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| August 16, 2001 | atimes.com | ||
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China
China's WTO entry promises short-term pain SINGAPORE - China's entry to the World Trade Organization (WTO) will, ironically, trigger a capital outflow, according to Jan Lee, an astute commentator on Asian economies. Lee, chief strategist with the German bank Bayerische Hypo-und VereinsBank in Singapore, estimates that up to US$2 billion had unofficially flowed out of China up to the end of May this year. "More is likely in the period ahead," he said. Lee explained that the trigger for capital outflow is likely to come from financial markets making a more realistic assessment of China's perceived benefits from WTO membership. "While the long-term benefits to China are clear, the short-term benefits are likely to appear nebulous at best," he says. "More likely, the short-term costs of opening up China's inefficient sectors to foreign competition [such as agriculture] will outweigh the benefits of foreign economic participation in Chinese markets. Economic deflation will result when China's WTO bubble bursts." However, Lee believes there will be one last burst of euphoria in the Chinese market, both onshore and offshore, before the process of Chinese WTO bubble deflation sets in. In coming weeks, Chinese leaders will comment optimistically about the improved economic and business outlook on Chinas entry to the WTO. The reality, however, is that economic growth is stagnant in China. Its real GDP growth has ranged between7-8 percent since 1998, compared with what Lee terms the full-employment potential of 10 per cent a year. Two difficulties will arise, he says. First, return on investment capital will deteriorate. Second, free liquidity factors will rise sharply. With China's WTO entry becoming a fact imminently, these two factors are likely to cause a reversal of capital flow. Lee says that, after its accession to the WTO, China has committed to phase in tariff cuts from an average of 30 percent to 3 percent over five years. "Remember, these are concessions on paper. The situation calls for review in a year. The expectation is that China will peel back tariffs and remove other barriers, but there can be no certainty that it will deliver." China has been given a transition period to phase in its WTO implementation. Like existing WTO members, it has a choice to delay some of the toughest decisions. If China, a developing country, does not follow implementation to the letter, it will not be alone. And implementation is precisely the problem many developing countries have cited as the reason they are not in favor of a new round which aims at bringing in further trade deregulation. (Asia Pulse) |
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