China

1
Chinas Economic Prospects

• European Representative Office
• Asian Development Bank
• Berlin, 13 October 2000

2
Contents

• Chinas Economic Performance
• China and the WTO
• ADB
• ADB in China
• AnnexState-Owned Enterprises
• Contact Persons

3
Chinas Economic PerformanceQuick Profile

• Since 1978, the Chinese economy has grown at 10
  percent annually, doubling per capita income
  every ten years this is faster than any other
  countrys achievement over the last three
  centuries
• During the past couple of years, Chinas economy
  has been one of the few bright spots in a region
  affected by financial crisis
• ADB expects Chinas good economic performance to
  continue

4
Chinas Economic PerformancePolicies

• Monetary and fiscal policies are accommodative
• Monetary policy was eased by lowering interest
  rates and reserve requirements for banks this
  overall policy stance continued in 2000
• Gradually there will be a greater role for market
  forces in determining exchange and interest rates
• The March 2000 budget is expansionary Government
  expenditures will increase by 17.8 percent and
  revenues by 14.2 percent
• The 2000 Budget deficit is 3.6 percent, compared
  4.1 percent in 1999

5
Chinas Economic PerformanceFundamentals

• During the first half of 2000, exports grew by 38
  percent and imports grew by 36 percent
• The current account surplus in 2000 is 16
  billion
• Foreign direct investment declined by 8.2 percent
  during January-May 2000 but, for the whole of
  2000, it is projected at 35-40 billion
• With foreign exchange reserves of about 160
  billion, an external debt of 151 billion, and a
  debt-service ratio of 15 percent, the external
  payments situation is comfortable

6
Chinas Economic PerformanceForecasts

• ADB is upgrading its economic forecasts for China
• Chinas economic growth was very strong in the
  first half of 2000 (8.2 percent)
• ADBs forecast for growth of GDP in 2000 is 7.5
  percent for 2001-2003, ADBs forecast is 7
  percent
• Growth is mainly driven by domestic consumption
• After slowing for six consecutive years, retail
  sales grew by 10.4 percent in the first five
  months of 2000, compared to 6.8 percent in 1999
• Deflation is no longer a concern the Consumer
  Price Index inflation forecast for 2000 is 1
  percent for 2001-2003, it is 2-3 percent

7
Chinas PerformanceRisks

• Chinas positive economic outlook is subject to
  three strategic risks, namely
• A deterioration in the fiscal situation
• Failure to contain the social costs of necessary
  reforms in state-owned enterprises within
  manageable levels
• Difficulties in managing the reform of the
  financial sector

8
China and the WTOQuick Profile

• Chinas much-awaited entry into the WTO will be
  good for both China and the world
• Membership in the WTO will increase Chinas
  participation in the global economy in a
  rules-based manner
• Membership in the WTO will bring both economic
  opportunities and challenges
• For China, the long-term gain from membership
  will be 1-2 percent of GDP

9
China and the WTOBenefits (1)

• Cutting tariffs, liberalizing trade and
  investment and opening up domestic sectors for
  foreign participation will lead to significant
  efficiency gains for Chinas economy
• Membership of the WTO will improve Chinas export
  prospects
• Chinas share of the textile market is kept at 17
  percent under the Multi-Fiber Agreement
• More than half of Chinas exports to the United
  States and about half of exports to the European
  Union face non-tariff barriers membership of the
  WTO will eliminate these restrictions and improve
  Chinas export prospects
• There will be economic benefits for China from
  membership in the WTO

10
China and the WTOBenefits (2)

• For Chinese consumers, membership in the WTO will
  mean greater freedom to choose from an increased
  availability of good quality goods and services
  at competitive prices
• Consumer choices will expand for a wide variety
  of goods and services, ranging from wheat and
  fruit to automobiles and to banking, insurance,
  telecommunications, and Internet services
• But, membership in the WTO will also pose
  challenges with regard to
• Agriculture
• Automobiles
• Banking
• Insurance
• Telecommunications

11
China and the WTOChallenges (1)

• There is a glut of some agricultural products in
  China (e.g., rice, wheat, corn, cotton, tobacco,
  and sugar)
• Domestic prices of some commodities are higher
  than international prices because of farm price
  support policies
• Cutting import tariffs and liberalizing trade
  will replace some domestic agricultural
  production and reduce incomes for farmers
  producing these commodities

12
China and the WTOChallenges (2)

• The Chinese automobile sector has developed
  behind high tariff walls and import restrictions
• Lowering tariffs and opening the sector for
  foreign competition will put domestic producers
  under competitive pressures
• Chinas 120 vehicle producers are fragmented and
  inefficient
• Under the WTO, tariffs on imported cars will fall
  from 80-100 percent to 25 percent foreign car
  makers will be allowed to supply financing to
  local buyers of automobiles
• This will force domestic car makers to bring
  their costs down and to improve efficiency

