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Northeast Revitalization Needs Investment Climate and State-Owned Enterprise Reform, Says World Bank

January 16, 2006

BEIJING, January 16, 2006 – Northeast revitalization depends on creating a better investment climate for private businesses and on reform of the Northeast's state-owned enterprises (SOEs), stressed Jeffrey S. Gutman, World Bank's Acting Vice President for East Asia and Pacific Region today. Mr. Gutman's remarks came at a conference on Northeast revitalization held in Harbin, organized by the Ministry of Finance, State Council Office for Northeast Revitalization, Heilongjiang Provincial Government, and World Bank Group.

According to David R. Dollar, World Bank's China Country Director, key investment climate improvements would include simpler procedures to start a new business; greater transparency in land use, taxes, and administrative fees; fewer restrictions or regulations on foreign investment into specific industries and into transport and logistics services; improved access to finance for small and medium enterprises (SMEs); and continued efforts to modernize urban infrastructure and improve urban quality of life.

While improving the investment climate to encourage new private investment, World Bank experts also think it important to accelerate the transformation of Northeast SOEs. One concern is that continued SOE dominance of the Northeast's economy may tend to "crowd out" more dynamic private businesses.

The World Bank stressed the need for SOE transformation to proceed according to commercial best practices. This would involve, for instance, sound corporate governance and greater ownership diversification for large SOEs; the prompt sale or liquidation of small or medium SOEs, through open and competitive processes to avoid the "loss of state assets"; and the operational restructuring of distressed-but-viable large SOEs through specialized agencies. Similar perhaps to approaches taken in some Chinese cities, locally-owned specialized agencies could manage enterprise restructuring (including the settlement of worker claims) and the sale or management of enterprise assets, including real estate.

Wider and faster transformation of Northeast SOEs would place greater demands on social safety nets. Progress has already been made. But the World Bank sees a need for additional reforms to improve the sustainability and efficiency of key programs, including unemployment insurance, minimum subsistence payments in urban areas (di bao), and pensions.

Investments in urban infrastructure and quality of life, SOE reform, and social protection will require the mobilization of substantial financial resources. World Bank experts suggested that the Northeast could mobilize significant financial resources on its own, for instance by ending subsidies to loss-making locally-administered SOEs and following commercial best-practices for the sale or management of SOE shares and assets. The prospect of near-term improvements in the Northeast's investment climate, business activity, and local business taxes should also make it possible to finance measures to improve the investment climate.

Citing problems with central-local government transfers, the World Bank also suggested a comprehensive review and additional rationalization of the inter-governmental fiscal system. A more balanced approach toward expenditure assignments and transfers, greater opportunities tax revenue mobilization (e.g., property taxes) by the local governments, and more authority to borrow (with appropriate controls) at the local level would make it easier for the Northeast to finance SOE reforms and investment climate improvements.

Presentations at the conference drew on background analyses developed by several research institutes in Liaoning, Jilin, and Heilongjiang provinces. In addition to detailed presentations by World Bank and Foreign Investment Advisory Services (FIAS) staff, experts from the central and local governments, the Asian Development Bank, and International Finance Corporation provided comments.

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