A CONVERSATION WITH THE WORLD BANK’S SHAHID JAVED BURKI AND DELEGATION1
OCTOBER 21, 1988
ZRJ: I welcome our friends from the World Bank to Shanghai and thank you for your help in building Shanghai. The World Bank is the largest international financial agency supporting Shanghai’s construction.
Burki: When I came to China in September of last year with our bank’s vice president, we reached an agreement for long-term loans. That is, the World Bank promised loans of US$600 million each to Shanghai and Jiangsu, with US$200 million to be paid out annually for three years, 75% of the loans to be hard loans, and 25% soft loans. These are to be used for building urban transportation facilities and industrial rebuilding, and we agreed that the loans would be transferred through your central bank. Mr. Mayor, this time we’ve come to Shanghai to hear your thoughts on which projects are the most suitable for the US$400 million for 1989 and 1990. At the same time, we’d like to share our thoughts from this visit to Shanghai.
ZRJ: It seems that foreign interest in investing in Shanghai is now growing stronger and stronger. We recently leased out a plot of land in the Hongqiao Development Zone. It was very successful—1.29 hectares fetched US$28 million, which attracted the notice of many American real estate developers. This year, Shanghai is using foreign capital to speed up urban infrastructure construction. We have five major projects under way, and one of them—a combined sewage wastewater treatment project—is being built with a World Bank loan. Because Shanghai is too highly indebted, the pace of urban construction can be speeded up only by large-scale use of foreign preferential loans.
In using large amounts of foreign capital, the first problem encountered is our ability to repay. Mr. Edwin Lim has pointed out that the debt-servicing ratio should be maintained at 15–20%. I recently read materials saying that the Japanese feel it can be maintained below 25%, while Shanghai’s current debt-servicing ratio is only 8%. I can say that Shanghai’s debt-servicing ratio for foreign loans is the lowest in the country, and it’s very far from the international accepted warning level.
With World Bank China Country Director Shahid Javed Burki, who was in Shanghai attending an international symposium on Shanghai’s economic development, February 7, 1991.
We estimate that the value of Shanghai’s total foreign exports this year may reach US$4.6 billion. Apart from US$1.5 billion that is to be turned over to the central government and the amount that must be spent to import raw materials and components for production, all the remaining forex will be used for building Shanghai. Shanghai therefore has sufficient ability to repay. In the past, Shanghai had few external loans; the repayment period for current loans is very long, and for some time to come, there will be fairly rapid growth in Shanghai’s production of export commodities. It seems there will be no problem in repayments of both principal and interest for foreign loans.
What we worry about now isn’t that we won’t be able to repay. We worry that feasibility studies and preparations for foreign-funded projects won’t be able to keep up, so that we wouldn’t be able to use some foreign loans with highly preferential terms, such as the US$200 million annually promised by the World Bank. The State Council has authorized Shanghai to use as much as US$3.2 billion of foreign capital by the end of 1990, but so far we’ve only used several hundred million dollars.
Next, there’s also a question of our matching ability. To use foreign capital, there must be a corresponding amount of matching renminbi. Since implementing fiscal contracting this year, Shanghai only needs to turn over RMB 10.5 billion a year, and this is fixed for five years. Anything over RMB 10.5 billion belongs to Shanghai. This year, even after deducting for price increases of raw materials and other subsidized factors, there won’t be any problem ensuring that the local government will have RMB 1.4 billion at its disposal. If we can be sure of RMB 1.4 billion every year, after five years we might have as much as RMB 7 billion to 8 billion, and this doesn’t even include increases in enterprise funds after fiscal contracting. Therefore there will also be no problem with Shanghai’s ability to match the several billion dollars that it will use.
Then there are the issues of use and management of foreign loans. The loans can be divided into two groups according to their use. One group is for urban infrastructure construction. These are guaranteed by the municipal government with centralized borrowing and centralized repayment—such loans are under the centralized management of the city’s Bureau of Finance. The other group is for upgrading industries. Because these projects can earn export forex themselves, the borrowing enterprises also have the ability to repay. I hear that you’re suggesting that these loans be transferred through a financial intermediary so that the work of using and repaying them can be better organized. We approve of this suggestion and are considering choosing the Shanghai Investment and Trust Corporation (SITCO) to be this financial intermediary. SITCO is a financial agency directly under the city government that has received permission from the State Council to borrow from abroad. It has a very good reputation and has issued bonds in both Japan and the United Kingdom. The chairperson of SITCO is [Vice Mayor] Li Zhaoji. Loan funds for industrial projects could be transferred to enterprises by SITCO, which would sign contracts with them and assume certain responsibilities. SITCO would be responsible for repaying all World Bank loans. This is our tentative thinking. I’m raising it to discuss with you, and it’s not a fixed conclusion.
