1. Elimination of sanitary and phyto-sanitary barriers on U.S. exports of wheat, citrus and meat, for example, the bans on importing wheat from TCK-affected regions.

2. Elimination of China’s subsidies to agricultural exports.

3. Liberalization of state companies’ monopoly and allowing private companies to engage in agricultural trade.

4. Adoption of a tariff-rate quota (TRQ) system for grain imports.

5. Reduction of tariffs on agricultural products to well below 20% for major agricultural imports from U.S.[ii]

The first item listed above will not have much impact on China’s imports because those trade barriers affect only small amounts of agricultural products and are hard to implement. The second item will not have much impact on China’s export either, because there are currently few subsidies for Chinese agricultural exports. The third item is beneficial to Chinese farmers and consumers. The state monopoly on agricultural export/import is extremely inefficient. The liberalization of agricultural trade and the consequent competition between private and state traders should be most welcomed by farmers and consumers. Controversy focuses mainly on the fourth and fifth items, namely, agreements on the importation of grain and the lowering of import tariffs.

China is a land-scarce economy. Agricultural production requires land input. However, it does not mean that the agriculture sector in China will be decimated when China enters the WTO. The relatively low price of agricultural products in U.S. is due to multiple factors. Grain, one of the major agricultural products, is land-intensive and the United States is relatively land-rich, giving it a comparative advantage in grain. In addition, the U.S. government subsidized and protected grain farmers for years through technology development export subsidies and price supports. Such policies deviate from the recent WTO agricultural cooperation agreement. Moreover, the WTO member countries including the U.S. are encouraging new negotiation on free trade of agricultural products, including grain. Thus, the U.S. will eventually have to give up almost all of its current protective agricultural policies, leading to a greatly diminished price advantage for U. S. grain. Agricultural production in the European Union is not much threat to Chinese agriculture since for most agricultural products other than wine, spirits, and milk products, European countries do not have comparative advantages.

Given that China has limited land but abundant population, it does not have a comparative advantage in grain production. Importing grain is equivalent to importing land, which is not harmful to Chinese economic development. In addition, a considerable portion of the price of grain in the domestic market does not reflect actual production cost, due to the inefficient monopoly operation of the state grain agency. In accordance with China’s commitment to allow entry of private traders, this situation will be improved after China enters the WTO. Therefore, the market competitiveness of grain production in China will be enhanced.

Moreover, the China-U.S. agreement on grain is a tariff-rate quota (TRQ) system. Within the agreed import quota, low tariffs will be implemented; for imports exceeding quota limits, high protective tariff will be imposed. The TRQ is initially 14.4 million tons and will gradually increase to 21.8 million tons.. In general, imports will not exceed the quota, because the high over-quota tariffs are prohibitive. In addition, even if the TRQ of 21.8 million tons is fully used, the resulting grain imports will only be 5% of China’s average grain output in the 1990s. The impact on domestic prices, and therefore on farmers’ income, will be very limited.

Apart from the land-intensive grains, many other agricultural products, such as animal husbandry, horticulture, aqua culture, and processed agricultural products, are labor intensive. In these commodities, China has a comparative advantage over most other countries. In fact, since reform began in the late 1970s, China’s agricultural trade has always been in surplus, soaring from USD 57 million in 1980 to USD 6.8 billion in 1999 (SSB 2000, p. 140). One of the important reasons for this trend is the increase in exports of labor-intensive agricultural products (Lu, 1999). The reduction of China’s import tariffs will not hurt China’s net exports of those labor-intensive products at all. Moreover, the past growth of agricultural exports was achieved under high protective tariffs and non-tariff barriers set by the importing countries. The agricultural trade interventions by WTO countries have been reduced substantially recently, and will diminish further in the near future. After joining the WTO, China will have increased access to foreign agricultural product markets. It is expected that China’s exports of labor-intensive agricultural products will increase tremendously.

WTO Accession’s Potential Impacts on Financial Sector

Financial sector is another most sensitive issues in the bilateral negotiations. In a market economy, the primary role of banks and financial institutions is to serve as an intermediary between savers and investors and to facilitate payments between economic units. Prior to the economic reform, China had a planned economy with heavy industry as its priority of development. The financial system was an integral part of the plan economy. Regular financial market activities were banned. People’s Bank of China (PBOC) was the only financial institution, serving as the central bank and at the same time providing commercial banking services (Lin, et. al., 1996). After the start of economic reform, those previously banned banks and non-bank financial institutions were gradually re-opened. However, the four big state banks, namely China Industry and Commerce Bank, China Agriculture Bank, Bank of China, and China Construction Bank, still dominate China’s financial sector.

