2003-2005

Summary

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Country Context

China has been managing macroeconomic conditions well. It has relied on stimulatory macroeconomic policies and a stable exchange rate to sustain domestic demand and activity and support structural reforms. Economic performance during 1997-2001 was among the best in the world, with annual GDP growth averaging 7-8 percent, and a much strengthened external position. Considerable progress has also been made in the broad structural reform agenda, and China's accession to the World Trade Organization (WTO), achieved in 2001, is providing major impetus to continued reforms. This progress is remarkable given the depth of the East Asian financial crisis and dislocations caused in the domestic economy due to policy initiatives pursued during this period in the enterprise and rural sectors.

Nevertheless, China faces major challenges, including the need to strengthen the Government's medium-term financial and fiscal position, particularly at the subnational level, to reshape institutions and the business environment in order to address key aspects of the national development agenda, and to deal with stresses on the natural environment that accompanied rapid growth. Further, despite impressive progress during the past decade in poverty reduction, more than 200 million people in China-mostly in rural areas of the lagging inland provinces-still live on expenditures of less than US$1 a day. Trends in inequality and social indicators also suggest that urban-rural and coastal-inland disparities have widened in recent years.

The Government's development strategy articulated in its Tenth Five-Year Plan (2001-2005) and reaffirmed in the recent 16th National Congress of the Communist Party addresses these challenges. With a national goal of achieving a "well-off society," China aims to sustain growth without neglecting the quality of growth and all-round social progress. Entrepreneurship, increased private investment, closer integration with the world economy, and an improved legal system and stronger protection of property rights are emphasized, as are continued efforts to develop human resources, narrow social disparities, and reduce poverty. Environmental sustainability and the application of science and technology (especially information and communications technology) to raise productivity and generate greater benefits are cornerstones of the strategy.

Bank Strategy and Program

This CAS coincides with major developments in China, including the shift in its reforms from the liberalization phase to the more difficult structural and institution-building phase. The CAS also reflects the changing nature of the China-Bank Group relationship, particularly the potential gains to both sides, as China not only receives Bank assistance, but also shares lessons of its development experiences more broadly and contributes to thinking on global development issues of common concern.

Under the overarching theme of supporting China in its two historic transitions-from a rural, agricultural to an urban, industrial society, and from a centrally-planned to a more globally integrated market-based economy-the Bank Group's assistance strategy would help China:

· Improve the business environment and help accelerate
     the transition to a market economy,
mostly through an array of knowledge-transfer activities. Support is targeted to enhancing macroeconomic management at both the national and sub-national levels, assisting China's integration into the global economy, reforming the financial sector, promoting private sector development and enterprise reform, and strengthening governance in the public sector;

· Address the needs of poorer and disadvantaged people
     and lagging regions,
through lending for rural development, infrastructure and social sector projects, as well as analytical, advisory and training support. Specific aims are to increase employment and productivity off and on the farm, strengthen transport links within and to lagging regions, develop human resources, strengthen social protection, and improve targeted poverty reduction programs;

· Facilitate an environmentally sustainable development
     process,
through lending, policy support and institutional development. Projects would be supported in water resource management, watershed rehabilitation, wastewater treatment, clean energy, sustainable rural development and urban pollution abatement. Global environment projects supported by the Global Environment Facility and Montreal Protocol would be implemented by the Bank.

Given the increased emphasis on knowledge-sharing in the China-Bank Group relationship, a major Knowledge Agenda-combining analytical and advisory services, research and training-would facilitate policy discussions and underpin future lending. During the CAS period, annual IBRD lending of about US$1.2-1.3 billion is envisioned, with about three quarters of proposed projects in poorer, inland provinces and many projects promoting innovation and change.

The program includes a more active role for the International Finance Corporation (IFC), whose technical assistance to improve the business environment would be complemented by investments to develop small and medium enterprises, the financial sector, the private sector in lagging provinces, and private enterprises in infrastructure, social services, and environmental technology. Model transactions would set standards in areas like corporate governance while creating demonstration effects. The Multilateral Investment Guarantee Agency would address interest in guarantees and investment marketing arising out of China's post-WTO opening.

Partnerships

The Bank's continued collaboration with our development partners will promote knowledge sharing and enhanced results. This is best exemplified by the "blending" of DFID (UK) grants with IBRD loans to provide concessionary funding for social and poverty reduction projects, while also enhancing the quality of operations. Other notable partnerships include the EU-on natural forest management-and AusAID in bringing the Bank's Global Development Learning Network to one of China's poorest western provinces. Additional partnerships with bilaterals on issues of mutual interest are also being nurtured. In tandem, collaboration will continue with the UN agencies, the International Monetary Fund, the Asian Development Bank and civil society, particularly China's Non-Government Organizations.