A Partnership Transformed

Three Decades of Cooperation between the Asian Development Bank and the People's Republic of China in Support of Reform and Opening Up

Robert Wihtol

• Publisher: Asian Development Bank
• Year: 2018
• ISBN:
  9789292613433
• Topic: Business
• Subtopic: Business History
• Index: Business

This publication is a history of the partnership between the Asian Development Bank (ADB) and the People's Republic of China (PRC) spanning three decades. Since joining ADB in 1986, the PRC has evolved from being a poor and predominantly agrarian economy to an upper-middle-income manufacturing and services powerhouse that has become a leading international source of financial, technical, and knowledge cooperation. This historically unprecedented transformation has shaped every aspect of the ADB–PRC relationship. The successful partnership owes much to the PRC's unique approach to developing its economy, and offers valuable lessons for other countries and development partners.

CHAPTER 1

Introduction

“The journey of a thousand miles starts with a single step.”

– Laozi

In the past 3 decades, the partnership between the Asian Development Bank (ADB) and the People’s Republic of China (PRC) has undergone a radical transformation. In this brief span of time, the PRC has evolved from being a low-income and predominantly agrarian economy, a net importer of both capital and technology, to an upper middle-income manufacturing and services powerhouse and leading international provider of financial, technical, and knowledge cooperation. This historically unprecedented transformation has shaped every aspect of the partnership.

When the PRC joined ADB in 1986, it had a gross domestic product (GDP) per capita of $282 and foreign exchange reserves of $2.1 billion. Just 25% of the population lived in urban areas. As a low-income country, the PRC joined ADB to increase its opportunities to tap into the global market for financing, technical expertise, and knowledge, in support of its own economic development.

By 2017, just 3 decades later, this situation had changed completely. The PRC’s GDP per capita had increased to $8,849, and its foreign exchange reserves, at $3.1 trillion, were the world’s largest. In purchasing power parity terms, the PRC’s GDP per capita in 2017 was $16,624. Because of rapid urbanization, the proportion of the population living in cities had more than doubled, to 59%. Most importantly, as an upper middle-income country with major concentrations of industrial and technological expertise, the PRC had transformed itself into a major international source of financing, technology, and knowledge, for both developing and developed countries.

The PRC’s transformation has had major implications for its relationship with ADB. From a predominantly one-way relationship, with ADB providing financing and other forms of support, the PRC is now working closely with the bank to provide financial, policy, and knowledge solutions to address its own challenges and those of other countries in the Asia and Pacific region. The transformation provides important lessons for the PRC, ADB, and other countries and development partners in the region and beyond.

Supporting the PRC’s Reform and Opening Up

This study examines two important aspects of the ADB–PRC partnership. First, it explores the role played by the partnership in supporting the PRC’s reform and opening up. In December 1978, the PRC’s leader Deng Xiaoping initiated a process of reform that would span the next 4 decades. Following a remarkable period of rapid economic development, at the 19th National Congress of the Communist Party of China held in October 2017, General Secretary Xi Jinping signaled the PRC’s willingness to offer its successful experience in economic development for other countries to emulate. At the Congress, Xi Jinping mapped out the steps the PRC should take to achieve full modernization by the middle of the 21st century.¹

The PRC’s reform and opening up was implemented in stages. Starting in 1979, the PRC opened itself to foreign trade and investment. The initial stage also saw significant changes in domestic economic policies, and the opening of markets in rural areas, townships, and villages. These laid the foundations for industrialization and urbanization. The early 1990s witnessed a revitalization of reforms and a confirmation of the institutions needed to build a socialist market economy. Comprehensive reforms were introduced in fiscal management, banking, foreign exchange, trade and investment, and the management of state-owned enterprises. The turn of the millennium marked a growing recognition by the PRC of the need to focus on the country’s less developed regions. The PRC opened the economy further to international partnerships. It joined the World Trade Organization (WTO) in 2001, participated proactively in regional cooperation, and laid the foundations for its current role as a global development partner.

