CHINA PLANS MAJOR TRADE REFORMS IN WTO BID

By Guy de Jonquières and William Dawkins

The Economist, October the 20 1995

China plans sweeping moves next year to liberalise trade and foreign investment regulations, including a 30 per cent cut in tariffs, in an apparent attempt to bolster its application to join the World Trade Organisation.The measures also include limited steps towards currency convertibility, elimination of many import quotas and controls, and easing of restrictions on operations by joint ventures with foreign shareholders. The plans were announced by President Jiang Zemin at the Asia Pacific Economic Co-operation (Apec) forum in Osaka, which ended yesterday. US Vice President Al Gore, standing in for President Bill Clinton at the meeting, welcomed the moves as "an important step down the pathway" to WTO membership. The measures follow talks between the two governments in Osaka over the weekend on a recent US diplomatic initiative intended to resolve the impasse in Beijing's WTO negotiations. Washington has handed Beijing a paper setting out the basic commitments required for WTO membership. US officials said

the weekend's talks were constructive and that Beijing appeared ready to tackle seriously the issues raised in the paper. Yesterday's liberalisation proposals were described as "positive" and "significant" by western economic analysts in Beijing. Some said the announcement could signal the start of a new phase of accelerated economic reform. However, observers cautioned that the full implications could not be assessed until important details were clarified. The measures Beijing plans to introduce next year are:

"Substantial" tariff cuts on more than 4,000 tariff lines, which would lower China's simple average tariff by no less than 30 per cent. Elimination of quotas, licensing and other import controls on about 170 tariff lines, or more than 30 per cent of commodities subject to these restrictions. Foreign exchange transactions by foreign companies to be "incorporated in the banking system of foreign exchange procurement and sale". Designation of Shanghai and other, unnamed, cities as "pilot bases" for joint ventures between Chinese and foreign partners. Extension of a trial scheme for joint retailing ventures with foreign partners. Western economic analysts said the most important element Was the planned tariff cuts. They estimated that these would reduce China's average tariff rate from about 35 per cent to 24-25 per cent, though that would still be above the 15 per cent average for developing economies. Analysts were more cautious about the impact of the planned relaxation of foreign exchange restrictions, whic

h are not at present scheduled to be dismantled completely until 2000. "Giving foreign enterprises access to China's bankinig system is a positive step forward," said one. "But it is not enough to remove all the currency restrictions imposed on them." China's announcement did not mention any plans to lift the requirement that foreign businesses obtain annual authorization to conduct foreign currency transactions. Many foreign companies consider this themost important restriction on their foreign exchange operations. Beijing's proposals indicate it has concluded it must decisively shift its approach if it is to complete its WTO entry negotiations. These were suspended last summer after making little progress since the start of the year, and are due to resume next month. However, it is unclear whether Beijing has moved far enough to satisfy US demands that it enter the WTO on a "commercially reasonable basis". China's economy is heading for a "soft landing" this year with inflation easing to less than 15 per c

ent and gross domestic product growth below 10 per cent, according to the State Information Centre (SIC). But the centre warned that achieving inflation and money supply targets would "not be an easy task". China faces a round of increased salaries and bonus payments to state employees in the last quarter' Rapidly rising costs of agricultural inputs such as pesticides and fertiliser are adding to pressures for food price increases. The cost of agricultural inputs rose 21.9 per cent in the nine months to September. The SIC also warned of pressures building on prices for energy, transportation and raw material following a virtual freeze on price rises under a macro-economic stabilisation plan introduced in July 1993. The centre, which disseminates forecasts of the Chinese economy on behalf of the State Planning Commission, was, however, fairly positive in its assessment of progress this year. "The economy is expected to end this year with stable industrial growth, an improved financial situation and inflation

under control," the centre reported. GDP growth would moderate to 9,7 per cent compared with 11.8per cent in 1994. Retail priceinflation would stand at 14.8per cent compared with 21,7 per cent. The SIC forecast that money supply targets would be broadly met, although the authorities are struggling to bring the M2 figure into line with financial planning requirements. The budget deficit was expected to be close to the target for the year of Yn63.lbn ($7.6bn). Revenues were predicted to be up by a hefty 24 per cent to Yn647bn, partly due to more effective tax collection procedures. Industrial production would be up 16.4 per cent over last year, but this represents a slowing in the rate of increase in line with the requirements of the 1993 stabilisation programme aimed at calming an overheating economy. China is predicting a trade surplus this year of $19.7bn compared with $5.39bn in 1994 and a deficit of $12.2bn in 1993. Retail sales would be up 28 per cent on last year. China will begin to issue short-term bo

nds of three, six and nine months in 1996, according to a senior Ministry of Finance official. The bonds will be issued to support open market operations to be launched by the People's Bank in April, the Business Weekly newspaper quoted Mr Gao Jian, director of the "state debt department" of the Finance Ministry, as saying. The bonds would be used to meet short-term capital needs and to balance capital demand, he said.