- The Washington Times - Friday, October 26, 2001

China's entry into the World Trade Organization (WTO), expected next month, will have a far-reaching impact on both the national and global economies, Kyodo News reported from Beijing this week.
Zhou Keren, vice minister of Foreign Trade and Economic Cooperation, has told an international forum there that after entering the WTO, China will expand its efforts in opening its banking, insurance, trade, tourism, business and service sectors to the outside world. Domestically, he noted, there will be winners and losers.
Qiu Xiaohua, deputy director of the National Bureau of Statistics, told the same forum the biggest challenges were a shortage of talented business-oriented people and monopoly industries facing international market competition for the first time.
Following is an assessment by Kyodo News of some key sectors, based on discussions with industry insiders and government officials:
* Telecoms: Upon accession, foreign operators will be permitted to take a 25 percent share in mobile telecom firms, rising to 35 percent after one year and 49 percent after three years. In Internet, paging and other value-added services, foreign firms may immediately take 30 percent stakes in Chinese companies in Beijing, Shanghai and Guangzhou, rising to 50 percent in two years, when geographical constraints are lifted.
Tariffs on many high-tech products like telecom equipment will be phased out and eliminated by 2005. A 25 percent stake will be allowed in fixed-line and long-distance services after three years, rising to 49 percent after six years.
Automobiles: The government is to cut import tariffs to 60 percent to 80 percent in the next two years and to 25 percent by mid-2006. The domestic auto industry is seen as one of the hardest hit with many casualties.
Cheaper imports also could hurt foreign auto joint ventures with better product quality and services, such as Shanghai General Motors and Shanghai Volkswagen. Some Chinese are holding off buying cars, expecting a wave of cheaper imports.
Banking: Foreign banks will be allowed to conduct domestic yuan currency business with Chinese firms in two years and with Chinese individuals in five years. Geographic restrictions on branch openings go at the same time.
Foreign banks could end up with more than half the domestic market for fee-based banking services, which include trade financing, credit-card transactions and cash management, Chinese bank officials say.
In five to 10 years, foreign banks could capture 15 percent of the market for foreign-exchange deposits, 10 percent of yuan deposits, 20 percent to 30 percent of foreign-exchange loans and 15 percent of yuan loans. Foreign banks would raid their Chinese counterparts for talent and could lure away 20 percent of staff at domestic banks with college degrees.
China has pushed its creaky banking sector into a scramble to expand services, forge cooperative pacts, list stocks, shed bad debts and merge to cope with the threat of foreign competition.
Securities: The government will let minority foreign-owned joint ventures into fund management on the same terms as Chinese firms. Three years after accession, foreign firms will be allowed 49 percent stakes in joint ventures.
Chinese securities companies are seen as weak in the investment-banking business. Brokering fees and proprietary trading make up the bulk of revenues of domestic brokerages, which have little edge in financial consultancy or fund management.
Fledgling domestic brokerages are seeking partnerships with foreign securities houses to tap their expertise and capital strength.
Insurance: China will allow "effective management control" in life insurance joint ventures, although it will limit foreign stakes to 50 percent. In the service field, the European Union secured the right in June for foreign firms to choose their Chinese joint venture partners freely.
The government will phase out geographical restrictions in three years, allow foreign insurers into health and pension areas over five years and permit wholly owned nonlife subsidiaries in two years. Foreign insurers are now largely restricted to Shanghai and Guangzhou. Domestic insurers, now enjoying a 99 percent market share, will face stiff competition from foreign firms.
Agriculture: China agreed in June to cap its future spending on farm subsidies at 8.5 percent of the value of domestic farm production. Duties on agricultural products will fall from 22 percent to 17 percent and on U.S. priority products from an average 31 percent to 14 percent by January 2004.
China will cut import tariffs on products such as rape oil, butter, mandarins and wine to a range of 9 percent to 18 percent from the present 25 percent to 85 percent.
Textiles: Quotas on Chinese textile imports will end formally in 2005 as mandated under a WTO-wide accord, although a special import "safeguard" system will be in place until the end of 2008.
China's textile and apparel sector is one of the few that should see a clear benefit from WTO entry with the lifting of import quotas abroad. Chinese textile firms focused on exports will be best positioned to capitalize on the agreement.
Distribution/retail: China will phase out restrictions on distribution services for most products within three years. It agreed to lift joint-venture restrictions on large department stores and virtually all chain stores. It also will scrap space restrictions on foreign-owned stores.
WTO entry will mean foreign firms can cut out distribution intermediaries and have the choice to set up their own networks, reducing the time taken to get their products to market.
The view this week from Shanghai, China's economic capital and largest city, is considerably more cautious, Agence France-Presse reports.
China's economic-reform juggernaut appears to be slowing dramatically, say analysts, with a series of decisions this week seeming to show authorities are losing their appetite for tough policies because of the global economic slowdown.
At the start of the week government pulled back from a sell-off of its stake in companies listed on the stock exchange, the proceeds of which would have gone into a social-welfare fund.
Following this came a report that the government in Beijing may call a halt to bankruptcies of insolvent large state enterprises, reflecting a jittery leadership trying to balance the pressing need for reform with the threat of growing unemployment and social unrest.
"China's economy has weathered the slowdown better than any other Asian economy, but there are signs that cracks are beginning to appear," said Robert Subaraman, regional economist at Lehman Brothers in Tokyo.
Gross domestic product growth slowed from 7.8 percent year-on-year in the June quarter to 7.0 percent in the September quarter.
Foreign direct investment also may be starting to taper off, with contractual foreign investment growth sliding between August and September amid the sickly global economic slowdown.
But now is a poor time for backtracking, observers say.
After a 15-year wait, China's WTO accession appears to be just weeks away, and membership will mean growing competition from foreign firms on China's home turf.
The freeze on selling off state-owned shares, announced late Monday, had an instant impact, triggering a sharp rebound on the Shanghai and Shenzhen stock markets the next day.
The potentially vast sell-off the government holds a 70 percent stake in most of China's listed firms had shaved more than 30 percent off the value of China's A-share markets since it was announced in June.
Reversing the policy could help the government fulfill other pressing financial aims, such as reviving the market's ability to channel funds to sickly state-owned enterprises.
However, the freeze on state-share sales also will hamper efforts to raise money to narrow the deficit in the country's social-security accounts, which will need to be drawn upon as hundreds of state firms fold in the wake of WTO entry.
In a related development, the London-based Financial Times reported on Wednesday that China had ordered provincial courts to stop processing bankruptcy claims from state-owned enterprises with assets of more than 50 million yuan (U.S. $6 million) pending supreme court approval.
Provincial courts and the State Economic and Trade Commission's bankruptcy office told AFP on Wednesday they still were processing bankruptcy claims as normal.
However, a halt in culling the weakest state-owned enterprises could lead to greater financial pain as foreign firms gain more access to China's economy, analysts say.
"There is growing incentive to slow down the pace of reform because the unemployment rate is already very high," said Mr. Subaraman of Lehman Brothers.
"The danger is that if reform fatigue should set in, it could compromise China's long-term growth."

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