Another issue is that I find World Bank procedures for using funds to be too cumbersome. Negotiations with the bank for the combined sewage wastewater treatment project and for a project to upgrade the lathe industry took four years—Shanghai went through three mayors and three Finance Bureau directors before they were concluded. I worry that if we go on like this, the revitalization of Shanghai will be held back. Of course slow progress isn’t all the bank’s fault. There are reasons on both sides, and I hope we can all do better work. You take a step forward and we take a step forward. What I especially want to point out here is that the caliber of Shanghai’s cadres is quite high—this is the foundation for improving efficiency in our work. I have one hope, namely that during my five-year term as mayor we will be able to completely use up the US$600 million promised by the World Bank. Let us work together on this.
Burki: The World Bank’s loan procedures are indeed rather complicated. We’ve now started making province- and municipality-level loans precisely to simplify procedures. More specifically, once a province or municipality has drawn up a sector-wide development strategy and once this has been approved by the bank, the loans will be transferred to you by your domestic financial intermediaries. The World Bank will no longer be in charge of project evaluations—the financial intermediaries will be responsible for these.
As I was leaving Washington, D.C., I ran into the World Bank industrial delegation from the United States. They felt their visit and discussions in Shanghai were very successful and will be returning to Shanghai in November. They asked me to relay these four thoughts.
—First, the Shanghai Electrical Machinery and Instrumentation Bureaus are both asking large consulting firms from abroad to help draw up development plans, and the consulting firms have worked together with you very well. They hope work in this area can be speeded up and a report produced as soon as possible so that the World Bank can start to work on this.
—Second, to simplify procedures, the World Bank will only discuss development plans with you and will no longer do individual enterprise evaluations. Financial intermediaries will be responsible for evaluations. However, you also needn’t wait until the feasibility studies for all projects have been completed before making any loans; otherwise this would also delay matters greatly.
—Third, it will be very helpful for future development to work on software (including software for technical training, quality control, and product testing). We understand that you’re not very willing to arrange loans for software because investments in software development aren’t able to directly repay loans. We hope that of the annual US$150 million to be invested in industrial projects, US$15 million to 20 million will be used for software development and technical assistance.
—Fourth, our tentative understanding is that Shanghai’s second batch of industrial projects consists of seven projects. We’re interested in four of these: refrigeration equipment, pharmaceuticals, chemical reagents, and automation instrumentation. Please present the strategic development plans for these as quickly as possible.
ZRJ: Personally, I attach great importance to software development and am very willing to develop cooperation with the World Bank in this area. I believe that this type of cooperation will cause us to use World Bank loans more quickly, and the benefits they will produce are also long-term benefits. Shanghai has the conditions for doing good software development, but because we still don’t have enough fiscal resources, we must be very careful to conserve forex, and we hope to obtain more foreign grants for software development. For our No. 1 Metro line, the German Federal Republic is not only providing preferential government loans, but it is also transferring technology to us and locating carriage manufacturing in Shanghai, as well as providing a US$20 million grant to be used for training managerial staff.
Edwin Lim: I’d like to discuss two issues. The first is the question of forex repayments for industrial projects. Among industrial projects, many are highly profitable and capable of earning forex, but there are also some that, while very important, are not highly profitable. I feel that both types of projects should be undertaken, with the city government evening out the forex. The World Bank does not give grants for software development, but this could be an official project for a loan.
The second is the question of financial intermediaries. The intermediaries we have in mind are not a single bank; rather, we think that using many banks would promote useful competition. SITCO belongs to the city government. Would you also allow investment banks, the China Construction Bank, the Bank of Communications, and the Industrial and Commercial Bank of China to also be involved? Of course we’re not excluding SITCO.
ZRJ: In a word, over the next two years, Shanghai will make good use of the US$400 million World Bank loans, that is, the US$300 million in hard loans and US$100 million in soft loans. The city government will even out the US$400 million of forex and repay it. Of this amount, the city’s Bureau of Finance will act as the window for infrastructure construction loans and manage them centrally; industrial project loans will be transferred through financial intermediaries. We can further discuss whether there should be one bank or several banks acting as financial intermediaries. But regardless of the number of banks, they must serve the same goal, that is, to put the US$300 million in industrial project loans to use.
I feel that having too many intermediaries might delay the use of the loans. Moreover, competition between many banks might easily disrupt matters—this is where China differs from other countries. In considering designating SITCO to be responsible for transferring the US$300 million in industrial project loans, we are in fact having the city government act as guarantor. This shows that we are determined to make good use of the US$400 million in loans within two years, including those for infrastructure construction. SITCO’s capital comes from the city government, but its operations are entirely independent. Of course the financial intermediary ultimately selected might not be SITCO, nor might it be a single bank—we don’t preclude letting other banks participate. We can continue to discuss these issues.
