected its implementation. From the perspective of each of the projects, leaders of the PBC at various levels greatly supported the implementation of the Project. However, support and understanding in the application of some of the Project findings in the latter period was not strong enough. (3) The composition of experts and the extent to which they understood China's national circumstances had a direct bearing on the implementation and output of the project. The foreign experts' professional knowledge, experience, and commitment were all direct determinants on the quality of the Project. A proper proportion between foreign and local experts in the team, on the other hand, directly determined the practicability or effectiveness of application of the Project. (4) The extent to which both designers and users of the Project understood and participated in it affected the practicality and implementation of the project. Insufficient understanding and participation in the project implementation by both designers and users resulted in unsatisfactory quality and practicability in some cases. Problems and Lessons. Compared with the projects funded with domestic financial resources, the main problems of the World Bank TA Project are as follows: (I) Project procedures were too complicated, and a large amount of time was spent on going through control and approval procedures. (2) The Project was lacking in forward-looking consideration and flexibility, resulting in an unduly long period of implementation, missing the most opportune time. (3) The World Bank lacked sufficient communication and exchange with the PIUs for some components, giving rise to misunderstanding on project implementation between the World Bank and PIUs. Therefore, some components were unable to achieve expected or better results. For instance, the major problem encountered in the CNAPS Pilot Implementation was the unduly long time of procurement, contract negotiation and amendment. There were indeed delays arising from too complicated, too long and repeated examinations and approvals. In handling concrete problems, the contracting parties were not sure if agreement and approval would - 36 -  be granted form the World Bank. This would naturally affect efficiency. In the meantime, managerial personnel were restrained from the aforementioned factors and lacked flexibility. The lessons learned from project design and implementation are: (1) Under CNAPS component, a flexible procurement procedure suitable for the acquisition of complex software-based systems is absolutely needed. The pilot implementation target was too ambitious. (2) It is essential to adapt to the rapid management changes in a complex project such as CNAPS. Major organizational changes within the PBC and major changes in the use of information technology within the commercial banks should be taken into account during the design and implementation of the project, allowing due flexibility. (3) It is necessary to bring the initiative of local experts into full play during project implementation. For instance, under the prudential supervision component, the foreign experts who undertook this project had rich experience in supervision and regulation and a deep understanding of these subjects, but they lacked knowledge of actual situation in China. (4) Attention should be paid to a proper proportion between micro and macro aspects of the components, with stress on both their implementation and effectiveness. Some components should be put into force from superior authorities, and it is not enough to only rely on PIUs. For example, the research on how to set up the organizational structure of the supervisory departments involved the adjustment in the financial supervisory system of China's financial industry, and the PBC did not have authority to decide on such an important issue. Some other components should be promoted from the bottom. For instance, the studies on on-site inspection and loan classification were of strong practicability, and it was far from enough if only the management of supervisory departments and a few distinguished supervisory staff members reached agreement on these issues. There was also a need to consider how to fully put the research fndings into practice. Take the accounting component as an example. As the management system and the function of the government were undergoing adjustment, so was the power to formulate and operate the financial and accounting systems. It took much time and energy for the consultants to familiarize themselves with these changes. As a result, it was difficult for them to give enough time and energy to the process of practical development and design, this affecting the quality and applicability of the component. Summary evaluation by MOF Accounting Department Achievement of Development Objective and Outputs. Generally speaking, the component of FSTA project helped to introduce new concepts and international accounting practices and proved to be a successful vehicle for knowledge transfer and staff