WSJ/ Economy: China WTO Entry Spawns Optimistic Feeling at Home
January 15, 2002
By PETER WONACOTT
Staff Reporter of THE WALL STREET JOURNAL
SHANGHAI, China -- He Xiangjian is feeling something rare among China's corporate chieftains: buoyant optimism about the World Trade Organization.
The chairman of one of China's leading home-appliance makers, GD Midea Holding Co., based in southern Guangdong province, Mr. He complains that Chinese import barriers have long pushed up prices for his refrigerators and air conditioners, which use several tons of foreign steel a year. Now China's WTO membership will ease steel quotas and lower import tariffs, saving the company at least $2 million annually. Midea needs even that small boost if it and other ambitious Chinese exporters are to become real global companies.
"Getting into WTO will be good for us," says the 58-year-old executive, breaking into a smile. "It's a growth opportunity."
Few in China, it would seem, deserve to be so sanguine. Just a month after China's long-sought entry to the global trade body, celebration has given way to worry over surging unemployment and cataclysmic change. Premier Zhu Rongji set the tone in November, saying that just pondering China's post-WTO-entry future gave him a headache. The People's Daily, the flagship publication of the Communist Party, cautioned last month that unemployment could double to 7% during the early stages of membership, an estimate that grossly understates the real figure by excluding millions already fired but still listed on company payrolls. Among the sectors ripe for foreign competition: China's inefficient farm sector, its debt-ridden banks, and its automobile industry. Combined, these industries anchor the economy -- and hold hundreds of millions of jobs in the balance.
Promises, Promises
Key commitments by the Chinese government on WTO membership
Agriculture: Farm subisidies will be capped at 8.5% of the value of farm production. Duties on imports will drop to 17% from 22%.
Autos: Import tariffs on autos fall to 25% by mid-2006 from their current level of 80%-100%. Restrictions on the category and type of vehicles that foreign automakers can produce in China will be lifted in two years.
Banks: Foreign banks will be allowed to conduct local-currency transactions for domestic corporate customers in two years, and for local residents in five years. Geographic restrictions on foreign banking business will be lifted over five years.
Insurance: Foreign companies can own 50% of life-insurance businesses and 100% of businesses involved in property/casualty insurance. Geographic restrictions will be gradually phased out.
Securities: Foreign investors can own minority stakes in fund-management companies, with the maximum ownership level rising to 49% in five years.
Energy/Oil: Private trading in both crude and refined oil will gradually be allowed. So, later, will retail distribution of oil.
Distribution: Foreign companies are allowed to set up joint ventures in five special economic zones as well as Beijing, Shanghai, Tianjin, Guangzhou, Dalian, Qingdao, Zhengzhou and Wuhan.
Accounting firms: Foreign firms that pass China's registered accountant tests can practice as fully licensed accountants on equal footing with Chinese firms.
Telecommunications: Foreign companies can take stakes of up to 25% in mobile-phone businesses. That cap will rise to 35% in one year and 49% after three years. Tariffs on high-tech imports will be eliminated by 2005.
Source: Citigroup, AWSJ Research
"The groom has just said 'I do' and now realizes he has a lifetime of responsibilities," said Donald A. Manzullo, a U.S. congressman who discussed China's WTO commitments in meetings last week with President Jiang Zemin and other top Chinese leaders. "It's starting to settle in how difficult it's going to be," he said.
But a close look at China's industrial landscape suggests the country's weakest industries can survive the first thrusts of foreign competition, while many of the most exposed are welcoming it. For one thing, China has more leeway in opening some markets than people realize, since some of the most crucial commitments don't kick in for years. And those sectors opening now are either troubled or dominated by a few big competitors, deterring the risk-averse. Finally, key Chinese industries, among them farming and parts of manufacturing, even stand to benefit with rising exports. In that light, the near-term outlook for China seems far better -- and that for foreign investors seeking immediate gains in China far worse -- than initially appeared.
While expected to fulfill its WTO promises, says Andy Rothman, China Strategist for CLSA Emerging Markets and a former U.S. diplomat, "when it comes down to a crunch, China is going to modulate implementation to take care of its domestic problems."
To China's advantage, the fine print of the WTO agreement offers wiggle room, namely for banks. Although Chinese negotiators agreed to widen market access, eliminating restrictions on loans and deposits in local currency, Beijing isn't obligated to treat foreign and domestic banks equally until five years after membership, notes Nicholas Lardy, a China scholar at the Brookings Institution. That allows Beijing to impose tight restrictions on foreign banks, tilting the playing field in favor of their Chinese competitors.
Mr. Lardy thinks such caveats, coupled with foreign wariness of lending to troubled state enterprises and small private companies, will slow market entry. In the first five years of membership, he predicts that foreign banks' share of the local currency business will rise to just 2% or 3%, from the current 1.5%. The forecast contrasts sharply with the Chinese central bank's own anxious prediction of a 15% slice for international banks within five years. But in line with Mr. Lardy's views, China last month issued new regulations governing foreign banks, requiring levels of local currency deposits to back loans that most will find tough to meet because of a lack of Chinese depositors.
For farm goods, the situation might not be as dire at it appears either. As market barriers fall, foreign exporters have cast hungry eyes at China's possible purchases of fruit, vegetables and grain. The U.S Agriculture Department, for example, expects China's agricultural imports this decade to increase an average of $1.5 billion a year. But China also has the capacity to guard its 800 million farmers through tariff-rate quotas. The quotas, used frequently by the U.S. and EU, give countries the option to buy a limited amount of imports at low tariffs while tagging additional imports at much higher rates. According to a report he wrote touching on the topic, Mr. Rothman expects China to employ the quotas for key commodities, such as wheat, corn, rice, sugar and cotton. At the same time, China's bulging grain surplus means it won't be buying much foreign stock any time soon.
Meanwhile, Chinese farmers -- especially along the eastern coast -- have become savvy exploiters of overseas markets, as the latest spat with Japan over the flood of imported Chinese mushrooms, leeks and straw mats show. With WTO membership increasing competition at home and widening access abroad, the government wants to encourage this export trend. "WTO will not deepen the rural crisis and may even offer a way out," says Mr. Rothman.
Even in China's vulnerable auto sector, it all isn't doom and gloom. The country still has dozens of companies struggling with outdated technology, too many workers and products few want to buy. But heavyweights are emerging, primarily state enterprises that have joint ventures with companies such as Germany's Volkswagen AG and General Motors Corp. of the U.S. These companies are producing China's first modern cars at prices few imports can match, with scale and brand recognition rivals now entering the market could take years to achieve. Strengthening their position, China's lower import tariffs will cut their production costs. And in the past few months, several Chinese auto makers have slashed prices to undercut foreign imports as tariffs drop.
The fallout from WTO entry does have its downside. An expected increase in imports could erase the nation's hefty trade surplus, warns Daniel Rosen, a visiting fellow at the Institute for International Economics in Washington. But an influx of equipment and technology could also spur manufacturing and help Chinese companies move up the export chain to compete head-on with unreformed economies such as Japan.
Still, the chief beneficiaries of China's WTO membership probably will be private companies such as Midea that long ago adjusted to cutthroat competition. Mr. He, the chairman and founder, got his start in business 30 years ago selling bottle caps during the Cultural Revolution. From there, he moved on to electric fans and then to a range of home appliances, always maintaining his cost edge over foreign imports. Today, he believes WTO membership will help boost the company's $200 million in annual exports by allowing him to sell his low-cost products in more overseas markets. "Foreign companies have no way to compete with us," he says. "Their costs are too high."
Write to Peter Wonacott at peter.wonacott@wsj.com1.
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