International Bank for Reconstruction and Development
                  International Development Association
                                                                 87628
                     International Finance Corporation
                Multilateral Investment Guarantee Agency
                        FOR OFFICIAL USE ONLY
                        CONFIDENTIAL
                                                                    EDS98-245
                                                                   May 28, 1998


Board Meeting of May 28, 1998
Statement by Ilkka Niemi
        China - Country Assistance Strategy - Progress Report
We generally endorse the analysis in the Progress Report. As stated
in the report, the development of China’s economy is expected to be
favorable, although the situation involves certain risks. It is
expected that the Asian crisis will lead to reduced export growth and
foreign investments and these factors will reduce overall growth
somewhat. However, the report envisions that the growth of GDP will
be over 7 percent in 1998 and in 1999. The fact that the growth
prevails uneven in terms of the different regions remains a source of
concern.
In case the growth of the economy slows down more than expected, the
challenges of economic policy will become more severe. The
possibility of weaker growth cannot be ruled out because of both
external and internal circumstances. That would hamper the reforms
China should pursue – financial sector reform, SOE reform and social
welfare reform. Especially SOE reform will lead to job losses and the
size of the problem will depend on the growth of the economy. Reform
policies are much easier to implement if the economic environment is
favourable.
The government of China has refused to devalue the currency in spite
of weaker export demand. This policy has significantly enhanced
stability in the whole Asia region. Chinese devaluation might lead to
a round of competitive devaluations. But this policy also highlights
the importance of domestic economic policies. The supply side of the
economy should be strengthened: infrastructure bottlenecks should be
reduced, human resources should be developed, and social and fiscal
reforms should be carried out.
The information provided in the report confirms that the reform agenda
and the main focus of the last CAS are still appropriate. While
stressing the need for a balanced regional development, the report
refers to the growing number of urban disadvantaged. The recent
increase in the number of “floating population” in major Chinese
cities critically underlines the importance of implementing the
reforms the CAS outlines on social safety-nets.
Given the large commitment and portfolio in China the proposal to
examine the options for addressing the issue of continued lending at
present levels could be supported.
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At the same time there are a number of considerations to be taken into
account.
First, the Bank is moving toward smaller average size projects that
are more targeted to reform and poverty issues in inland provinces.
This means that the lending volume could fall below USD 2.5 billion
envisaged in last year’s CAS. The projects will, however, not require
less manpower and capacity in the Bank and in China to prepare,
implement and monitor. The projects do carry both direct and indirect
costs.
Second, recent OED figures have shown that the performance ratio in
China, outstanding as it is, nevertheless is not free from problems.
The ratio of unsatisfactory projects is increasing in conjunction with
the shift to inland provinces.

Third, China’s exposure is increasing and within a few years China
will be IBRD’s largest borrower. Further commitments will require
increases in the reserves, which also need to be taken into account
when the Bank prepares its project pipeline. The Progress Report
proposes that this question be discussed in the next full CAS.
Meanwhile I believe a careful approach to future lending levels could
be applied.