From the outset, ADB has worked closely with the PRC to support its reform and opening up. Initially, ADB’s lending focused on strengthening the financial sector and key state-owned enterprises. In the 1990s, lending shifted to addressing infrastructure bottlenecks in transport and energy, in support of economic growth. To address the government’s growing concern with urbanization and the environment, lending for urban development, water, and natural resource management gradually increased since the mid-1990s. Many projects piloted new approaches. In the past decade, the PRC’s progression from a low-middle-income to an upper-middle-income economy and demographic transition have ushered in new challenges. These have led to further shifts in the partnership. Since 2015, ADB has also provided financing for skills training and elderly care.

Alongside lending operations, ADB’s technical assistance (TA) grants and knowledge cooperation have supported a wide range of economic, social, and environmental reforms. Initially, TA grants focused on strengthening the capacity of government agencies and building up a lending program. In the 1990s, ADB undertook studies in key areas of reform. ADB projects piloted user charges for bridges and highways, helped introduce water and wastewater tariffs, and supported reforms in most major sectors of the economy. In the past decade, ADB’s policy and knowledge work has focused on the environment and helped the PRC to strengthen its South–South cooperation. The book provides a detailed review of ADB’s support for the PRC’s reforms.

What Are the Success Factors?

This study also explores the reasons for the success of the relationship. From 1986 to 2017, ADB provided the PRC with $34.8 billion of sovereign loans, $4.1 billion of nonsovereign loans, equity investments, and guarantees mainly for private sector projects, and $85 million of investment grants, in most major sectors of the economy. The total financing of $39.1 billion, for 324 projects, makes the PRC the bank’s second largest borrower. ADB has also provided the PRC with $501 million in TA grants for 862 individual project preparatory, capacity development, policy, and knowledge projects. At least equally important, ADB and the PRC have become strong partners in policy development, capacity building, and knowledge sharing. Initially, ADB provided the PRC’s central and local government agencies with financing, capacity building, and policy and knowledge support. Since the early 2000s, the PRC has itself evolved into a major development partner.

ADB’s partnership with the PRC has been successful in conventional terms. ADB has provided loans and grants relevant to the PRC’s development challenges. The projects were efficiently and effectively implemented and had a significant impact. However, the relationship has also been successful in a broader sense. ADB has helped to build the capacities of key ministries and agencies, supported the establishment of a wide range of public sector management policies and practices, and responded to the PRC’s need for policy advice and knowledge. Since the turn of the millennium, ADB has supported the PRC’s efforts to expand its role as a source of South–South cooperation.

What are the key factors behind this success? Some—such as having clearly defined plans and policies, and focusing on efficiency—are similar to those behind success stories in other countries. However, others are unique to the PRC and offer valuable lessons. The PRC has developed quickly. At the same time, its approach to economic development is gradualist and experimental, often referred to as “crossing the river by feeling the stones.” New approaches are initially piloted in a few selected localities. Once successful, or once sufficient experience had been gained, the innovations are replicated in other parts of the country.

The PRC has effectively applied this approach to its cooperation with ADB and other international financial institutions (IFIs).² ADB-financed projects have frequently been used to pilot new approaches. Subsequently these were disseminated and replicated. The study looks at the role that this approach has played in the success of the ADB–PRC partnership, and the lessons it offers for others to emulate.

* * *

In 2016, the PRC and ADB celebrated 30 years of partnership. This year, 2018, marks the 40th anniversary of the opening of the PRC’s economy to reforms, including opening up to cooperation with IFIs. The timing is opportune to review the evolution of the relationship, draw lessons from the cooperation to date, and consider where it should go from here.