Statistics data shows that by early 2000 foreign banks and financial institutions have already set up 191 representative offices and subsidiaries in China with total assets of USD 36 billion in 23 locations, including Shanghai, Beijing, Tianjin and Shenzhen, and Hainan province. Many foreign banks have been recently allowed to upgrade their representative offices to branches and to conduct local currency business in Pudong and Shenzhen. For insurance, the Chinese government recently approved four foreign insurance companies to set up new branches or joint ventures.

After the WTO accession, China agrees to remove the geographic and business restrictions by 2005, allowing foreign banks to set up branches in all other cities in China, conduct local currency business, and provide retailing services. Foreign insurance companies will also be allowed to own up to 50 percent of the equity of the joint ventures and to operate in more cities.

It is predictable that China’s financial sector will become increasingly more open to foreign financial institutions after the WTO accession. For a long period, China treated the financial sector as a special industry, not only was very cautious in liberalizing the sector to foreign competition but also imposed many restrictions on the entry and operation of local financial institutions. After the WTO accession, foreign financial institutions will receive a national treatment. The state-owned banks and insurance companies will lose their existing protections. Therefore, the competition in China’s financial market is expected to be very strong.

Financial sector and the state-owned enterprises (SOE) are the two important and unaccomplished areas of reform in China’s transition from a planned economy to a market economy. For a long time, the high ratio of non-performing loans in China’s banking sector has attracted many attentions.[iii] The state banks have heavy burdens of policy lending. Meanwhile, the monopolistic nature of the state banks results in low efficiency in their operations. The overall quality of China’s banking industry is poor and not competitive. In fact, China did not have a clear direction of financial reform until 1994. Since then, the four state banks have attempted to move their operations towards commercial banking. China has also set up a number of other regional and nationwide banks. In addition, the government issues more licenses to domestic insurance companies. The government has also had a better understanding of the possible roles of equity market for the SOE reforms and for China’s economic development.

After the WTO accession, the four big state banks’ monopolistic position will cease to exist. The asset values and business volumes of these four banks are no larger than other major foreign banks. Their operations and techniques are not as advanced as the overseas banks. Therefore, foreign banks have the ability to bring a large enough shock wave to end the monopolistic nature of China’s banking industry. Of course, the local banks, especially the four state banks, have developed for yeas a relatively complete service network. Therefore, they still have an advantageous position in this regard. How long this advantage can be maintained depends on whether local banks can learn from foreign banks, improve their services, and become competitive. This advantage, however, has its limitation. China’s banking business concentrates in the developed, coastal regions and major cities. Foreign banks can easily open branches in those areas. They will first compete for the high profits, low costs, and less risky business, such as international clearance. Data show that foreign banks have already handled over 40% of China’s trade settlements.

Foreign banks and other international financial institutions appear to be very attractive to domestic customers, because of their quality and efficiency of services, complete range of financial products and innovations, and sound financial foundation. Therefore, it is inevitable that certain business will shift from domestic banks to foreign banks. Those foreign enterprises in China are even more prone to do so because of their familiarity with foreign banks’ operations. In the loan business, foreign banks depend mainly on customers’ credit ranking and ability of repayment. Because of the transparency and efficiency of their business operation, good state-owned and private enterprises as well foreign enterprises are inclined to borrow from foreign banks. Foreign financial institutions also have advantages in other business, including discount of promissory notes, insurance, and security investments.

The other competition in financial sector will be in the saving deposits business. State banks’ financial resources come mainly from domestic households and enterprises’ deposits. One frequently raised concern in the domestic discussion of the WTO accession is whether or not the deposits will be relocated in a large amount to the foreign banks. Some fears this possibility would happen because of the concentration of deposits in a small percentage of wealthy depositors. It is argued that they are likely to relocate their deposits to foreign banks because of both foreign banks’ better services and sound financial positions. The state banks’ problem of high ratio of non-performing loans would be exposed if the relocation occurs. This incidence could lead to bank runs and other crisis, if handled inappropriately, which could in turn accelerate the relocation of deposits and further weaken the state banks. The survival of many SOEs depends on the continuous supports of loans from the state banks. If such a scenario occurs, the four state banks will not have the means to support the SOEs. Many of those poorly performed and inefficient SOEs would go bankrupt. In my judgement, such a doomsday prediction will not occur because of the recent change of policy from an anonymous banking to a real-name banking. The reallocation of deposits from the state banks to foreign banks will reveal those wealthy depositors’ identities, an undesirable situation to them. Therefore, the competition among state banks and foreign banks for deposits is likely to be on the new stream of savings instead of those savings already in the state banks.

