[A-List] WTO news: China

[Keaney Michael]

The costs of change
By Francesco Sisci
Asia Times, 12 February 2002

BEIING - Last week China's Ministry of Labor provided a new official
account of the reality of unemployment in the country and thus outlined
a stark picture of the costs of ongoing reforms and its accession to the
World Trade Organization (WTO).

While the figures on urban unemployment were largely known - more than
12 million people completely out of job or still hanging on to their old
work units for minimal benefits - the reality in the countryside appears
much grimmer. More than 104 million people in the rural areas were
claiming unemployment benefits at the end of last year, about 20 percent
of the local workforce. In total, there are some 120 million unemployed
in China, for a national average of about 10 percent.

These new official data are important in more than one sense. They
provide China with new arguments in its new difficult and aggressive
bargaining with the WTO in Geneva (see China: The new and 'pushy' boy on
the block by D Ravi Kanth, Asia Times Online, Feb 7). While the data
depict quite graphically Beijing's own burden, they also demonstrate the
difficulties faced by other developing countries as they attempt to
conform to the new rules of international commerce. China's national
interests coincide with those of other developing countries, including
India. And these countries by far outnumber the rich countries, which
not only monopolize global trade but also have so far controlled most of
the workings of the WTO.

China can hope that these new unemployment figures help it win support
for its dealings with the WTO, and those of weaker countries. This has a
scent of old Third World ideology, but just a scent, because this time
China does not refute the rules of modern trade - it wants to engage and
change them from within.

However, despite the gray picture China may want to project, there is
also a brighter story to tell.

Side by side with the 120 million unemployed in China there are some 120
million people who own a mobile phone, even though telecommunication
costs are higher than in the West. Furthermore, while 2001 was a
terrible year for most of the world, with most countries suffering
minimal or even negative growth rates, China's economy enjoyed growth of
more than 7 percent, an impressive achievement however skeptics of
Chinese statistics may decide to downsize the figure. And the trend is
not stopping. In January 2002 imports rose 21.9 percent year-on-year to
US$18.97 billion, while exports rose 29.2 percent to $21.7 billion. In
December exports came in at $24.5 billion and imports were $22.39
billion.

The first picture all this brings to mind is that while things are going
well for China overall, there is a yawning gap between rich and poor,
with the risk of huge social repercussions. However, this first reading
might not be totally accurate. The two above-mentioned
120-million-strong groups each account for less than 10 percent of
China's total population. Moreover, the reduction of the agricultural
workforce will increase as will the number of workers laid off from
state-owned enterprises; meanwhile, the number of mobile-phone owners is
also increasing at double-digit speed. What is taking place is a classic
case of industrialization.

While rural residents become paupers, there is rapid growth in wealth in
urban areas and a fast-growing middle class. And the differences in
lifestyle and purchasing ability between the new middle class and the
top layer of society are dwindling, with more people who are now buying
their own homes and and have just bought or are about to buy their own
car.

In fact, in Chinese cities most families now own their own homes, with a
value of a few hundred thousand yuan (around $35,00) up to several
million yuan. One can estimate around 100 million families owning houses
in cities, large or small. These people are the new middle class - one
that so far excludes most of the millions of migrant workers coming to
the cities from the countryside. It is necessary to conceive a
comprehensive plan for the integration of migrant workers to cities as a
policy for expansion of the middle class. This entails a policy of
credit for migrant workers to purchase housing and credit for their
possible commercial activities in the cities.

The issue of credit touches upon the crux of the matter: the health of
Chinese banks. Last year the amount of outstanding deposits in the four
commercial banks totaled 8.2 trillion yuan ($991 billion), while
outstanding loans were worth 6.09 trillion yuan. Furthermore the
governor of the central bank, Dai Xianglong, said the bad-loan ratio
acknowledged by the big four state banks was 2.7 percent. When doubtful
loans, which could become bad loans, are included, the ratio is 8-9
percent.

There has thus apparently been a sharp decrease of bad loans, but even
if we doubt the veracity of Chinese figures, the official statistics
reveal a new problem, possibly as large as that of non-performing loans,
and that is non-performing deposits. Deposits exceed loans by more than
one-third. This proves that even if we were to assume that the amount of
bad loans is three times the official figure, Chinese banks are
certainly solid enough not to default. But it also means that banks are
extra-cautious in handing out loans, which squeezes growth in the
economy (and job creation) and imposes extra costs on banks, which have
to pay interest on non-performing deposits. These costs are covered by
high interest on loans, which despite almost zero inflation command a
hefty 5 percent.

These numbers indicate that the biggest problem now in China is not one
of macro-management but of micro-management. The solution is simple in
theory, and the 10th Five Year Plan underscores it: give credit to small
and medium enterprises. These enterprises would drive economic growth
and create new job opportunities, providing employment for some of those
idle 120 million.

But the practice is much more difficult. First and foremost, there is no
clear procedure or legal mechanism for handling defaults on payments, or
for bankrupting a client and disposing of his former property. Without
these constraints, small private borrowers, who are outside the state
apparatus and thus not sensitive to the administrative pressure of
promotion and demotion, may just refuse to pay the installment. This is
not mere theory, as in Beijing and Shanghai many individuals who bought
a house with a mortgage have just stopped paying the banks, and the
banks don't know what to do. There are no official statistics about how
many mortgages are in default. As well, the state may consider it is
better for social peace to let those tenants stay for free rather than
face the protests forced eviction would provoke, and the trouble of
disposing of the dispossessed real estate.

However, there is a larger danger for the Chinese economy - lots of
money and few reliable businesses to invest in. This is ultimately also
the problem of the stock exchange. Many of the listed companies are
junk, and those who buy their stocks do not behave as investors but as
gamblers. They are indifferent to the real quality of the company in
which they invest, and are not interested in what the company will do
with the money they acquire through stocks. Investors are more keen on
calculating when to get in and when to get out, just as if playing a
hand of blackjack, when the player knows that there is no real value
beyond the cards.

This has happened for many reasons. The good intentions of the rulers
have gone wrong in the hands of the managers. At the end of the day a
good company has no lack of funding and has no interest in being listed,
while many of the listed companies use the money they collect in the
stock exchange to fend off banks and bad debts and not for productive
purposes. One could say that the state is selling off part of its bad
debts to the citizens, at least some of whom made their money stealing
property from the state through corruption. In such a cycle, while
overall morality may be safe, economic effectiveness is lost.

In order to start putting money to good use one needs expertise and
solid guidelines for micro-management. But these can start only on the
basis of a solid modern civil code (or a comprehensive set of civil
laws, for those fond of common law), which will enshrine the rights of
private property. But the civil code, while allegedly been in the offing
for years, is still missing. Yet given the strange complexities of
modern society, this civil code would do more good to the 120 million
unemployed than a myriad of policies that will necessarily be
contradictory and difficult to apply.

Full article at
http://www.atimes.com/china/DB12Ad01.html

Michael Keaney
Mercuria Business School
Martinlaaksontie 36
01620 Vantaa
Finland

michael.keaney at mbs.fi