The following chapters tell the story of the remarkable transformation in ADB’s partnership with the PRC. The chapters are organized chronologically into periods that broadly correspond with shifts in the PRC’s economic policies and the PRC’s responses to events in the regional and global environment. Chapters 2 to 8 reflect the key stages of the evolution of the ADB–PRC relationship. The narrative is guided by several threads. In addition to the evolution of the PRC’s policy of reform and opening up, and ADB’s response, the study considers major shifts in ADB’s policies and priorities, and organizational changes in ADB and the Government of the PRC. Chapter 9 reviews distinguishing features in the partnership that help to account for its success. The final chapter provides some reflections on the future.

1     Xi, 2017, “Secure a Decisive Victory in Building a Moderately Prosperous Society in All Respects and Strive for the Great Success of Socialism with Chinese Characteristics for a New Era,” 24.

2     Zheng (ed.), 2010, Innovation and Development. Collection of Good Practice Papers on Management of Projects Financed by International Financial Institutions, i–iii.

CHAPTER 2

Opening Up and Joining ADB (1978–1986)

“1986 has also witnessed a major event in the expanding role and growing importance of the ADB. I refer to the admission of the People’s Republic of China to the bank. As the country with the largest area and the largest population in our region, the membership of China greatly enhances the scope, geographical coverage and operational importance of our institution.”

– Masao Fujioka, Address at the ADB Annual Meeting, 1986

The participation of the People’s Republic of China (PRC) in the work of the international financial institutions (IFIs) can be traced back to two series of events—the opening of the PRC’s economy and the expansion of its diplomatic relations. The Third Plenary of the 11th Session of the Central Committee of the Communist Party of China held in December 1978 heralded the opening of the PRC’s economy. The plenary established new priorities and set in motion a process of reform that opened the PRC to foreign direct investment and other external economic and financial relationships. The assumption by the PRC of its seat in the United Nations in 1971, again, paved the way for the PRC to expand its diplomatic relations, including participating in the work of the IFIs, which started in the 1980s.

The PRC Initiates Reforms

Deng Xiaoping’s speech at the Central Working Conference in December 1978, which also served as the keynote address of the Third Plenary, is generally seen as having triggered the opening up of the PRC’s economy. The speech highlighted the importance of the “four modernizations,” of agriculture, industry, national defense, and science and technology, and set in motion a process of reform and opening up that would last 4 decades.¹

The reforms initiated by the Third Plenary were carefully implemented in phases. The first stage introduced the Open Door Policy, with reform in foreign trade and investment and the passing of a law on joint venture companies. The joint ventures would in the coming years play a catalytic role in promoting exports, employment, and economic growth. In 1979, the government introduced the “dual track” system, which allowed state-owned industries to sell products exceeding their planned targets. This allowed for the gradual emergence of a market track.²

The first stage of reforms also introduced the “household responsibility system” and freed markets in rural areas, which allowed farmers to benefit more directly from their own work.³ Under this system, farmers were able to sell produce on the informal market, which led to a rapid increase in rural incomes. The system was complemented by the establishment of township and village enterprises, which played a key role in boosting employment and accelerating industrialization and urbanization.⁴

These initial reforms were followed in 1980 by the establishment of special economic zones in the coastal cities of Shantou, Shenzhen, and Zhuhai in Guangdong province, and Xiamen in Fujian province. After a pilot period, the PRC opened 14 more coastal cities to overseas investment in 1984, followed by a further expansion the next year. In 1980, the government established the principle of “eating from separate kitchens,” which significantly strengthened the management of fiscal relations between government agencies. In 1984, the government officially allowed the establishment of private enterprises with fewer than eight employees, and reformed the taxation of the profits of state-owned enterprises.⁵

The PRC also took initial steps to liberalize the financial sector. To provide financing under the reforms and to distinguish clearly between central and commercial banking, in 1979 the government formed three banks separately from its central bank, the People’s Bank of China (PBOC). These were the Agricultural Bank of China, the Bank of China, and the People’s Construction Bank of China. In 1984, the government established the fourth large state-owned bank, the Industrial and Commercial Bank of China, to handle industrial and commercial credit...