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BEIJING — It is not often appreciated that accession to the World Trade Organization is a one-sided process: The applicant country has to make a series of concessions to existing members in return for gaining access to the trade concessions that existing members have extended to each other over a period of years. In the case of developing countries such as China, they already have access to such concessions through the various Generalized Systems of Preferences schemes and the US MFN/NTR deals. The matching concessions that China has made in its bilateral negotiations with existing members are the membership dues it has paid to put these benefits on a permanent basis and also to get the protection through the disputes procedure processes of the WTO.

One of the commitments new members of the WTO have to take on when they join is an agreement to give up non-market-based, trade-policy instruments, for example quotas and state trading arrangements. Trade among WTO members is supposed to be determined purely by market forces.

I do not believe that many, probably most, of the state-owned enterprises in China have the capacity to engage in export trade or to meet import competition on a market-driven basis while covering costs of production plus a normal profit margin. The use of subsidies and resort to dumping (selling products abroad for less than they are sold for at home) are also ruled out by the WTO. As a result, I believe that at the end of the relatively short transition periods that China has agreed to, many SOEs will be bankrupted. The alternative is for the government to seek to support them illegally, according to WTO rules, and to subject itself to the dispute procedures processes of the WTO. Many WTO and China watchers confidently expect this outcome.

The one bright spot has been the thought that the rapidly growing private sector could respond to the market forces unleashed by WTO membership and both lead an export drive and meet the challenges of import competition. After all, in the first year in which private firms were allowed to trade on their own account, as opposed to using mostly state owned trading companies, 25 private companies accounted for 40 percent of all exports from Guangdong Province. In Pudong, it is private companies with new trading rights that are the most dynamic export-oriented enterprises.

It is not often realized how extensive China’s private sector is. Government statistics claim it now accounts for 50 percent of all economic activity. Taking agriculture into account, as well as services and industry, and if the black and gray economies are also included, the share will be much greater.

Consistent figures on the private sector do not exist. But the sketchy data we do have confirms the view that the private sector is now a major force in the Chinese economy. Private (nonagricultural) entities are classed into two broad groups: household units employing fewer than eight people and private enterprises employing eight people or more. The private enterprises category is divided into individually owned units and limited liability companies.

By the end of 1998, there were 31.2 million registered small household units. They had registered capital of 310 billion yuan (reminbi) and employed 61.2 million employees. Their reported annualized output in 1988 was 371 billion yuan, of which 12.3 billion was exported.

As far as private enterprises are concerned, by the middle of 1999, 1.28 million had been registered, of which 700,000 were limited liability companies. Together they employed 17.8 million people. (Note that employment by all registered private companies was thus around 80 million compared to the registered employment of 75 million in the state-owned enterprise sector). The registered capital of both groups of private enterprises was 818 billion yuan in mid-1999. Output data are not available for this group, but they accounted for 60 percent of all new jobs in 1999.

The individual household units are mainly the mom-and-pop shops that one sees all over China, including breakfast stalls, hairdressers and cobblers; but don’t forget those export statistics. Of the private enterprises, roughly half are in the services sector and half in manufacturing, with some now, following the easing of restrictions on business scope, being established in primary production (including commercial agriculture) and public services. Recent private-sector growth has been fastest in the high-tech sector: By the end of 1998, more than 90,000 high-tech enterprises had been registered. Some high-tech units are very large; in 1998, 14 had output of more than 2 billion yuan.

So, while many, if not most, SOEs continue to stagnate and decline, and threaten the health of the financial sector with their continued losses, the private sector provides the only beacon for hope for the post-WTO entry world of market-driven competition. However, this presents the government with a great conundrum.

On present assessments, only the private sector can provide the sustained economic growth needed to maintain the stability that the Chinese Communist Party seeks. But with the growth of the private sector there also comes the sort of development of a civil society that appears to be inconsistent with the vision of the CCP for the future of China. Private sector representation on local, provincial and national People’s Congresses is growing, their representation on youth wings is particularly strong. During the March 1999 debate on the amendment to the constitution to raise the status of the private sector to one of being equally important to the state sector, they were responsible for a very visible and very loud critical analysis of government policies toward the sector.

Are we facing a golden egg situation? When he presented the “Three representatives” campaign recently, President Jiang Zemin announced, possibly in response to the March 1999 protests, that he wanted to see the appointment of party cells in all private enterprises in order to ensure that their activities are consistent with the party line. If this reform goes ahead and the cells have the same impact on corporate governance as they do in the state-owned enterprise sector, then China’s ability to respond to the market challenges presented by accession to the WTO and to benefit from them will, in my opinion, be seriously compromised.

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