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WHY A WEALTHY CHINA GETS WORLD BANK BACKING

It shouldn't be a surprise that World Bank President James D. Wolfensohn is a big China booster. After all, Beijing is the bank's biggest customer. In the year ended June 30, the bank lent China $2.8 billion, and it has provided the Chinese a total of $28 billion over the past 17 years to build dams and a host of other big-ticket infrastructure projects. So it's also no surprise that Wolfensohn bristles when reminded that China is now one of the world's wealthiest borrowers. It attracted $42 billion in foreign investment in 1996 and has amassed $121 billion in currency reserves--not including Hong Kong's own $80 billion trove.

But Wolfensohn, 63, a native of Australia who used to head his own Wall Street investment banking boutique, believes China's needs far outstrip its impressive resources. With 250 million Chinese still living on less than $1 a day, Beijing must continue making the jump from a state-dominated economy to one more dependent on free enterprise for growth and jobs. Wolfensohn insists that the World Bank must help Beijing meet that goal. ''People who say 'pull out of China' are very shortsighted,'' he says. ''Wherever we can, we would like to have the private sector do the job. [But] I don't see immediately the private sector solving the problems of development.''

FRIENDLY PROD. Wolfensohn says ''I would prefer to have a friendly partnership with China,'' but that has not stopped the bank from prodding Beijing. In June, the bank said that few reforms of bankrupt state enterprises have worked. Then, on the eve of its annual meeting in Hong Kong in September, the bank warned that China faces ''sino-sclerosis'' if it fails to open markets more rapidly and repair loss-plagued banks and state manufacturers.

Wolfensohn hopes criticism like this will find its way into policy. Indeed, World Bankers say they get as big a bang for their buck from backing economic and social reforms as they do out of loans for dams and power plants. They are enmeshed in Beijing's effort to reform its ailing financial system, where 20% of the country's bank loans are classified as bad. Until the system is fixed, Wolfensohn notes, China won't be able to raise the huge sums it needs for development. ''They need $600 billion,'' says Wolfensohn. ''That cannot be met by public financing. They need a financial system and regulations and a legal framework to facilitate foreign investment.''

One way the bank is helping Beijing get its financial house in order is by teaching the Chinese how to supervise lenders better. For example, the World Bank in 1993 lent $7.3 million so the People's Bank of China, the central bank, could hire Price Waterhouse to strengthen its supervision and accounting controls. Price Waterhouse helped the central bank move from a paper to an automated reporting system, produced a bank examiners' handbook, set up a risk-monitoring system, and recruited retired British and Spanish central bankers to give seminars to the Chinese.

The World Bank is also bringing in innovative financial techniques to get privately financed projects off the ground. One example: a $700 million agreement China signed in September with a consortium headed by the power utility Electricite de France. China will let the consortium build and operate a power station in Laibin. After 15 years, the Chinese government will assume ownership. This technique is common in developing nations. But it was a first for China, which broke new ground by accepting public bids from developers on power tariffs, rather than negotiating them in secret.

The International Finance Corp., the arm of the World Bank that lends to private companies, is also supporting a market approach. It is backing the emergence of a privately owned financial-services industry and expanding lending to smaller companies. It is also trying to develop the first domestic bond-rating agency in China. ''We are trying to help set up model institutions,'' says IFC Asia Dept. manager Ravi S. Bugga.

With per capita incomes rising, by 1999, China will no longer qualify for nearly free long-term loans designed to aid the poorest borrowers. But World Bank aid is unlikely to disappear soon. Beijing still needs cash and advice to restructure China's economy. Wolfensohn is ready to continue dishing out both.

By Leah Nathans Spiro in Washington


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Updated Sept. 18, 1997 by bwwebmaster
Copyright 1997, Bloomberg L.P.
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