13
China and the WTOChallenges (3)

• The financial position of the Chinese banking
  system is weak
• Foreign competition will require domestic banks
  to improve efficiency and products offered
• Addressing non-performing loans and
  recapitalizing the banks will take time
• A key challenge to strengthen the banks by
  implementing international prudential norms and
  risk management practices so that banks are able
  to adjust to international competition
• Some domestic banks will form strategic
  partnerships with foreign banks to meet the
  post-WTO challenges

14
China and the WTOChallenges (4)

• Chinas insurance sector is financially weak
  most life insurance companies have pay-out
  obligations that are greater than their current
  return on investments
• Shortages of actuaries and professional insurance
  management staff have contributed to poor
  business practices by insurance companies
• The quality of service and business skills of the
  Chinese insurance sector are not comparable to
  those of international companies
• Domestic insurance companies will need to adopt
  international business and prudential practices
  so that they can adjust to the international
  competition that will follow Chinas entry into
  the WTO

15
China and the WTOChallenges (5)

• In the past, the Government owned China Telecoms
  controlled most of the business, including
  fixed-line telephone services, cellular
  telephones, and Internet services
• Although this situation is changing with the
  split up of China Telecoms, the
  telecommunications sector is not prepared to face
  international competition
• The costs of telecommunication in China are high
  and the quality of many of the services is poor
• While competition in telecommunications will
  improve service quality and reduce costs, there
  will be adjustment pressures on domestic
  telecommunications companies

16
ADBQuick Profile (1)

• ADB is a multilateral financial institution
  established in 1966 and headquartered in Manila,
  Philippines it is a partnership of 59 member
  countries, employing 2,000 staff
• Since 1966, ADB has provided over 82 billion to
  finance more than 1,500 projects in the Asian and
  Pacific region
• ADB has a Triple A credit rating from both
  Moodys and Standard and Poor
• In August 2000, the Asiaweek magazine recognized
  ADB as Asias best agency over the period
  1975-2000

17
ADBQuick Profile (2)

• ADB loans finance infrastructure, environmental
  protection, urban development, agriculture,
  education and health
• Along with loans go policy advice, technical
  studies, and human resource development
• ADB places priority on good portfolio quality
• ADB mobilizes cofinancing from bilateral,
  multilateral, and commercial sources
• In 1999, ADB adopted poverty reduction as its
  overarching objective 900 million extremely poor
  people live in the Asian and Pacific region
• ADB is restructuring its operations to focus on
  poverty reduction and 40 percent of ADB loans
  must now help to reduce poverty

18
ADB in ChinaSectoral Focus

• China joined ADB in 1986 ADB has since then
  approved loans totaling nearly 10 billion to
  finance key development projects the sectoral
  focus of ADB loans to China is
• Transport (46 percent)
• Energy (19 percent)
• Environment and water supply (17 percent)
• Finance and industry (13 percent)
• Agriculture (5 percent)
• China makes excellent use of ADB's money and is
  one of ADB's best performing borrowers ADB
  projects are implemented on time and their
  objectives are achieved
• ADB lending to China now averages about 1
  billion each year this lending has been
  complemented by 160 million in technical
  assistance grants

19
ADB in ChinaGeographic Focus

• During 1987-1995, about two thirds of ADBs
  lending concerned the coastal provinces the
  remainder was for projects in the interior
  provinces
• However, because most of China's poor live in the
  interior provinces, ADB has made a concerted
  effort to shift its lending to those areas
• Over 2000-2003, two thirds of the projects
  supported by ADB will be in the interior provinces

20
ADB in ChinaLegal System

• ADB helped draft the Securities Law and the Land
  Administration Law, both of which became
  effective in 1999
• In 1999, ADB provided 1.4 million to help
  formulate seven key laws and regulations (e.g.,
  Company Law, Bankruptcy Law, Trust Law, Social
  Security Law, Registration of Commercial and
  Industrial Organizations Law, Administrative
  Licensing Law, and regulations related to the
  closing and bankruptcy of financial institutions)
• In 2000, ADB will provide assistance to help
  draft the Government Procurement Law
• In future, ADB will help to identify the changes
  in laws required for Chinas membership in the WTO

21
ADB in ChinaPrivate Sector (1)

• ADB can make loans or equity investments in
  private sector projects but its maximum exposure
  is 50 million or 25 percent of total project
  cost, whichever is less
• ADBs spread over LIBOR or US dollar rates varies
  from 2 percent to 2.75 percent
• ADB uses credit enhancement tools to mobilize
  commercial cofinancing on attractive terms
• ADBs priorities for private sector lending in
  China are for
• Investments for infrastructure
• Capital market operations such as funds
• Enterprise and financial sector reform
• ADB will not finance manufacturing plants on the
  east coast most of the 40 billion in foreign
  direct investment to China have gone into such
  enterprises

