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Tuesday, November 16, 1999 Published at 16:24 GMT

World: Asia-Pacific

Analysis: China's big WTO gamble

The Internet has huge potential in China

By BBC China affairs analyst James Miles

The agreement signed on Monday between China and the United States on Beijing's bid to join the World Trade Organization (WTO) is likely to be seen by reformers in the Chinese leadership as a powerful asset in their campaign to overhaul the country's loss making state-owned industries.

For the last few months, reformers appear to have been engaged in a struggle with more conservative leaders over the extent to which China should open up its markets to the outside world and thereby risk dealing a fatal blow to the many state enterprises that are operating in the red.

US visit

The struggle intensified after the Prime Minister, Zhu Rongji, visited the United States in April.

World trade wars
It was widely expected then that a deal on China's WTO membership bid would be reached during the trip. But despite an offer by China that many members of the American business community saw as a sufficient compromise by Beijing on market access issues, US President Bill Clinton rejected the package.

He apparently feared that a deal on those terms would not be acceptable to Congress at a time of growing hostility towards China among US politicians.

[ image: Foreign brands are already starting to penetrate the Chinese market]
Foreign brands are already starting to penetrate the Chinese market
It is widely believed that Mr Zhu's failure to reach a deal weakened his political standing and exposed him to accusations by conservatives that he had offered too many trade concessions to the United States without due consideration of the potential impact on China's faltering economy.

Critics believed that exposing state owned industries to greater foreign competition would exacerbate already soaring unemployment and lead to foreign domination of China's markets.

Political tensions

Mr Zhu's efforts to reach agreement with Washington are also likely to have aroused resentment within the Chinese government because of the growing tension at that time between China and the United States.

His trip to the US came shortly after the start of Nato's military campaign against Yugoslavia which was bitterly denounced by Beijing and was followed within a few days by the bombing of the Chinese Embassy in Belgrade by the US Air Force.

The bombing, which Washington insisted was accidental, triggered anti-American protests across China and led to the suspension by Beijing of talks with Washington on WTO membership.

Internet investment

Now, however, an agreement has been reached between the two countries in which China does not appear to have retreated from the offers it made in April.

For example, Beijing has now agreed to allow foreign companies to own 49% shares in telecom ventures, rising to 50% within two years. This is faster than the timetable suggested in China's April proposal.

China has also agreed to allow US companies to invest in Chinese internet firms. Just two months ago it had banned such participation.

[ image: Telecoms are a tempting area for foreign investors]
Telecoms are a tempting area for foreign investors
By agreeing to reduce tariffs on farm goods and automobiles, allow foreign banks to do regular retail business in China and give US firms access to China's distribution networks, Beijing is threatening the interests of some of its most protected sectors.

Boosting imports of high-quality, low-cost imported grain could have a significant impact on China's agricultural sector, which is by far the country's biggest employer.

If foreign banks are allowed to offer the same services as domestic banks, state-owned financial institutions which are now mired in bad debt could face a severe test.

These are the kind of challenges that Mr Zhu and his supporters believe will benefit China's economy by forcing the implementation of unpopular but necessary and long overdue changes in the state sector.

Without moves to make China's financial system more responsive to the market and its industries less dependent on state subsidies and handouts for their survival, many Chinese economists fear that the country's economy could stagnate or even suffer the same kind of meltdown as recently witnessed in several other Asian countries.

Although membership of the WTO could help Mr Zhu's cause and the ambitious campaign he launched last year to bring most state-owned firms out of the red within three years, his problems are far from over.

Foreign investment may well pick up as a result of WTO entry, but with unemployment continuing to rise, industries still threatened by deflation, and the economic growth rate slowing, China faces enormous difficulties in the months and years ahead.

If further opening of its markets threatens social stability, China is likely to put on the brakes again.

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