SCMP Friday, May 26, 2000


'Short-term pain, long-term gain'


While Beijing has applauded its likely entry into the World Trade Organisation (WTO), joining the global body could contribute to slower economic growth, more job losses and a weaker trade position next year as pain offsets early gains.

Economists, speaking shortly after the US House of Representatives voted to smooth the way for WTO accession by backing Permanent Normal Trade Relations (PNTR) status for the mainland, said the real benefits for Beijing would be substantial but would take time to emerge.

"There will be big shocks to the economy next year," said Yin Xinming, an economist at Fudan University. "There will be more negatives in the short run." Other economists agreed with that view.

"GDP [gross domestic product] growth could slow to seven per cent next year from about eight per cent this year," said Chi Lo, regional head of research at Standard Chartered Bank in Hong Kong. That would reflect a variety of factors, including weaker global economic growth as well as the restructuring of the mainland's inefficient state industry under pressure from increased competition from abroad.

Beijing has been warning its state enterprises, many of which are overstaffed and unable to operate profitably, that they would have to prepare for new challenges after entry to the WTO. It has agreed to reduce import duties gradually and to scrap several non-tariff barriers to trade and investment that have long angered foreign businessmen.

Import duties on cars, for example, will fall to 25 per cent by 2006 from 80 to 100 per cent now. Agricultural duties will drop to 17.5 per cent from 22 per cent, while a host of restrictions will be eased in areas from telecommunications to finance and retailing to transport.

As a result, economists are predicting more mergers and closures among state-run companies. This was likely to mean increased layoffs, which in turn would drag down economic growth.

Mr Chi said the mainland could have a current account deficit of US$16 billion (HK$123 billion) next year. While that would still be manageable, it would compare with an expected surplus of US$4 billion this year and an actual surplus of US$12 billion last year.

A slower expansion in main markets could slow the mainland's export growth next year to 12 per cent from a forecast 15 per cent this year. Meanwhile, imports could climb by 18 per cent next year against 20 per cent this year, the economist said.

The bright spot in the near-term economic picture is foreign direct investment (FDI), where a moderate upturn could be expected fairly soon. Mr Chi expects to see FDI rising to US$50 billion next year from US$45.6 billion this year.

Government officials have been quick to play up this aspect of the expected entry into the WTO. Liu Zuozhang, deputy director of foreign investment at the Ministry of Foreign Trade and Economic Co-operation, said accession to the WTO would promote foreign investment. He called this a "win-win" situation.

But more companies competing for a share of the domestic market will put pressure on unemployment, which officially stands at 3.1 per cent in urban areas but is believed to be considerably higher.

"Short-term pain and long-term gain," said Merrill Lynch economist Ma Guonan, in a description of the overall impact of WTO entry. But he and other economists said Beijing still had several ways to cushion the blow from increased competition - and one of them was its currency.

Beijing has already been testing the waters, allowing more flexibility in the exchange rate for the yuan, which had been held firmly at about 8.27 to the US dollar. Analysts said a slight weakening of the yuan could offset some of the pressure for more imports due to lower tariffs.