China and the WTO -

China and the WTO - HBS 9-707-032 China initiated, perhaps, what can be called the biggest commitment that any country had made in welcoming the 21st century, by joining the World Trade Organization (WTO) in 2001 and promising foreign markets a whole new package of augmented accessibility to China's local markets as well as decreased taxes and tariffs on trade.

China's inclusion in the WTO was not sudden but actually followed a long series of negotiations, which lasted 15 years, from the Chinese governments to all WTO member states as a group and individually. The inclusion in the WTO was eventually indirectly influenced by China's steady growth rates that it had not only had been able to maintain but increase over a period of three decades, keeping a steady rate of 9% per annum growth rate in the last decade alone.

Some analysts even went on to claim that within 2-3 decades China's economy could move from the third strongest economy to surpassing the two economies, USA and Europe, above it in the Gross Domestic Production and Gross National Production (GDP and GNP). Despite the obvious growth rates, as aforementioned, the Chinese government had to face numerous problems and overcome unforeseen hurdles after their inclusion in the WTO.

One of the factors that posed a hurdle for the Chinese governments and markets was the increased competition that the Chinese banks faced due to the inclusion of foreign banks and banking systems. The biggest factor that dominated the Chinese banking sector was their control by the government and the absence of any form of concept of profit-making. A high majority of the country's profits hence were accumulated in a total four banks.

However, the turning point in letting foreign banks have the freedom to dictate their terms in the banking sector came when Beijing in an attempt to organize the banking sector as a competitor for foreign banking systems built four commercial banks and permitted them to lend money based on what at the time seemed like a good lending policy.

However, the inexperience of lending financial loans made the situation worse and in order to retain local clientele base the Chinese government had to allow foreign banks the freedom that they needed to work within the Chinese societies as well as learn the art of loaning and profit-making in order to have any contribution in the local banking sector.

This was followed by their move of investing a huge sum of $170 billion of the overdue loans into four different companies while at the same time recapitalizing a total of $32 billion to the state banks. The foreign investment filtered more and more into the Chinese market and foreign loans become one of the main sources for the Chinese government in returning the loans.

The analysis of the current patterns of Chinese government debts shows signs that foreign banks will be given more freedom and the loans would need another 4-5 years before positive balance is attained. Another hefty impact after the inclusion of China into the WTO was the privatization of many of their State-Owned Enterprises (SOEs) which were failing miserably against the competition posed by the foreign investors. This was another blow for the local markets as the SOEs formed the crux of all Chinese businesses.

The privatization of this sector was initiated in 1995 when the government kept the big profit-making SOEs and discarded the smaller SOEs, yet the government was forced to hand over the market share that these big SOEs had after joining WTO and eventually hand the complete control of the SOEs to the State-owned Assets Supervision and Administration Commission (SASAC) to distribute and allocate the shares which resulted in a dramatic drop of the total SOEs form 118,000 (1995) to 34,000 (current).

This figure still includes some of the biggest and the core industries like those of energy, basic necessities, cement, etc. And there are many Chinese analysts who still believe that the role of the SOEs and the state can never be completely eliminated. One of the main criticisms that the Chinese government faced after their inclusion in the WTO was with regards to the undervaluing of Yuan which at the time was valued at $8.3.

This resulted in the Chinese markets gaining immense foreign reserves and furthermore allowed the Chinese to make large amounts of imports which was negatively affecting the overall occupational rates and dropping them by 15% on average in both the U.S.A. And Europe. Even though the U.S.

critics were adamant on the Yuan and its undervaluing being the reason for the economic deficit that they were going through, many Chinese analysts argued that the Chinese imports were only replacing imports from other Asian markets which is why there was such an obvious increase in their overall percentage of imports. Furthermore, they argued that as far as its negative influence on the occupational percentages went, the occupational.