Feasibility studies for large infrastructure projects may take a little longer, but might it be possible to shorten the time needed for small projects? The Huangpu River Bridge2 was originally to have been built in cooperation with Japan, but the negotiations then broke off, and for a while we couldn’t find a lender. It wasn’t until this April that we found the Asian Development Bank. They’ve now agreed to first have work on the bridge start this year and then to slowly complete the loan procedures. This approach is unique and is great support for Shanghai.
The World Bank was originally in favor of a river-crossing project at Ningguo Road, but I now hear that you no longer think it necessary to build this. Shanghai urgently needs to develop Pudong, but it first must solve the traffic problem. Next year, we plan to work with Japan to build a new deep-water port at Wusongkou, in the Waigaoqiao area of Pudong. We will link up Pudong and the old urban area with a ring of ports, bridges, and tunnels and gradually move some of the people and factories from the old area to Pudong. Otherwise the old area would be too crowded and impossible to rebuild. I hope the World Bank will continue to help us build the river-crossing project at Ningguo Road3 as originally proposed.
Burki: The World Bank is very meticulous in its project evaluations, and this includes a need for satisfaction with the project design. Our experts feel that the volume of traffic at Ningguo Road will be much larger than that at the Nanpu Bridge, and they therefore propose that construction of the Ningguo Road project start first. Moreover, owing to considerations of both economic benefits and project technology, they propose a tunnel and do not favor an elevated bridge. This is because a bridge would have to be very high and the on-ramps must spiral up, but the horsepower and brakes of Chinese trucks would not be able to deal with such conditions.
Inspecting the construction site of the Yan’an Road East Tunnel, May 29, 1988. On the far left, Li Chuntao, chair of the Municipal Construction Commission; to Zhu’s left, Qian Daren, manager of the Municipal Tunnel Construction Company.
ZRJ: It hasn’t yet been decided whether the Ningguo Road project should be a bridge or a tunnel. A majority is in favor of a tunnel while a minority is in favor of a bridge. From the perspective of Shanghai’s development strategy, I would be in favor of a bridge even though it would cost a bit more, and the technical problems can be solved. Of course there is still time to continue weighing the arguments. We will make a decision only after ample comparisons and hope World Bank experts will assist us.
World Bank delegation member: I’ve visited all of Shanghai’s river crossings and I’ve also read your traffic information materials. We feel that given current traffic volumes, after the Nanpu Bridge is completed the need for the Ningguo Road crossing won’t be as urgent, and it can wait until the mid-1990s for reconsideration. The need would arise only if the land on both sides of Ningguo Road is to be developed very soon. Infrastructure projects also have to consider cost recovery, and even land development should yield certain economic benefits.
Burki: We’ve already discussed infrastructure loans with your vice mayor. Some infrastructure, such as urban transportation, can be treated as industrial projects. You should propose a development plan, and after the World Bank agrees to it, we will no longer be involved in specific project evaluations.
ZRJ: This is my suggestion, that we discuss many small projects as one large project.
Burki: We are currently considering five main components of Shanghai’s infrastructure: the Ningguo Road river crossing (tunnel or bridge); land development in Pudong and Puxi after the river crossing is completed; a major north-south traffic thoroughfare in the urban area; an elevated road over North Zhongshan Road; and alleviation of traffic congestion in the central city. We can describe our specific thinking on these five projects in detail in a letter to you.
ZRJ: I’m very much in favor of these five projects. One lesson we’ve learned from the past is that a lot of time can be wasted on repeated discussions over major decisions. I hope we can change this and come to decisions on these projects as soon as possible.
1. On October 21, 1988, Zhu Rongji met with Shahid Javed Burki, World Bank country director for China; Edwin Lim, the World Bank’s chief representative in China; and Zafer Ecevit, chief of the Population, Resources, and Urban Construction section of the World Bank’s China Office.
2. The south abutment of the Huangpu River Bridge refers to the present Nanpu Bridge. This was the first bridge in Shanghai to span the Huangpu River. It has a total length of 8,689 meters and is a twin-tower, dual-cable diagonal cable-stayed structure. The main section of the bridge is 46 meters high. Total investment in this project was RMB 820 million; construction began in December 1988, and it was opened to traffic in December 1991.
3. The Ningguo Road cross-river project refers to the present Yangpu Bridge. It and the Nanpu Bridge are known as sister bridges. It has a total length of 7,658 meters and its main arch spans 602 meters. The main section of the bridge is a river-spanning twin-tower, dual-cable diagonal cable-stayed structure. Total investment in this project was RMB 1.33 billion; construction began in May 1991, and it was opened to traffic in October 1993.