Soft lenders like the Asian Development Bank and the World Bank devote themselves to social development in poorer regions. Their financial investment in China is smal – the ADB lends US$45 billion annually and the World Bank US$25 billion, a reflection of the country’s move to the moderately affluent neighborhood in the global village. As such, China will be asked to teach as much as to learn, sharing its wealth of experience in areas such as poverty reduction with nations not so far down the development track. Yet, as ADB Chief Economist for China Min Tang told CHINA ECONOMIC REVIEW, the soft lenders’ work in China is far from complete.
Q: What are the key issues facing ADB in China?
A: China has developed very fast and the question ADB faces is how do we fit in with the new demands. So far, the country has focused on GDP growth and it is now time for more balanced, socio-economic development, and we are adjusting our assistance accordingly. China can also start helping other countries. For example, poverty alleviation in China has been very successful – the number of people living in poverty has fallen from 400 million to 100 million – and other nations can learn from this.
Q: Why has ADB taken a stake in Bank of China?
A: To aid banking reform. It is a very small stake – US$70 million, less than 1%. Overall, ADB investment in China is very small, equivalent to 0.1% of fixed assets in China, which is about US$1.5 billion a year – and that’s peanuts. ADB’s role is to encourage Bank of China to introduce new technology and follow international banking standards.
Q: ADB and the International Finance Corporation became the first foreign institutions to issue local currency ‘Panda Bonds.’ What is ADB’s strategy here?
A: ADB is helping China develop a domestic bond market and mobilize a resource that will reduce dependence on banking. We have many corporate requirements because we have many international organizations to deal with, and we have a specific requirement to issue bonds. To meet this requirement, the Chinese government has had to change many policies. Bond issues will ultimately depend on commercial banks, but this will take time because the bond market is still very small, as it always is in developing countries. Most bonds in China are government bonds; the corporate bond market, bonds from large state-owned enterprises, is very small, while the market for bonds from smaller companies is even smaller, almost non-existent.
Q: How does the development of the Chinese domestic bond market relate to the ADB’s central goal of eliminating poverty?
A: All our bond issues are first issues, so it’s a test program. Private sector development means more job opportunities for the poor. The poor are mainly in rural areas, and China has little arable land, so a lot of farmers have to go to the urban areas to find jobs. And if the private sector can create these jobs, the poor will improve their lives. ADB bond issues are currently only for private sector operations, but in the future we are discussing with the government how to use bond proceeds to lend to the public sector, in rural education, health and so on.
Q: To what extent does financial reform in China have a trickle-down effect that benefits the poor?
A: A lot of ADB’s investment trickles down to the poor areas in central and western regions, we now have very little in coastal areas. Infrastructure investment in roads and railways helps the poor as when transport becomes better, the poor can use it to take goods to market. ADB is also involved in a lot of rural development projects in which we lend directly so the poor can create businesses. Trickle down is important, but we undertake projects to demonstrate to the government and society how they might do business and improve the poverty situation at the same time. It comes down to what we call the demonstration effect.
Q: What impact does rural-to-urban migration have on ADB planning?
A: In the last 25 years, China has had great success in its poverty alleviation program, but more recently poverty reduction has slowed down. China has dealt with the easy part through rural-to-urban migration, and now it must confront the hardcore groups where poverty is at its worst. We recommend that China establish minimum living standards covering the very, very poor – about 20 million people – and the disabled, infirmed and elderly. The government should have a social safety net for these people, giving them money so they can survive. Secondly, China should consider the introduction of a micro-credit system – small loans to the poor – that has been used effectively in other countries.
Q: Are micro-credits profitable, or are they a form of charity?
A: There are micro-credit banks in some countries that are very big and successful, such as those in Bangladesh and Nepal. Repayment is very, very high – 98-99% – and the lenders make money too because they charge high interest rates, sometimes even 25-30%. The reason for this is that operational costs are high: you have to go to the village to lend someone US$100 and you have to go back every week to collect repayments. If the people did not have this money, they would have to borrow from moneylenders who charge 40%, 50%, even 100% interest. We have been running pilot projects in Fujian, Henan and Guizhou provinces – thousands of loans have been given out, each one usually less than US$300.