China WTO entry pushes reform at a price

By Bill Savadove

BEIJING (Reuters): China's entry to the World Trade Organization (WTO), given the stamp of approval by U.S. lawmakers on Tuesday, will set in motion the most far-reaching reforms since Beijing opened its hermit economy to the outside world in 1978.

China's late leader Deng Xiaoping launched a policy of reform and opening in the late 1970s after three decades of shunning the world, setting the rigidly state-planned economy on the path to radical change.

Now the world's most populous nation is all but set to join the WTO and open the doors to its tightly guarded markets wider.

But its move to a more market-based economy will be painful, business executives and analysts say.

"This may be the most dramatic, most complicated and most significant economic transformation in modern history," said Robert Rubin, former U.S. Treasury Secretary and chairman of the executive committee of U.S. financial services giant Citigroup.

"I would say again now that China could be the largest economy in the world within the next few decades -- though accomplishing that will be no easy task."

WTO entry could throw millions out of work, threatening to unleash mass unrest, as ailing state firms close or regroup to face more foreign competition.

Foreign companies say WTO entry will vastly improve the business environment in China, although few are expecting a "silver bullet" to cure all their woes.

"China has made a number of commitments in opening up services and removing barriers, but they haven't committed to everything," said Timothy Stratford, chairman of the U.S. Chamber of Commerce in China.

"There are areas where we would like to see even more opening up."

There are also nagging worries about Beijing's ability to implement the agreement and play by the rules, despite pledges from top Chinese leaders.

U.S. trade officials rebuffed a request by China this month to delay tariff cuts on high-technology products, insisting Beijing stand by last year's landmark bilateral WTO accord.

"Chinese officials have all expressed their commitment to follow the rules. They're going to be hampered in several respects," said Stratford, who is also chief legal counsel in China for U.S. automotive giant General Motors.

"There are different industries and different interest groups that would prefer to stay protectionist," he said. "There is going to be a process of implementing things where there may be bureaucratic resistance."

Analysts say the sheer number of Chinese laws which need to be amended, as well as some ambiguity surrounding the requirements of the WTO itself, will hamper implementation.

Chinese leaders say they are trying to get ready.

"China is sorting out existing foreign-related economic laws and regulations and making amendments and additions to them according to the organizational rules of the WTO," Trade Minister Shi Guangsheng said recently.

But some analysts say preparations are lacking.

"Solid and down-to-earth preparatory work is scarce, although officials and entrepreneurs have long been crying wolf," official media quoted Lu Zhiqian, deputy director of the cabinet's Development Research Center, as saying.

Chinese academics also urge WTO members not to have unrealistically high expectations, to remember that change will be gradual and that key industries will remain protected.

"WTO members should have this basic attitude towards new members -- new members are tentatively opening their markets," said Zhang Hanlin, professor at the University of International Business and Economics.

"There has never been a country entering WTO which fully opened its markets for good and services."

Still, change will be sweeping.

Foreign car makers will be able to distribute and retail vehicles on their own, and provide financing to buyers.

Telecommunications operators will eventually be permitted to take a 49 percent stake in mobile firms.

And foreign banks will finally be able to deal with domestic companies and individuals for domestic yuan currency business.

WTO will put more competitive pressure on big state-owned commercial banks -- which are technically insolvent after years of lending to the shaky state sector -- making it crucial for them to change, analysts say.

Leaders must have the political will to make tough choices to reform state banks and firms, they say.

"For China it is imperative to unwind the interlocking structure of state-owned enterprises and state-owned commercial banks and transform both into privately-owned, profit-oriented enterprises," Rubin said.

"Such ownership and such motivation is at the core of a market-based economy and partial measures will never produce desired results."