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The Bank Group Strategy Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized46896 V2 Document of The World Bank INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND INTERNATIONAL FINANCE CORPORATION AND MULTILATERAL INVESTMENT GUARANTEE AGENCY COUNTRY PARTNERSHIP STRATEGY FOR THE PEOPLE'S REPUBLIC OF CHINA FOR THE PERIOD 2006-2010 May 23, 2006 China Country Management Unit East Asia and Pacific Region International Finance Corporation Multilateral Investment Guarantee Agency Currency Equivalents US$1.00 = RMB 8.037 (as of March 2006) The last China Country Assistance Strategy was discussed on December 19, 2002. Abbreviations and Acronyms AAA Analytical and Advisory Activities IEG Independent Evaluation Group ADB Asian Development Bank IFC International Finance Corporation AIDS Acquired Irrunune Deficiency Syn- IMF International Monetary Fund drome M&E Monitoring and Evaluation ASEAN Association of Southeast Asian Na- MD Gs Millennium Development Goals tions MIC Middle Income Country CAE Country Assistance Evaluation MIGA Multilateral Investment Guarantee CAS Country Assistance Strategy Agency CDB China Development Bank MOFCOM Ministry of Commerce CDD Community-Driven Development MoF Ministry of Finance CDM Clean Development Mechanism MoFA Ministry of Foreign Affairs CEM Country Economic Memorandum MSE Micro and Small Enterprises CG Consultative Group NCMS New Cooperative Medical Scheme CPC Communist Party of China NDRC National Development Reform CPS Country Partnership Strategy Commission CR Completion Report NGO Non-Governmental Organization CSR Corporate Social Responsibility NPL Non-Performing Loan CSRC China Securities Regulatory Com- ODA Official Development Assistance mission ODS Ozone Depleting Substance DAC Development Assistance Commit- OECD Organization for Economic tee Cooperation and Development DFID United Kingdom Department for PBoC People's Bank of China International Development PCBs Polychlorinated Biphenyls DOTS Directly Observed Treatment Strat- PEP Private Enterprise Partnership egy (for treating tuberculosis) POPs Persistant Organic Pollutants Environmental Impact Assessment EIA PPP Purchasing Power Parity European Union E.U. PSU Public Service Unit FDI Foreign Direct Investment QAG Quality Assurance Group Foreign Investment Advisory Ser- FIAS RCC Rural Credit Cooperative vice RMB Renminbi (Chinese currency) FY Fiscal Year SAFE State Adrnin. of Foreign Exchange FYP Five Year Program SARS Severe Acute Respiratory Syndrome GDP Gross Domestic Product SCB State-owned Commercial Bank GEF Global Environment Facility SME Small- and Medium-sized Enter- Greenhouse Gas GHG prise Goe Government of China SOE State-Owned Enterprise HFC Trifluoromethane TA Technical Assistance HIV Human Irrununodeficiency Virus TVE Township and Village Enterprise IBRD International Bank for Reconstruc- UN United Nations tion and Development U.S. United States ICT Information and Communications WBI World Bank Institute Technology WRM Water Resources Management IDA International Development Asso- ciation WTO World Trade Organization IBRD IFC MIGA Vice President: Jeffrey Gutman Declan Du.ff Yukiko Omura, Hxec. Country Director: David Dollar Karin Finkelston Philippe Valahu Task Team Leader: Johannes Zutt Stoyan Tenev Cecilia Sager • • ii Table of Contents Executive summary..... .. ...... ...... .. ... ........... .... ....... ... ... .... ..... .... .... .. ... ..... .. .. ... ..... ... ..... ..... v Country context ......... ... ... .... .... .. ........ ........ ... ..... ...... .... ... ..... .... ....... .............. ..... ...... ...... 1 Social and economic context . .. 1 Poverty profile . 4 China's development challenges . .. .. .. 7 Bank Group track record ... ... ... .. .... .. ......... ....... ... ........ .. .......... ....... ............ .. ... ...... .... .... 11 Bank Group strategy . .. .. .. 15 Pillar 1: Integrating China into the world economy .............. ............ ... .. ... ... ... .. ..... ... 18 Pillar 2: Reducing poverty, inequality, social exclusion . 20 Pillar 3: Managing resource scarcity and environmental challenges . 23 Pillar 4: Financing sustained and efficient growth . 28 Pillar 5: Improving public and market institutions . 30 Delivering the Bank Group program .. .. .... ... ..... .. ... ... .. ..... ........ ....... .... ..... ...... ...... ... .. .. 33 The portfolio . 35 The Bank Group's knowledge program . 37 Partner roles and donor coordination..... ... ... ....... .. ... ..... ...... ........ .. .. .. .. ... .... ... ............ 38 Portfolio management . .. .. 39 Managing risks . 43 Annexes Annex 1: China CPS results matrix.......... ... ........ ..... ...... .... ..... .............. ..... ........ .. ...... 47 Annex 2: CAS completion report . 