As a result of the prolonged accession negotiations, China has achieved its long cherished objective of integrating with the world economy. Accession to the WTO is only the finishing touch to the institutional integration with the global economy. It is the outcome of a long process of economic and structural reform. The process is more important than the end result.

China has taken advantage of all available opportunities to achieve a sustained high economic growth of an average 9 percent and two-digit trade expansion. It has resulted in a meaningful integration to the benefit of both China and the multilateral trading system.

1. Indicators of Integration.

The depth of integration is testified by a number of economic indicators:

• Foreign trade/GDP ratio = US$600bn/US$1204.8bn = 49.83 percent.

  Higher than the ratio for United States, which is generally considered the most open economy in the world.

• FDI US$44.1bn (2002 estimate).

  China has been for several years the world’s second largest FDI recipient country next only to the United States. Foreign investment plays a key role in the Chinese economy.

• Foreign investment enterprises account for nearly 50 percent of China’s total imports and exports. The Chinese market is inextricably linked to the global market.
• Convertibility of the RMB on current account.

  During the negotiating process, China implemented a series of monetary and financial structural reforms to create the conditions for convertibility of the RMB. Exports expansion contributed to the build-up of foreign reserve and achieved a positive balance of payment on current account. China succeeded in converting the RMB long before the completion of the WTO accession negotiations.

• Average tariffs rate will be reduced to 8 percent.
• All non-tariff measures inconsistent with WTO rules will be phased out.
• Active member of the Bretton Wood system since the early 1980s.

2. China’s monetary, financial, economic and trade policies are subject to IMF regular surveillance through an annual consultation system.

The Chinese Economy and the Global Economy

China is integrating with a globalized world economy, which is substantially different from the one when China applied for GATT membership in 1986. The current global economy is characterised with 3 striking features:

• Globalization - A freer flow of trade in goods and services resulting from dramatic tariff cut and removal of non-tariff measures. A freer flow of foreign investment following a major change of attitude by developing countries favoring investment from multinational enterprises. Increased trade-related and investment-related transfer of technology. Vast amount of financial resources move around the world due to liberalisation of international financial markets. Accelerated information flow brought about by the emergence of the information technology particularly the Internet. Naturally leading to a greater mobility of human resources.
• Knowledge-based - Knowledge acquires increasing importance and diminishing importance of materials in productive activities.
• ICT and Internet-led growth - Productivity and efficiency hinges upon application of ICT and knowledge. The new global economy provides enormous opportunities and requires fundamental changes in the pattern of production and trade.

3. Opportunities

The integration with the global economy under the WTO multilateral trading system provides the following opportunities for China:

• Stable market access opportunities for the fast growing Chinese economy.
• Leverage with its strong supply capacity and huge market potentials.

  Supply capacity and market potential gives China enormous leverage to manoeuvre international resources into its long-term economic development strategy. China has already succeeded in securing an average 9 percent economic growth for two decades, two-digit percent growth of foreign trade and more than US$200bn foreign currency reserves.

• A global market base provides a better chance to narrow income gap.

  Despite all the progress made in the past two decades, China remains a low-income country. A global market base provides a better chance for the Chinese people to bridge the income disparity with advanced countries.

• Protection of China’s trade interests through multilateral rules.

  In spite of all its faults, the multilateral trading system provides reasonable protection of China’s trade interests. One notable positive outcome is the removal of the uncertainty and risk caused by the US congressional battle over MFN treatment to China. Chinese and American enterprises no longer run the risk of abrupt changes in the business environment.

• FDI’s positive impact on efficiency and productivity. China’s practical experience showed that FDI has a positive impact on efficiency, productivity, product quality and market outlets.

However, globalisation is a double edge sword cutting both ways. It poses great challenges for the Chinese economy as well.

4. Challenges

China is in a process of transition to a market economy and faces great challenges in many ways. The following is a short enumeration from the international competition perspective:

• More vulnerable to global economic crises.

