Author’s note: This article was written in 4/99. Everyone knows for now China has already accessed to WTO. The Chinese government hoped that access to WTO would speed up reform. The Chinese people worry about foreign competition and job loss. In fact, WTO does bring in foreign investments, alleviate job losses and reform in economy. The reform now much needed is the state sector and the banking sector. The Chinese should pull the foreign forces, such as foreign banks, venture capitalists, and other fund providers to joint force restructuring the battled sectors. It makes the competition keener and the industries will be more vibrant. (12/2002)
Why China was making big concession to US to make way for admitting to WTO? Why is it so hurry to join WTO in spite of inherent problems of unreadiness in several areas such as agriculture, insurance, and banking sectors that will be open for foreign investments? Some propound that in order to keep GDP growth at 7% this year, WTO is the solution. This theory is unfounded, as it will be too late to get result after admission. This theory also underestimated Chinese leaders to be a bunch of shortsighted lot. This returns to my two questions: why China makes big concession and why is it so hurry and they have already waited for thirteen years.
I think the internal severe economic situation cannot be ignored although Premier Zhu denied that China economy was " in the mire" in an interview with AWSJ recently. The official report of GDP growth last year was 8%. However, some thought that this figure was unreliable. Actual economic output fell short of prediction.
To counter deflation and push up domestic demand, China struggles to spend its resources, billions of Yuan on fiscal stimulus. It based on the premise that if GDP growth below 5% would have grave consequences for social stability.
Sagging domestic demand arises due to a change of domestic economy from demand-pull to supply push. Overcapacity resulted excess supplies and inventories surplus. This problem is exacerbated by stagnant and burdensome state enterprises.
Restructuring of ailing state enterprises resulted in growing unemployment rate and social unrest. Loss making state enterprises also reduce government revenue collection. Funds are channeled to meet social objectives; such as meeting unfunded pensions liabilities and providing a safety net for the rising number of laid off workers rather than more productive utilisation.
The fall in export contracted about 7.9 % year on year in Q1 99 due to weak demand from other Asian countries such as South Korea and Japan.
Besides, its banking system is riddled by surging non-performing loans, similar problems as those of the Japan. The non-performing loans are mainly coming from lending to state enterprises. This financial distress is also clogging other financial institutions and credit operatives, freewheeling finance companies and securities house The total banking restructuring bill hitherto can be as large as US $200 billion. If China is to follow Japan footstep, all these costs are to be borne by the government budget, and the public debts to GDP ratio will rise sharply, and whittle down the country’s medium term fiscal stimulus sustainability. Although China like Japan has large reserve as buffer, China has not gone through the scale of banking reform like that of Japan. The losses from NPL can quickly deplete its reserves.
WTO will open up China further. China is currently negotiating with European Union and US to reduce tariff for specific sectors such as agriculture, telecommunication, insurance, banking etc. Certainly, Australia and Japan will follow the queue. All eyes are on this big market, hopefully one can be a step ahead of others during China’s further open up, and compete where they have an edge over the others. Partly, domestic interested parties in these countries wield to have sufficient clout forcing their political leaders to secure these advantages for them. So, I see that the chance for China being admitted to WTO this time round is brimming with hope.
The last unanswered question is what is the implication to China and the rest of the world?
Foreign direct investment will go up, the barrier to trade with other members of WTO removed will attract more foreign investments to China. Comparatively, China has abundant of cheap and good quality human and nature resources, which give them a competitive edge over other third world countries. The only barrier is their lack of transparency in business dealing. WTO will remove this barrier.
Increase in foreign investments will stabilise local currency, reduce unemployment, and alleviate the tension of social unrest. As more foreign goods flood in China market, suitable increase in money supplies, reduction in interest rate will increase domestic spending and curb deflation pressure. The crux of the problem is China does not have a central bank device to control money supply. Probably this can be resolved through open market operation to inject fund to the economy. There are plenty of leeway for the Chinese to improve their life style when money is easy.
Foreign Banks and financial institutions, insurance companies force local bank and local financial institutions to reform faster and catch up with the international practices in order to compete better.
There will be great impact on agricultural sector. China basically is an agricultural country. It should craft long term strategy to compete with the foreign imports. To ensure long term survival of agricultural sector is to the benefit of the Chinese people. Foreign imports should be taken as buffer.
On the other hand, foreign imports will weed out less efficient producers and less competitive products. And more people will join unemployment rank and increase social problems.
Further economy open up also expose the pitfalls in the present political structure which does not adapt to the kaleidoscope of the economic landscape, and will force the Chinese government to reform its governing structure, policies and ensure that they are more align to international practices.
Premier Zhu wooed American professionals to work in China may get little response from Americans unless they are American Chinese. It is disconcerting that why Premier Zhu not look into Singapore for sourcing(I put an ad for myself), Singapore has similar pool of management talents they are western educated ,know Chinese culture better and in character, and it appears more affordable and economical based on China’s current yield and productivity.
Even Jack Welch may have problems managing the largest State Enterprise in China and turn it around, because of the wide cultural diversity. What is work in America may not work in China. The Chinese live under the reigns of communist government for several decades. Although there are profound changes in China, to change people’s mind take decades and generations.
I have colleague from China, living in Singapore for years. The brought up was in China, the mentality is more Chinese than Singaporean even she got the Singapore PR. It was said that the Chinese was only interested in technological skills rather than western management philosophy.
What is the implication to the rest of the world? I have mentioned that the West is eyeing China this big market. Few countries in the world achieve above 6 % GDP growth. The regional ailing countries in this part of the world need to cleverly position themselves to compete with the West and let China piggybacks them for growth. The crucial point is to assess the competency and the strength of the country at large, banking on the vantage point, joint venture with big leagues or becoming their supporting arm.
Learning the experience of doing business in China is of paramount importance. China is changing to meet the western standards. We need to acclimate to local environment to earn economic rent.
Once China is a WTO member, competition will be more on level playing field, and China is forced to walk the chalk and play the rule of the game in any event, and will be more transparent in the deal. And if you dither and lag behind others, you will pay a price not to be an early bird for lack of perspicacity.
