The World Bank and China Over the past 20 years, China achieved both an extraordinary decline in poverty and high levels of education and health status. In 1978, China was among the world's poorest countries, with 80 percent of the population having incomes of less than US$1 a day and only a third of all adults able to read or write. By 1998, the proportion of the population with incomes less than US$1 a day had declined to about 12 percent, life expectancy was an enviable 70 years, and illiteracy among 15 to 25 year-olds was about 7 percent. A gradual introduction of economic reforms launched the growth process and rapid structural change that dramatically transformed the face of China and reduced the incidence of poverty. Official figures put the growth of China's per capita real Gross Domestic Product (GDP) at an annual average of 8 percent during 1978-96. Over that period, per capita income doubled every ten years, faster than almost any country in recent history. When growth began to slacken in 1997 with the regional financial downturn and the effects of China's accelerating financial and industrial restructuring, the Government adopted an appropriate program of domestic demand stimulus. The stimulus package—largely using monetary policy and domestic bond issues for infrastructure development and technology upgrading in key industries—kept the economy growing at 7.8 percent in 1998 and 7.1 percent in 1999. Economic performance in the year 2000 promises to maintain the rebound, with 8.2 percent growth in the first half of the year, surging exports and contracted foreign direct investment, and a 20 percent increase in tax revenues compared to the previous year. Deflation, which has gripped the economy for more than two years, also appears to be ending. Growth rates (%) 1997 1998 1999 GDP 8.8 7.8 7.1 Exports (GNFS) 23.1 7.3 7.9 Imports (GNFS) 12.7 3.0 18.0 Inflation (%) (CPI) 2.8 -0.8 -1.4 National Accounts (% GDP) Current account 3.3 3.1 1.6 balance Gross investment 38.2 38.8 38.3 Public finance (% GDP) Fiscal balance -1.8 -3.1 -4.1 Program (Bank'sFY, FY96 FY97 FY98 US$ million) Lending 2,815 2,616 2,097 Gross disbursements 2,121 2,089 1,833 Even with these encouraging trends, China has recognized that the benefits of growth are not being shared equally throughout the country. Per capita GDP in the coastal area is more than double that of any interior province. Since two thirds of the population live in the interior, the income disparity is widely felt. In March 2000, the Government announced a program for Western Area Development that made the lagging interior provinces a major beneficiary of the Government's stimulus package. The new program for China's interior areas makes official—and intensifies—a shift of investment priorities that has actually been going on for some time. This year's investment under the Western Area program emphasizes infrastructure projects, science and education facilities, environmental improvements and enterprise modernization. A longer- term strategy for reducing the coastal-interior gap is also being developed. China and the World Bank Group China resumed its membership in the World Bank in 1980. The World Bank's mandate in China, as in all its borrowing member countries, is to support broad-based economic development in the pursuit of poverty reduction. Bank projects have played a unique role in supporting China's economic reform and modernization process, targeting poverty alleviation, infrastructure development, and human resources development. The Bank has provided financial support and technical cooperation, and has given advice on economic reforms, investment priorities, and macroeconomic policies and institutions. In this way, China has gained increased exposure to international experience in development and reform as well as access to advanced management expertise. In FY00, China received World Bank loans totaling US$1.67 billion, bringing cumulative lending to the country to almost US$35.0 billion as of June 30, 2000, of which US$25.0 billion was IBRD and US$10.0 billion was IDA. The greatest portion of funds—28 percent—has gone to agricultural and rural development, followed by 24 percent to transport expansion, 19 percent to energy development (mainly thermal and hydropower), 12 percent to water supply, urban development and environmental improvements, 9 percent to education, health, and technical assistance, and 8 percent to industrial reform and modernization. As of July 1999, IDA funding was no longer available to China. This factor, combined with the increasing availability of domestic financing, has resulted in a gradual decline in the level of Bank lending to China since the late 1990s. Further, since World Bank funds now largely go to the poorer and institutionally weaker inland provinces, investments per project have been scaled down to the provinces' capacities. Emerging Challenges New challenges and opportunities are emerging as China manages its two transitions from a centrally-planned to a market-oriented economy and from a rural and agricultural to an urban and industrialized country. The World Bank is committed to helping China meet these challenges. Through a balanced mix of lending and non-lending services—which include policy advice, technical assistance, and analytical work—the Bank is offering both financial support and expertise where they are most needed. Maintaining Macroeconomic Stability and the Momentum of Reform China's anticipated accession to the World Trade Organization (WTO) has intensified official reform efforts. It is expected that China's Tenth Five-Year Plan (2001-2005), now under preparation, will tackle the remaining—and in some ways most difficult—policy and institutional reforms needed for the transition from a command to a market economy. The Financial Sector. China's banking sector continues to present a substantial challenge. Performance of the four major state banks still suffer from declining capital-asset ratios and losses on loans to state enterprises. Reforms in the sector have, however, accelerated under the prompting, first, of the Asian financial turmoil and, more recently, of approaching accession to the WTO and the associated commitments to liberalize and open up the financial sector to foreign competition. The People's Bank of China (PBoC), the central bank, is pursuing a broad program of reforms intended, inter alia, to strengthen management of the four major banks, reduce accumulation of their non-performing loans through transfer of these loans to Asset Management Companies (AMCs), enhance bank supervision, further tighten risk management, raise loan-loss provisioning, liberalize now regulated interest rates, and promote use of international accounting standards as well as an improved loan classification system. A signal of the sector's gradual commercialization is the upcoming stock exchange listing of one major institution, the Bank of China. Once established, the more market-oriented banking system will help intermediate China's high savings into more productive investment. Capital market development also continues to gain momentum, partly to diversify state-owned enterprises' (SOEs') funding sources and stimulate economic growth through higher returns for investors. This will provide an avenue for the Government to dilute its holdings in state enterprises and facilitate investment. Establishment of bond markets, now at an early stage, will support the Government's development of indirect instruments of macroeconomic management and the banking sector's assets liabilities management, as well as provide alternative funding sources to enterprises. The World Bank supports these efforts by cooperating with the authorities to study key issues and by participating in technical assistance activities funded by the Bank and its European and Japanese partners. The current work focuses on enhanced bank supervision by the PBoC, development of financial infrastructure and banking staff capabilities, strengthening of specific banks, bad debt resolution, deposit insurance, establishment of asset management corporations, development of a domestic bond market, dissemination of international accounting and auditing procedures, and strengthening of government debt management capacity. To build on these activities, a major new financial sector technical assistance program is being identified for Bank funding. World Bank programs are closely coordinated with those of the International Monetary Fund and other major partners like the Asian Development Bank. The Government welcomes this collaborative, complementary approach in view of the scale of both the sector and the issues being addressed. State-Owned Enterprises. SOEs have been an expensive burden for the government, hampering both job creation and economic growth. Last year—1999—signaled a deepening of structural reform in China towards an open market economy led increasingly by the private sector. A constitutional amendment last summer recognized the important role of the private sector and the rule of law, and the subsequent Fourth Party Plenum allowed controlling private ownership of large enterprises in all but a few strategic industries, which were in any case advised to corporatize. These policy pronouncements have been translated into an SOE reform strategy concentrating on debt-equity swaps managed by the AMCs, changes in SOE ownership structures, restructuring of loss-makers through merger, bankruptcy, sale, downsizing, etc., various local government initiatives to either withdraw