development. Assisted by this project, MOF issued a set of exposure drafts of specific accounting standards that were broadly in compliance with International Accounting Standards (IAS), which included a specific standard for basic banking business. By the end of 2002, 16 specific standards have been issued formally. Moreover, given the fact that the govemnment will probably continue to promulgate specific accounting standards in the near future, the component did help MOF to construct a outline or framework of the system of Chinese accounting standards, also the due process for standards-setting. Specific outputs included: (a) Promulgation of the general standard and 30 exposure drafts of specific accounting standards. (b) Transfer of knowledge and techniques from consultants to the MOF counterpart teams to enable the latter to continue to develop, maintain, and modify a body of accounting standards appropriate and responsive to the growing and changing market economy. (c) Development of a plan to inform accountants in China on the use of the new standards through seminars, publicity and trainmg activities. (d) Workshops and study tours. - 37 -  These outputs were delivered. Research was carried out on 7-8 countries cases. A due process for drafting standards was formalized from drafting by Accounting Regulatory Department, through internal review by a core group of Accounting Regulatory Management, to the public discussion and reviewed by the members of China Accounting Standards Committee. The institutional impact development impact is substantial in accounting standard-setting under MOF component. Maior Factors Affecting Implementation and Output Due to the background of China in early 1990s, there were some unique problems which arose in setting up accounting standards. First, different areas of China were at different stages of reform and development. This can be seen in the different stages of mechanical conversion of the operation of the enterprises, different degrees of adaptability to the market, and different operating styles. Secondly, there was a time span between the completion of drafts and the promulgation of standards. We believe that the major contract under MOF accounting has a three-year implementation duration, which were considered too short, as it affected the achievement of some of the outputs under MOF accounting component. For example, for some difficult accounting standards like business combination and some standards of specific industry like oil and gas, they generally take a relatively long time to do research and make a lot of investigation. Sustainabilitv. From our point of view, the outcome and benefits of MOF accounting component are likely to sustain. This can be evidenced by the fact that 16 specific accounting standards have been issued and implemented by above-mentioned three categories of enterprises. Also, MOF is continuing to set other specific accounting standards. Bank and Borrower/PIU Perfonrance. Overall, we believe that the performance of the Bank and MOF -are satisfactory. Accounting Regulatory Department, which was the implementing unit of MOF accounting component, worked very closely with the international consultant (Deloitte Touch Tohmatsu) and delivered the Bank team and project progress report regularly. Lessons Learned. Because this is the first technical assistance project in our department, we did not have much experience regarding the Bank's due procedure and some related matters. In order to utilize the fund effectively, we believe that we should increase much communication and cooperation with the Bank and well understand the Bank's policy with respect to procurement, signing contract and so on. For the perspective of an implementation unit, we have also to make periodic reports to the Bank. Summary evaluation by MOF Tlreasury Department. Since Treasury Department, MOF was established in 2000, our department restarted implementation of the Sub-project-Govemment Securities Market Development in China-Part B under the FSTA. Through vigorous support by the World Bank project team and unremitting efforts by the consultants, the "China Govermment Securities Market Development Sub-Project" was canried out relatively smoothly, basically completed major tasks concerned and realized predetennined target. Major tasks that we have accomplished are as follows: 1. In early 2000, with the help of the World Bank project team, we have hired five experts in government securities market from Ireland, New Zealand, Spain, Sweden and the United States, who - 38 -  formed an international consultant panel to conduct research on the current status of China government securities market development and strategic conception for further development. At the same time, in order to support the Intemational Consultant Panel, we also invited some public debt administrators to work as advisors to the Consultant Panel. We organized two field study missions for the consultant panel to make survey on the current status of China govemrnment securities market development. They had many meetings with supervisory and monitoring departments on China financial markets, securities issuing bodies, and market participants. The Consultant Panel completed the "Report on China Govenmment Securities Development" in 2001. The report comprehensively analyzes the government securities market development status in China, achievement obtained, challenges and problems confronted by incorporating international experiences concemed. The report also recommends future development direction and suggestions. 