  Integration lands China in a more vulnerable position to world economic crises.

• Chinese enterprises will face greater risk from international competition.
• Lack of advanced management skills.

  It will take time and it will require great efforts for Chinese enterprises to acquire modern management skills to effectively compete in international market.

• Lack of a sophisticated financial system.

  There is an urgent need for establishing a sophisticated financial system that can effectively avert possible financial crisis and mobilise substantial domestic savings into productive activities.

• SMEs short of management skills. The large number of SMEs should be the most important growth factor, but most SMEs are short of highly qualified management to brace into the world market.
• The public sector reform remains a considerable task. Until a complete reform of the public sector takes place, the Chinese economy will not be in full healthy state.

Fortunately, the information and communication technology is a powerful tool that can assist coping with these challenges. Government and enterprises can make full use of the Internet to obtain all necessary information to monitor the trend of the global economy, in particular the risk of economic and financial crises. ICT and Internet are also useful instruments to enhance productivity, reduce production and transaction costs, as well as enhance management efficiency. Internet users increase rapidly in China. The impact will only be felt when enterprises begin to use Internet for productive and managerial purposes. ICT and Internet can also contribute to improve trade-related logistic services such as custom automation and transport services.

5. ICT and E-commerce in China.

• China has made a remarkable progress in building the ICT infrastructure. Tele-density has increased to 31.99 percent, and both the optical fibre length and broadband are expanding. There are great potentials for further growth taking into account the size of the population.
• The average growth of the IT industry for past few years was 31.4 percent.
• Exports of electronic and IT products reach US$55bn.

  In a seminar held in 1988, representatives from the electronic industry were quite pessimistic about the domestic industry. They believed China needed 40m years to catch up. Now electronic and IT products have become one of China's main exports. Until 1995, China had practically no domestic production of mobile phones. Now the domestic mobile manufacturing industry is talking about capturing 50 percent of the domestic market.

• Total investment in IT US$97bn.

  It implies an increased capacity in the years to come.

• Internet population is expected to reach 56.6 million, and become the world second largest.
• B2B e-commerce will stand at US$6 billion (2002 estimate). It is likely to increase to US$22 billion in 2004. That will create the conditions for e-commerce to take off in China.

There are still many hurdles to overcome, particularly the weakness of the service sector.

6. Case of Trade in Services

A latest submission by China to the WTO concerning international balance of payment on current account provides the following information:

Current account balance of payment: + $17,405.270 mn

Of which:

Services: - $5,931.013 mn

Transport: - $6,689.077 mn

Communication Services: - $54.857 mn

Construction services: - $16.815 mn

Insurance: - $2,483.686 mn

Royalties and license fees: - $1,827.963 mn

7. This list identifies the weak sub-sectors of services in China where improvement can be made by applying ICT and electronic commerce. One example of export potential is digitisable products. The Case of Digitisable Products.

Digitisable products are those, which can be sold in physical or electronic format (downloading). They include films, printed matters, sounds and medias, software and video games. According to 1999 statistics, China imported US$700 million with an annual growth rate of 17.6 percent. Exports amounted US$667 million with an annual growth rate of 28 percent. It implies great potentials for export growth. It is interesting to note that China's tariff rate for these products is 8.8 percent, lower than the world average. Lower protections end up strengthening the competitiveness of the domestic industry. However, optimism should be qualified with a caution note: Most of the exports are in physical form, there is a risk of trade diversion towards online transaction and Chinese exporters may be marginalized when competing with foreign online sellers they don't move towards online transaction.

In conclusion, the accession to the WTO and the emergence of e-commerce open up a new space for Chinese enterprises to compete in a global market, but all depends on how Chinese policy makers can skilfully use its leverage for China's national interests and to manoeuvre international and domestic resources into China's development strategy and how fast Chinese enterprises can modernise their management system.

(china.org.cn December 23, 2002)