Talk Story


Sunday, February 17, 2002

In China, revolutions
don’t happen overnight

THE kitchen god takes a three-day break at the start of the week-long Chinese New Year observance. Until the god returns, everybody eats out.

It's a sublimely practical tradition, good for restaurants, home cooks and anybody looking for an excuse to dine out.

Practicality is important in a nation of 1.2 billion people where history has punished the impractical, such as Mao's "Great Leap Forward," and rewarded the practical, such as Deng Xiaoping's "One Country, Two Systems."

Americans, with only 225 years of national history, often misunderstand a country with origins in the Xia Dynasty of 2200 B.C. The Chinese have longer frames of reference.

For example, in 1989 Deng described the state of the Chinese economy: "We have already accomplished our first goal, doubling the gross national product. We plan to take 12 years to attain our second goal of again doubling the GNP. In the next 50 years we hope to reach the level of a moderately developed nation."

In 2000, with 37 years to go, China's GNP ranked third in the world at $1.08 trillion, after $9.87 trillion for the United States and $4.75 trillion for Japan. However, per capita GNP is only $850, compared to $35,000 in the United States and $37,000 in Japan.

China's entry into the World Trade Organization last December was expected to speed development by opening its markets to foreign competition and precipitating economic, legal and political reforms. It has been called China's second economic revolution.

WTO membership means foreign banks can do business in China -- within two years with corporations and within five with individuals. Foreign insurance companies can own majority control of Chinese property and casualty companies and up to 50 percent of life insurance firms. Foreign fund managers can have 33 percent shares in Chinese joint ventures, increasing to 49 percent after 3 years.

Moreover, China agreed to phase out tax breaks and other favoritism towards state-owned enterprises, which include its steel, oil and transportation industries and all financial institutions.

Since December, there have been some surprises, says S. Gong Rhee of the University of Hawaii College of Business Administration. The walls protecting China's economy have not come tumbling down. That wouldn't be practical.

For instance, each foreign bank can open only one branch in China. The Agricultural Bank of China has 50,000 branches, the Industrial and Commercial Bank of China has 44,000 branches, the China Construction Bank has 23,000 and the Bank of China 13,000.

Citycorp can have just one.

Insurance companies applying for licenses face long delays. First, they have to find a local Chinese partner and painstakingly negotiate a partnership. After that, Rhee says, obtaining government approval will take a year or longer.

Chinese savers have had few opportunities to invest the $800 billion they have socked away, presenting a marvelous opportunity for foreign fund managers. Unfortunately, to enter the market they must either start a new joint venture, which can take years, or buy a share of an existing Chinese investment company.

Oh, but all 15 existing Chinese firms already have foreign partners.

Why is China keeping the walls up? "There are weak links in the Chinese economy," Rhee says. "China will open its markets, but at its own pace."

Weak links, indeed. Official estimates put the number of "nonperforming" loans in state-owned bank portfolios at 25 to 37 percent. Unofficial estimates are 50 percent, or $350 billion in bad debt, mostly held by other state-owned enterprises -- railroads, steel mills, etc.

State-owned companies control 60 percent of China's industrial assets but produce only 30 percent of its industrial output. Employing 55 percent of all urban workers -- of whom 15 million are redundant -- they face huge pension liabilities and massive debts.

One out of four of these state-owned companies is losing money. Despite that, China plans to create 30 to 50 giant state-owned enterprises to compete with multinational corporations coming into the Chinese market. "I'm not optimistic about these plans," Rhee says.

"When China's markets do open, the entry barriers will remain very high. They will be highest in the financial sector," he says.

At the same time, Rhee expects China's 8 percent annual growth to continue. "In 10 years, China will really be a dominant force in the world economy."

In Chinese terms, that's practically tomorrow.

John Flanagan is the Star-Bulletin's contributing editor.
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