22
ADB in ChinaPrivate Sector (2)

• ADB private sector project lending in China has
  totaled 164 million also, 245 million have
  been invested in China by various funds in which
  ADB has participated
• In 2000, ADB will help to identify policy and
  legal changes necessary to stimulate private
  sector development and business support services
• ADB will work with the All China Federation of
  Industry and Commerce, which represents 3,000
  local chambers of commerce over 90 percent of
  their 1.3 million members are privately
  registered firms
• ADB will also support the development of small
  and medium enterprises by
• Creating a better policy environment for small
  and medium enterprises
• Developing instruments to improve the access of
  small and medium enterprises to debt and equity
  financing

23
ADB in ChinaEnvironmental Improvements

• Addressing Chinas environmental problems is
  essential for improving the quality of life of
  people, attracting foreign investment, and
  achieving sustainable growth
• ADBs environmental program in China has five
  objectives
• Improving the policy, legal, and regulatory
  framework
• Building capacity in key agencies
• Improving the environment in selected cities
• Promoting conservation of soil, water, and marine
  resources
• Promoting the use of clean process and clean coal
  technologies for industrial production and power
  generation

24
AnnexState-Owned Enterprises (1)

• Reforms in state-owned enterprises are critical
  to Chinas economic prospects its entry into the
  WTO, which will expose the enterprises to
  international competition, makes these reforms
  even more urgent, and no less daunting
• China has over 100,000 medium and large-scale
  state-owned enterprises enterprises, about a
  third of which incur losses but continue to be
  supported by the Government
• Measured by output, the share of state-owned
  enterprises in the Chinese economy has declined,
  from 75 percent in the late 1970s to about 28
  percent now
• But, state-owned enterprises still account for
  about 44 percent of urban employment and as much
  as 70 percent of government revenues and, all of
  Chinas heavy industry is in the hands of
  state-owned enterprises

25
AnnexState-Owned Enterprises (2)

• Some progress has been made China was the first
  large communist country to embark on market
  reforms in the 1980s, it began to free prices of
  inputs and outputs, introduced the first laws to
  turn enterprises into legal entities, and moved
  toward a bankruptcy code and double-entry book
  keeping it also allowed state-owned enterprises
  to retain some of the profits they made
• In the 1990s, China also began to separate the
  management of state-owned enterprises from the
  Government, ordering bankers to demand that their
  loans to state-owned enterprises be repaid
• In 1985, one in ten state-owned enterprises
  admitted losses by 1998, one in two did
• But, as a legacy of central planning, many
  state-owned enterprises still sell products that
  have no market or that are marketed badly

26
AnnexState-Owned Enterprises (3)

• To set the stage for further reforms, the
  Government is attempting to separate state-owned
  enterprises into three groups it estimates that
  about 50 percent of them have no future, that
  about 40 percent could be turned around, and that
  the remainder, or 10 percent, show promise
• The intended fate for the first group is a
  managed and gradual exit from the market to
  begin, their bad debts are being transferred to
  four state-approved asset-management companies
  the state-owned enterprises in the second group
  are being prepared for sale to foreign or
  domestic private investors those in the third
  group are being listed on the stock market
• If the Government sells a state-owned enterprise
  before it is restructured, it will do so for a
  pittance and, the Government needs cash to pay
  off pension liabilities

27
AnnexState-Owned Enterprises (4)

• Yet, restructuring the enterprises in the hope of
  selling them for more is more difficult
• Reforming state-owned enterprises further would
  mean restructuring them into shareholding
  companies fully responsible for their own
  financial operations, using more market-based
  labor practices, and improving corporate
  governance (including managerial and financial
  accountability)
• A more radical step would be to disable the
  primary engine of mismanagement, which is access
  to soft budgets state-owned enterprises could
  not run their businesses against the laws of
  economics if their sources of cheap credit were
  to dry up
• Whatever happens, the reform of state-owned
  enterprises must be accompanied by an
  acceleration of efforts to establish a social
  security system, develop housing markets, and
  expand the tertiary sector to absorb the surplus
  labor

28
Contact Persons

• Resident Representative, Asian Development Bank,
  Beijing, Peoples Republic of China
• Tel. [phone]
• Fax. [phone]
• Regional Representative, European Representative
  Office, Asian Development Bank, Frankfurt,
  Germany
• Tel. [phone]
• Fax. [phone]
• Olivier Serrat, Liaison Officer, European
  Representative Office, Asian Development Bank,
  Frankfurt, Germany
• Tel. [phone]
• Fax. [phone]