On track to be a superpower

China’s economy continues its fast growth and its leaders appear firmly committed to continuing reform, as the country prepares for entry into WTO which may attract further substantial foreign direct investment. But the past 20 years of reform have been comparatively easy, having been imposed by an all-powerful central government on a closed economy. Now China must begin to compete globally and to cope with political tension at home arising from the uneven distribution of the benefits of reform. Phillip Moore reports

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Stephen Roache, Morgan Stanley Dean Witter's chief economist, wondered if jet lag was clouding his judgement. It was June, and his ninth trip to China in 27 months. But this was a visit with a difference. There was unmistakably more openness.







Jiang Zemin: convincing foreign investment bankers of China's commitment to reform

Roache was one of 500 participants invited to a forum held once every Five years by the Chinese People's Political Consultative Conference (CPPCC), although of the 500 only 30 were foreigners, only three were American and Roache was the only representative of a US investment bank. "It's usually a very inward-looking conference that is closed to outsiders," says Roache. "The theme this year was economics and globalization and was very outward-looking, which in itself tells you something about China today."
Even more telling was what was originally billed as a 15-minute "courtesy meeting" with president Jiang Zemin for the foreign participants in the Great Hall of the People on Tiananmen Square. In the event, the meeting - most of which was taken up by an open dialogue between Jiang and Singapore's Lee Kuan Yew - lasted 90 minutes, and left Roache intoxicated with enthusiasm about China's potential. "I have never been more optimistic on economic prospects for China," he wrote on his return to New York. "The pieces are falling into place with exquisite precision."
Roache based this on three principal elements. The First was the cyclical revival in China's economy, with 8.1% growth in the First quarter of 2000 and retail sales expanding by 10.4% in the First Five months of the year, probably heralding the end of 24 months of deflation.

The second was China's almost certain imminent accession to the World Trade Organisation (WTO), which leads Roache to believe that the People's Republic is about to see a "bonanza" of foreign direct investment (FDI) building on the 25% year-on-year rise recorded in the First Five months of 2000.
Others agree that WTO membership marks a critical milestone in the reform programme, not simply because of the promise of increased trade and inward investment. More important still, say analysts, is that it will expose China to the rule of law rather than to the rule of man, and impose an external discipline on the local economy that the Chinese government alone would be unable to match.
The third and most important influence underscoring Roache's belief that "China's time is now" (as he entitled his June report) is the apparently unequivocal commitment of the country's leadership to accelerated economic reform. "From the very top," says the Roache report: "China seems passionately committed to reforms on a scale that few are willing to contemplate. Jiang Zemin stands shoulder-to-shoulder with premier Zhu Rongji in this regard ... But Jiang, in particular, left me convinced that China is now ready to get on with the heavy lifting of structural reforms."
Inevitably, the sheer effervescence of this analysis raised eyebrows among those who live and work much closer to the Great Hall of the People than Roache does. Some were reminded of an equally upbeat report from Morgan Stanley's Barton Biggs at the start of the 1990s, speedily followed by another renouncing that optimism. Others point out that Roache's enthusiasm might not have been entirely unconnected with Morgan Stanley's 35% holding in Beijing-based investment bank, China International Capital Corporation (CIIC).
"Frankly it's dificult enough to know what's going on in Beijing if you're based in Hong Kong or even in Shanghai," says an analyst in Hong Kong. "It beats me how you can do so from New York." This may sound Flippant, but it's an important observation. Although Beijing's most prominent reformers appear to enjoy the upper hand in the corridors of power today, there is no guarantee that they will continue to do so indefinitely. Far from it. In a modern office block a stone's throw from Tiananmen Square, one banker oVers a stark reminder about the reality of Chinese politics today. "I'm a great admirer of Zhu Rongji," he says, "and I doubt whether even [US Federal Reserve chairman] Alan Greenspan could have done a better job with the Chinese economy in the last couple of years. But as premier he does not enjoy anything like as much leeway as people outside China may think. The old revolutionaries in the Party still exercise a lot of power in this country. To give you an example: in this office since the end of May we haven't been able to get CNN." The channel was cut off before the anniversary of the Tiananmen Square student protests.







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Whatever his reservations, this banker appears to echo the vast majority of well-informed analysts who believe that longer-term reform is as irreversible as it is positive, and that if the reform programme is implemented in its entirety China will emerge as the economic superpower of Asia within 20 years. "We are talking about an economy which has been posting near double-digit growth rates for the last decade," says Yukon Huang, country director and chief of mission at the World Bank's office in Beijing. "That rate has now slipped, but even with an annual growth rate of 7%, in 20 years' time China will have the same purchasing power per capita as Portugal and will be second only to the US in terms of total GDP. Its share of total world exports will rise from 3.5% or 4% today to 10%, making it the third-largest trading bloc after the US and the EU, surpassing Japan in terms of trading volume. So you can see why some people are calling this China's century."
Playing by other people's rules
Others point out that there are important reasons why past performance should be used with extreme caution as a guide to China's future direction. Nicholas Lardy, senior fellow in the foreign studies programme at Washington DC's Brookings Institution, makes the point in his recent book China's Unfinished Economic Revolution. "In contrast to the First two decades of reform, in which almost everyone shared to some degree in the gains from growth, the current phase will reduce the real incomes of a significant portion of the population, at least on a transitory basis," the book notes. "This outcome is certain to stress the political system far beyond the experience of recent decades."
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