THE CHINESE CHALLENGE

The Economist, November 20 1995

China's announcement yesterday of important steps to liberalise trade and foreign investment is more than a move towards further integration into the world economy. It also demonstrates the leadership's capacities and intentions. Further growth and reform seem almost certain. If managing this process is a challenge for its leadership, adjusting to it is quite as daunting for the world at large.

Today's survey in the Financial Times shows why China's leadership has grown palpably more confident over the last year. It has already weathered the first storms of the post-Deng era.

Chief of these was cooling the overheated economy. After Deng Xiaoping's journey to the south in 1992, real gross domestic product expanded at the extraordinary rates of 13.6 per cent that year and 13.4 per cent in 1993. Inflation's rise towards the 21.7 per cent reached in 1994 showed the economy was overheating. The response was the package of measures introduced in mid-1993. These have worked: overall inflation should be below the target of 15 per cent this year; and non-food inflation has disappeared. Meanwhile, economic growth slowed, but merely to 11.8 in 1994 and perhaps 10 per cent this year. Mr Zhu Rongji, the executive vice-premier in charge of the economy, has reason to feel pleased. Wisely, he refuses to show overconfidence. He knows how easily China's semi-reformed economy with its tens of thousands of bankruptcy-proof state-owned enterprises, loss-burdened financial system and revenue-starved government - could slip the leash.

Market-led growth

Yet, for all the difficulties, it would be wiser to bet on continued rapid growth than on the reverse. The Communist party's future rests on successful market-led economy. It may

attempt to influence the pattern of development, but will not - probably cannot - halt it. If the leadership fears failure, how much more does the rest of It-he world fear success. -It will transform everything. From that, reality there can be no escape. The only question is how to respond. In trade, China's challenge is obvious. Already the world's 10th largest trading country, China might be fourth by 2000. Foreign exchange reserves have risen from less than $20bn in mid-1993 to $72.9bn at the end of October. The immediate issue is how to complete China's long drawn-out negotiations for membership of the World Trade Organisation. There are huge potential benefits to success. Not only would China be involved in - and responsible for - the trading system. It would also have to accept significant legal and administrative obligations. Chinese reformers should see such requirements as an invaluable weapon in their own hand. So should outsiders.

Difficulties arise

This, however, is the long-run view. In the short term, difficulties arise over many issues. It is not just difficult toreach agreement; partners fear that agreements would not be enforced. Western music publishers argue, for example, that piracy remains rife, notwithstanding the agreement on copyright reached between the US and China early this year. Yet if the world decides to wait until China has become a modern, law-based state, it may not be in the WTO for years. That would be foolish. What must be done, instead, is to agree on the standards China should reach, along with a timetable. Yesterday's announcement of a sharp cut in tariffs, and elimination of many import quotas, is a first step. Further liberalisation : will be required, including in its markets for services. China is indeed a developing country, as its government argues, but one unlike any, other. It must offer more liberalisation and more self-discipline than the others, because it is potentially more disruptive. But it cannot be asked to

show greater respect for WTO principles than its major partners have ever- managed themselves. Any special safeguard mechanism against its exports must be kept to a limited transitional period. China must join the WTO soon. It is more important that it be inside the organisation, than for its partners to preserve a theoretical right to treat it as they wish.