2. In 2000 and 2001, two large-scale international workshops were held in Beijing and Hong Kong respectively, which facilitated exchange among national debt market administrators and participants, and foreigners of the same occupation, promoted further standardization of China govemrnment securities market development and enhanced market confidence. 3. With the help of the World Bank project team, many small-scale seminars were conducted from 2000-2002, which covered many important topics on national debt management, including national debt issuance system, enhancing institutional investors in national debt market, national debt laws and regulations, treasury cash management, etc. These small-scale workshops provide beneficial support to our work. 4. Equipment procurement. With permission from the World Bank and within the World Bank predetermined sub-project budget, we purchased equipment via govemment procurement procedure, to upgrade and replace hardware conceming national debt management, constructing national debt management information system, supervisory and monitoring system on debt issuance, debt cashing management system, office automation, which imnproved efficiency of China national debt management. 5. Short-term training abroad. We have organized 4 short-term study missions or training to foreign countries such as the United States, Canada, Australia, New Zealand, Japan, South Korea, United Kingdom, Greece and Turkey. Short-termn training enhanced our staff's understanding of national debt market in foreign countries. 6. Both the World Bank project team and our department realized that China govermment securities market has basically formed, but still needs improvement and enhancement. The consultants' report and World Bank follow-up letters all put forward initial implementation strategy and framework advice. These strategy and recommnendations will be tested via practice gradually in future. We hope that World Bank can continue to provide support to us through new forms of technical assistance, since World Bank has delivered a lot of useful experiences and suggestions relating to govemment public debt management via FSTA, and World Bank possesses unique knowledge, human resources and coordinating capacity. 7. Further expand mutual exchange between our department and the World Bank regarding govemment public debt management. Our department will continue cooperation with the World Bank. We hope that World Bank can provide more communications and exchange opportunities, and meanwhile diversify exchange and communications methods. - 39 -  (b) Cofinanciers: The Project was cofinanced by a grant of 607.5 million Japanese Yen provided in March, 1991. Part A of the Grant proceeds (TF27220), which was executed by the Bank, funded project preparation activities for the designing of the national payments system. Part B of the Grant executed by the government (TF27221) supported project implementation. All audit reports of TF27221 were unqualified. Below is a summary of the comments received from the Ministry of Finance of Japan. (c) Other partners (NGOs/private sector): Not applicable. 10. Additional Information Peer reviewer comments. The ICR has been reviewed by two peer reviewers. One peer reviewer (Mr. Andrew Sheng, Chairman, SFC, Hong Kong) has provided written comments which are available in IRIS. The other peer reviewer (Mr. Ronald Points, Manager, Financial Management, EASPR) focused more on the accounting framework components, and has confirmed his consent with the assessment of the ICR which has incorporated his comments. Below are the excerpts of Mr. Sheng's comments: 1. The report provides an overall assessment of the work conducted by the World Bank in China for a period of over 10 years and most of the developments/implementation work have already completed. There is no doubt that this project, one of the most ambitious and wide-ranging of its kind when it was first designed, has contributed significantly to the fairly successful evolution of the financial sector in Chmna to date, even though many challenges remain. 