It is undoubted that the WTO accession will bring competitive pressure to the financial sector in China. Foreign institutions can bring in advanced management skills and business practices. If China’s financial institutions can master the advanced business practices, develop new financial products, improve service quality, and cut down operating costs, Chinese financial institutions should be able to compete with their foreign counterparts. They need to do the above reforms in order to survive. Therefore, the pressure from the WTO accession will be beneficial to the development of China’s financial sector, enabling the sector to provide more efficient and convenient services to customers, and benefiting China’s overall economic growth.

China will relax the entry restriction on financial sector after the WTO accession, which will not only allow foreign financial institutions to enter China’s financial market, but also provide opportunities for other domestic financial institutions to develop. The latter possibility is especially important for China’s long-term development. After the WTO accession, the Chinese government will not have enough means to support the non-viable big SOEs. Chinese economy will have to develop more closely along the line of China’s comparative advantages, at this stage of economic development, namely, more labor-intensive industries (Lin et al. 1996). Most enterprises in the labor-intensive industries are small- and medium-size. The best institution for serving their financial needs is the local, small- and medium-size banks (Lin 1999). In the past, the government suppressed the development of local, small- and medium-size banks to favor the development of the four big state banks. The financial needs of the small- and medium-size enterprises were under served. The WTO accession will provide a better opportunity for the small- and medium-size bank to develop, which in turn will facilitate the growth of small- and medium-size enterprises and enhance Chinese economy’s competitiveness.

Concluding Remarks

In this paper, I have analyzed the potential impacts of WTO accession on Chinese agriculture and financial sectors. China’s agricultural agreement of removal of trade barriers, elimination of export subsidies, reduction of tariffs, and import of grain seem to have given the Chinese general public the impression that China has given in too much to outside pressures on a weak sector in Chinese economy. However, the above analysis shows that the accession to the WTO will actually do more good than harm to Chinese agriculture. The agricultural agreement actually is, using a Chinese proverb, “shu le mian zi, ying le li zi” (losing the face but winning the substance).

Regarding the impacts of WTO accession and subsequent entry of foreign financial institutions on China’s financial sector, it is no doubt that there will be a strong competitive pressure on China’s inefficient financial sectors. Chinese government needs to abandon inappropriate administrative interventions that have been implemented for a long time and adopt policies that conform to the normal practices of a market economy. Financial regulations need to be strengthened and become transparent. Interest rates need to be liberalized and determined by markets. The Treasury bond market and the central bank’s open market operation will become normal. The restructuring is likely to result in a rapid development of efficient financial institutions and the defeats of inefficient ones. It is predictable that both the financial institutions and non-financial enterprises in China will have a more stable, transparent, and predictable business environment after the WTO accession. This new development will create a favorable milieu for a sustainable dynamic growth in Chinese economy.

Reference:

Hai Wen, and Ping Xinqiao eds., China’s Economics Research: the Compilation of Working Papers at China Center for Economic Research at Peking University in 1995-1999. Beijing: Beijing University Press, p456-480.

State Statistical Bureau (SSB), 2000. China Statistical Abstract 2000, Beijing: China Statistics Press.

Johnson, D. Gale, 2000. “WTO and Chinese Agriculture,” paper presented at seminar at China Center for Economic Research, Peking University on March 23, 2000.

Lardy, Nicholas R. China’s Unfinished Economic Revolution, Washington, D.C.: Brookings Institution Press, 1998.

Lapres, Arthur. 2000. “The E.U.-China WTO Deal Compared” available on www.gyoza.com/lapres.

Lin, Justin Yifu, “What is the Direction of China’s Financial Reform?” in Wen Hai, and Feng Lu, eds. China Economic Transition and Economic Policy, Beijing: Peking University Press, 2000, pp. 296-301 ( in Chinese).

Lin, Justin Yifu, Fang Cai, and Zhou Li, The China Miracle: Development Strategy and Economic Reform, Hong Kong: Chinese University Press, 1996.

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