China and the WTO: Entering the Exclusive Club

FROM THE LECTURE SERIES: THE FALL AND RISE OF CHINA

By Richard Baum, Ph.D.University of California, Los Angeles

Since 1979, the party’s old-timers had warned anyone who would listen about capitalism’s boom-and-bust nature and its polarizing tendencies. They had bitterly decried the toxic cultural by-products of bourgeois liberalization. In the 1990s, when their prophecy appeared, at least in some measure, to be coming true, their voices were barely audible and China’s dream to enter WTO, a distant dream.

Photo of the People’s Bank of China building.
Under the fiscal and administrate decentralization measures introduced just a year earlier, local branch managers of the People’s Bank  of China had indulged in an inflationary epidemic of binge lending. (Image: Shan_shan/Shutterstock)

Zhu Rongji: China’s New Economic Czar

By the mid-1990s, most of the revolutionary ‘immortals’ of the Long March generation, including Chen Yun, Peng Zhen and Wang Zhen, had died. With China now seemingly perched precariously on an overheated, inflationary economic bubble, it was unclear just how, or when, or with what results, the bubble might burst.

To prevent a sudden rupture and to achieve a soft landing, Vice-Premier Zhu Rongji, China’s new economic czar, unveiled in July of 1993 a 16-point program designed to curtail credit, to limit new investment, to reduce inflation, and to generally cool down China’s overheated economy. Just one year after stepping on the accelerator of reform, Zhu now began applying the brakes.

This is a transcript from the video series The Fall and Rise of ChinaWatch it now, on Wondrium.

Restructuring China’s Banking System

Energetically attacking China’s economic ills on a number of fronts, Zhu Rongji took on the daunting task of restructuring China’s chronically dysfunctional banking system. Under the fiscal and administrative decentralization measures introduced just a year earlier, local branch managers of the People’s Bank  of China had indulged in an inflationary epidemic of binge lending, which resulted in a huge increase in non-performing loans.

To resolve the problem, Zhu Rongji sacked the bank’s governor and personally took over the job himself. Then he brought in a team of technocrats to reorganize the bank and reform its lending practices.

Under the old system, branch managers could make unsecured loans to local governments and SOEs [State Owned Enterprises] at preferential, sub-market interest rates, without collateral and without performing due diligence. As a result, by 1994, non-performing loans, or NPLs, had mushroomed to the unprecedented level of $200 billion, equivalent to almost 25 percent of China’s total GDP.

Under Zhu Rongji’s banking reforms, the central bank would now set interest rates and margin requirements, and local branch managers would be held personally accountable for all loans issued within their jurisdiction.

Learn more about China’s economic landscape.

Uniform National Taxation System

To increase the central government’s dwindling share of total fiscal revenues, Zhu Rongji also introduced a new uniform national taxation system. The system had two key features: a 17 percent value-added tax on all manufactured goods, and a new revenue-sharing program that empowered the central government to collect 60 percent of the province’s total commercial tax revenues right off the top, leaving the provinces and localities to split the remaining 40 percent.

By thus, giving the central government additional control over the major share of tax revenues, Zhu Rongji successfully increased Beijing’s fiscal leverage over the provinces. In the process, however, he alienated a great many provincial and local officials, who resented him for curbing their discretionary fiscal autonomy.

Zhu’s Important Contributions

An image of Zhu Rongji.
Zhu Rongji’s successfully led China into the World Trade Organization in 2000. (Image: World Economic Forum/Public domain)

However, Zhu Rongji’s two most important contributions to China’s soft landing in the 1990s came after he was promoted to replace Li Peng as premier in 1998. Zhu used the full authority of the office to tackle head-on the Herculean tasks of reorganizing China’s debt-ridden state enterprises and bringing China into the World Trade Organization.

Beginning in the summer of 1998, Zhu forced tens of thousands of unprofitable state enterprises to sell off their non-performing assets and to consolidate their more productive assets. He then offered ownership shares in these consolidated enterprises to non-state investors.

Finally, the very worst-performing enterprises, the ones that could not be sold or consolidated or re-capitalized, were forced into bankruptcy.

As a result of these reforms, the governance of China’s state industrial sector was now subjected, for the first time, to the full discipline of the marketplace. Forced to become leaner and meaner, many of the newly reorganized SOEs registered significant improvement in their bottom-line economic performance.

Zhu’s crowning achievement as premier was the success of his decade-long drive to lead China into the World Trade Organization. After coming very close to reaching agreement with the WTO’s key Western gatekeepers in 1999, Zhu finally completed the task in 2000.

Learn more about the effects of globalization in China.

A Global Economic Powerhouse

Under the accession agreement, China was required to make a number of sweeping concessions and commitments. These included reducing tariffs on a wide variety of foreign imports, ending price supports for Chinese farm products, eliminating export subsidies to the steel and automotive industries, combating the rampant theft of intellectual property (such as computer software, video games and DVDs), and opening up China’s banking and insurance sectors to foreign competition.

Although Zhu Rongji was widely criticized within China for giving up a number of China’s traditional sovereign prerogatives in exchange for WTO membership, most economists agree that it was China’s entry into this exclusive international club that spurred China’s rise from a mildly impressive regional trading power to the status of a global economic powerhouse.

Common Questions about China and the Word Trade Organization

Q: What was Zhu Rongji’s 16-point program designed to do?

Vice-Premier Zhu Rongji, China’s new economic czar, unveiled in July of 1993 a 16-point program designed to curtail credit, to limit new investment, to reduce inflation, and to generally cool down China’s overheated economy.

Q: What could the branch managers do under the old banking sysytem?

Under the old Chinese banking system, branch managers could make unsecured loans to local governments and SOEs (State Owned Enterprises) at preferential, sub-market interest rates, without collateral and without performing due diligence.

Q: What was Zhu Rongji widely criticized for within China?

Zhu Rongji was widely criticized within China for giving up a number of China’s traditional sovereign prerogatives in exchange for WTO membership.

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