55 Annex 3: Private sector strategy . 109 Annex 4: Millennium development goals . .. 121 Annex 5: Consultations on country partnership strategy . .. 123 Annex 6: Standard CPS annexes .. ....... ... .. .. .... .. ...... .. .. ... .... .... .... ...... .. .... .. ..... ............ 131 Annex 7: Country Financing Parameters .. ...... ........ ...... ..... ...... ... ....................... ... ..... 145 iii • • Executive summary hina has grown rapidly since 1978, when it began to reform. Over the past 27 years, it has shifted from a centrally-planned to a market economy, maintained GDP growth of about 9% per annum, and lifted 400 million people out of pov­ Certy . With a population of 1.3 billion, China recently became the world's fourth largest economy and third largest trading nation. Even so, China remains a developing country, with GDP per capita about $1,740 and more than 135 million people living on less than $1 a day. It also faces daunting challenges in maintaining rapid growth; managing the resource demands and environmental consequences of growth; and addressing the result­ ing inequalities in income and opportunity, which could otherwise undermine the consen­ sus needed to undertake growth-oriented policy reforms. To succeed in meeting these challenges, China will need to shift its growth strategy from one that relies heavily on industry and investment to one that encourages development of the services industry and reduces barriers to labor mobility. Growth that is more balanced between industry and services as well as between capital accumulation (on one side) and urban employment and productivity growth (on the other) will result in higher employment growth, a more economic and sustainable use of energy and primary commodities, and less environmental degradation. The Government of China (GoC) will encourage this shift in implementing its 11th Five Year Program (FYP), which is a "people-centered" strategy aim­ ing to achieve a "harmonious society" that balances economic growth with distributional and ecological concerns. The Bank Group continues to play an important development role in China. Through a combination of AAA and knowledge embedded in its limited lending, the Bank has sup­ ported innovations that, scaled-up, have provided benefits far exceeding the direct benefits of the original projects. These spillover benefits include, for example, key policy or institu­ tional reforms, upgraded technologies, and stronger human resource capacity in local gov­ ernments. Innovations typically draw on the Bank Group's international experience and emerge from a long-term GoC-Bank Group partnership founded on trust, shared commit­ ment, and pragmatic cooperation aiming to bring a sustainable solution tailored to a press­ ing development problem. Given China's financial circumstances and its appropriate development program, the Bank Group aims to be a client-driven knowledge institution that uses lending and other operations to pilot reforms and support institutional development. This Country Partnership Strategy (CPS) focuses on five thematic areas of engagement that build on the Bank Group's international expertise while maximizing the creation and dissemination of knowledge of China's development processes inside and outside China. In particular, the Bank Group aims to help: • Integrate China into the world economy, by deepening its participation in multilateral economic institutions, reducing internal and external barriers to trade and investment, and contributing to its overseas development efforts (pillar 1); COUNTRY PARTNERSHIP STRATEGY FOR THE PEOPLE'S REPUBLIC OF CHINA • Reduce poverty, inequality and social exclusion, through promoting balanced urban­ ization, sustaining rural livelihoods, and expanding access to basic social and infra­ structure services, particularly in the rural areas (pillar 2); • Manage resource scarcity and environmental challenges, through reducing air pollu­ tion, conserving water resources and optimizing energy use (partly through pricing reforms), improving land administration and management, and observing international environmental conventions (pillar 3); • Deepen financial intermediation, by expanding access to financial services (especially among SMEs), developing the capital markets, managing systemic risks, and maintain­ ing financial stability (pillar 4); and • Improving public and market institutions, by improving firm competitiveness, reform­ ing public sector units, and rationalizing intergovernmental fiscal relations (pillar 5). The Bank Group will support GoC activities in these areas through a variety of instru­ ments. IBRD AAA and lending will apply international expertise to helping the GoC to complete the transition to a market economy, improve the
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