2. The Project focused on four clusters of activity: central bank functions, accounting framework, government debt market and national payment system, which were the most critical areas of improvement/development in China during the period. When the FSTA was being designed in the late 1980s, there was insufficient appreciation of the importance of the whole financial, accounting, regulatory and judicial infrastructure that is necessary for the successful development of the financial sector. Nor were the importance of four key functions of the financial sector in resource allocation, price discovery, risk management and corporate govemance that obvious in the literature, nor the operational manuals of the Bank. 3. Only after the problems of financial sector reforms in the transitional economies of Eastem and Central Europe emerge, followed by the Asian crisis, was there greater appreciation of the importance of the point that financial system exists to protect property rights for savers and investors. Therefore, those financial systems that expropriated property rights of investors through financial repression, policy-induced resource allocation, hidden taxation, tunneling, stealing and fraud, would find quickly that the investors engaged in capital flight, investment in informal markets or speculation in real property. However, the mind-set of centrally-planned or mercantilist emerging market policy-makers had the idea that the financial system was a system that could be milked to finance either inefficient state-owned enterprises or support rent-seeking oligarchies [crony capitalism]. 4. Unless there was sufficient appreciation of the fundamental finctions and objectives of the financial system even within the Bank, sound technical advice to the reformers were basically piece-meal or partial in approach. 5. There is no question in my mind that the FSTA designers were quite clear-sighted in identifying -40 -  important building blocks for the Chinese financial sector. The four components were all necessary, but not sufficient, components of the financial sector infrastructure and institution building. The success of each component varied depending on.the comporient design, initial conditions and also the sophistication and ownership of the impleinenting agency. I agree with the overall "Lessons Learned." To be fair to the project designers, there was simply insufficient appreciation in the late 1980s of the complexities of institutional and market reform. The Bank can improve its procurement policies in getting project supervision and delivery. It was a-pity that there were no follow-up projects to the FSTA. 6. On the whole, the FSTA was a path-breakiing TA project that should have led to a whole series of follow-up projects that could have given a coherent and properly-sequenced reform programs and projects for the Chinese financial sector. 7. The fact that the Chinese financial sector has advanced so far without major financial crisis on the scale experienced in other transitional econo"mies is testimony to the resilient and pragmatic policy-makers. On the other hand, the fact that there reinain considerable gaps in the institutional and market framework means that there is considerable more reform work to be done. -41 -  Annex X. Key Perfornma,nce lo&iccators/Log Fnamme Matnix The present performance indicator system was not in place at project preparation and approval. Instead, the Project used a system of "monitoring and monitorable indicators" valid at that time. This system was designed to check project implementation progress. The evaluation of the indicators under the Project was provided in Section 3.3. -42 -  Annex 2. Project Costs and Financing Project Cost b Com onent (in US$ million equivalent) - - Appraisal Actual/Latest Percentage of . ., - - - -Estimate Estimate A--ppraisal Component IUS$ million US$ million , - Central bank functions & PBC accounting 17.52 12.48 71 National Payments and Clearing System 42.62 48.14 113 MOF accounting & CNAO auditing standards 3.76 3.76 100 MOF debt market development 1.58 1.46 92 Total Baseline Cost 65.48 65.84 Total Project Costs 65.48 65.84 Total Financing Required 65.48 65.84 Note: Based on SAR, disbursement data and staff estimates. Cost estimate at appraisal included the cost financed by IDA of US$60 million, that financed by the government of about US$1.03 million, and that financed by JGF of US$4.46 million. The increase in ActuallLatest Estimate was mainly due to increase in local costs. Project Cost Financed by Supplemental Loan No. 4574 (in US$ million equivalent) Appraisal Actual/Latest Percentage of Estimate Estimate Appraisal Component . + : * US$ million US$ million million National Payments and Clearing System (NPC) Goods 8.32 7.80 94 Front End Fee .08 .08 100 Total 8.40 7.88 94 Note: Based on MOF and disbursement data. Total cost estimate at appraisal included, IBRD financed cost of US$8 mullion, and counterpart funding of US$0.4 million. Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equival nt) Procurement Method'-- Expenditure Category ICB NCB , N.B.F. TotalFCost 1. Works 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 2. Goods 49.40 0.00 1.64 0.00 51.04 (48.19) (0.00) (1.17) (0.00) (49.36) 3. Services 0.00 0.00 8.96 0.00 8.96 (0.00) (0.00) (9.76) (0.00) (9.76) 4. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.43) (0.00) (0.43) 5. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) - 43 -  6. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) Total 49.40 0.00 10.60 0.00 60.00 (48.19) (0.00) (11.36) (0.00) (59.55) Note: Based on disbursement data and staff estimates. Goods procured under ICB were partly financed by the Supplemental Loan. The above table provides information on the Credit. Under the Supplemnental Loan, there was only one expenditure category: Goods; and US$6.43 million was under ICB, US$0.37 million under Direct Contract, and US$0.91 million under Intemational Shopping. "Figures in parenthesis are the amounts to be financed by the IDA Credit. All costs include contingencies. 2/ Project Financing by Componsn8 (In US$ milion squivalent) > j m 1 z 1; lt~~~~~~~~~~~~ferceiitne of A praisal Component l ! Apps alsalaEstriate A n tssthflate - o .__ _._ _-__ IDDA -Govt Col; WDA GoSDvAt'- CoF. ''WA Govi. CoF. Central bank function & 16.72 0.80 11.68 0.80 69.9 100.0 PBC accounting National payments system 40.47 2.15 45.19 0.80 2.15 111.7 100.0 MOF accounting & CNAO 1.54 0.20 2.02 1.54 0.20 2.31 100.0 100.0 114.4 auditing MOF debt market 1.26 0.03 0.29 1.14 0.03 90.5 100.0 0.0 development TOTAL 59.99 1.03 4.46 59.55 1.83 4.46 99.3 177.7 100.0 Under the Supplemental Loan, the actual financing by IBRD was the same as the appraisal estimate. There was no cofinancing and the govemment contribution was esimated at US$0.4 million. - 44 -  Annex 3. Economic Costs and Benefits Not applicable -45 -  Annex 4. Bank Inputs () Missions. Stage of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, 1 FMS, etc.) Implementation Development Month/Year Count Specialty Progress Objective Identification/Preparation 10/14/1990 10 TASK TEAM LEADER (1); BANKING SPEC. (2); FINANCIAL ANALYST (1); OTHER (6) 03/17/1991 5 TASK TEAM LEADER (1); ACCOUNTING SPECIALIST (1); OTHER (3) Appraisal/Negotiation 09/16/1991 3 TASK TEAM LEADER (1); SR. ECONOMIST (1); SR. COUNSEL (I) Supervision 11/16/1992 1 SR. COUNSEL (1) S S 12/09/1992 2 TASK TEAM LEADER (1); S S BANKING SPECIALIST (1) 02/13/1993 5 TASK TEAM LEADER (1); S S BANKING SPECIALIST (1); FINANCIAL ANALYST (1); OPERATIONS OFFICER (2) 05/10/1993 7 TASK TEAM LEADER (1); S S OPERATIONS OFFICER (3); BANKING SPECIALIST (2); LEGISLATION (1) 06/01/1993 4 LEGISLATION (1); S S FINANCIAL SECTOR (1); TASK MANAGER (I); BANK SUPERVISION (1) 05/01/1994 3 SR FINANCIAL OFFICER (1); S S SR. BANKING SPEC. (1); SR. OPERATIONS OFFICER (1) 03/05/1995 4 SR. FINANCIAL OFFICER (1); S S SR. ECONOMIST (1); SR BANKING SPEC. (1); SR. OPERATIONS OFFICER (1) 08/08/1995 2 TASK MANAGER (I); S S SR.PAYT.SYSTEMS SPCLST (1) 03/20/1996 3 TASK MANAGER (1); SENIOR S S ECONOMIST-CHINA (1); CONSULTANT (1) 08/15/1996 1 TASK MANAGER (1) S S 05/15/1998 4 TEAM LEADER (1); PR. FIN. S S ECONOMIST (I); PR. PAYMENT SYS. SPEC. (1); SR. -46 -  ECONOMIST (I) 03/15/1999 3 MISSION LEADER (1); ADV., S S FINAN. INFRAST. (1), FIN. SECTOR SPECIALIST (1) 11/01/1999 3 TEAM LEADER (1); S S PAYMENT SYSTEMS SPEC. (1); BOND MARKET SPEC (1) 10/13/2000 3 MISSION LEADER (1); FIN. S S MRKT SPECIALIST (1); FIN INFRAST. SPECLST (I) ICR 01/14/2003 3 TASK TEAM LEADER (1); SR. FINANCIAL MGMT. SPEC. (1); OPERATIONS POLICY ADVISER (1) (b) Staff: Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US$ ('000) Identification/Preparation 579.1 /a Appraisal/Negotiation Supervision 1,235.7 /b ICR Total /c 1,814 8 /a Includes Identification through Negotiation. /b Includes Supervision through ICR. /c Not all information for the project stages is available, due to length of project and changes in Bank systems. -47 -  Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Ratzng OI Macro policies O H OSUOM O N O NA L SectorPolicies O H OSUOM O N O NA OI Physical O H OSUOM O N O NA O Financial O H OSUOM O N O NA OL Institutional Development O H O SU O M O N 0 NA O Environmental O H OSUOM O N O NA Social O Poverty Reduction O H OSUOM O N O NA O Gender OH OSUOM ON ONA O Other (Please specify) O H OSUOM O N O NA L Private sector development 0 H O SU O M 0 N 0 NA El Public sector management 0 H O SU O M 0 N 0 NA LI Other (Please specify) 0 H O SU O M 0 N 0 NA Given the fact that the Project was implemented by about 12 PIUs in three different government agencies, each component was individually rated Component Rating Central bank functions S Prudential supervision S Monetary policy function s Legal function HS Research & statistics HS PBC office automation HS PBC Graduate School HS Accounfing fiSamework S MOF accounting M PBC accounting Auditmg standards S Govemment debt market S Book-entry system S Risk studies HS MOF component S National payments system S - 48 -  Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6.1 Bankperformance Rating O Lending OHS*S OU OHU O Supervision OHS*S O U O HU O Overall OHSOS OU OHU Bank performance in supervision is considered satisfactory but with room for improvement 6.2 Borrowerperformance Rating O Preparation OHSOS OU OHU OI Government implementation performance O HS O S O U O HU O Implementation agency performance O HS OS O U O HU O Overall OHS *OS OU OHU -49 -  Annex 7. List of Suppor