China’s Economic Prospects European Representative Office Asian Development Bank Berlin, 13...

China’s Economic ProspectsChina’s Economic Prospects

European Representative Office

Asian Development BankBerlin, 13 October 2000

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ContentsContents

• China’s Economic Performance• China and the WTO• ADB• ADB in China• Annex—State-Owned Enterprises• Contact Persons

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China’s Economic Performance—Quick ProfileChina’s Economic Performance—Quick 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 country’s achievement over the last three centuries

• During the past couple of years, China’s economy has been one of the few bright spots in a region affected by financial crisis

• ADB expects China’s good economic performance to continue

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China’s Economic Performance—PoliciesChina’s Economic Performance—Policies

• 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

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China’s Economic Performance—FundamentalsChina’s Economic Performance—Fundamentals

• 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

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China’s Economic Performance—ForecastsChina’s Economic Performance—Forecasts

• ADB is upgrading its economic forecasts for China• China’s economic growth was very strong in the first half of 2000 (8.2

percent) • ADB’s forecast for growth of GDP in 2000 is 7.5 percent; for 2001-2003,

ADB’s 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

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China’s Performance—RisksChina’s Performance—Risks

• China’s 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

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China and the WTO—Quick ProfileChina and the WTO—Quick Profile

• China’s much-awaited entry into the WTO will be good for both China and the world

• Membership in the WTO will increase China’s 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

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China and the WTO—Benefits (1)China and the WTO—Benefits (1)

• Cutting tariffs, liberalizing trade and investment and opening up domestic sectors for foreign participation will lead to significant efficiency gains for China’s economy

• Membership of the WTO will improve China’s export prospects• China’s share of the textile market is kept at 17 percent under the Multi-

Fiber Agreement• More than half of China’s 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 China’s export prospects

• There will be economic benefits for China from membership in the WTO

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China and the WTO—Benefits (2)China and the WTO—Benefits (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

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China and the WTO—Challenges (1)China and the WTO—Challenges (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

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• 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

• China’s 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

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• 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

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• China’s 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 China’s entry into the WTO

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• 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

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ADB—Quick Profile (1)ADB—Quick 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 Moody’s and Standard and Poor• In August 2000, the Asiaweek magazine recognized ADB as Asia’s best

agency over the period 1975-2000

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ADB—Quick Profile (2)ADB—Quick 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

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ADB in China—Sectoral FocusADB in China—Sectoral 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

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ADB in China—Geographic FocusADB in China—Geographic Focus

• During 1987-1995, about two thirds of ADB’s 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

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ADB in China—Legal SystemADB in China—Legal 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 China’s membership in the WTO

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ADB in China—Private Sector (1)ADB in China—Private 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

• ADB’s 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

• ADB’s 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

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ADB in China—Private Sector (2)ADB in China—Private 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

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ADB in China—Environmental ImprovementsADB in China—Environmental Improvements

• Addressing China’s environmental problems is essential for improving the quality of life of people, attracting foreign investment, and achieving sustainable growth

• ADB’s 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

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Annex—State-Owned Enterprises (1)Annex—State-Owned Enterprises (1)

• Reforms in state-owned enterprises are critical to China’s 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 China’s heavy industry is in the hands of state-owned enterprises

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• 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

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• 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

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• 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

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Contact PersonsContact Persons

• Resident Representative, Asian Development Bank, Beijing, People’s Republic of China

Tel. (86-10) 6642 6601

Fax. (86-10) 6642 6606• Regional Representative, European

Representative Office, Asian Development Bank, Frankfurt, Germany

Tel. (49-69) 92 02 14 80

Fax. (49-69) 92 02 14 99• Olivier Serrat, Liaison Officer, European

Representative Office, Asian Development Bank, Frankfurt, Germany

Tel. (49-69) 92 02 14 84

Fax. (49-69) 92 02 14 99

China’s Economic Prospects European Representative Office Asian Development Bank Berlin, 13...

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