Long march to WTO revolution will b e slow

Recently, Mr Michael Garvey, head of Enterprise Ireland for China, escorted a visitor from an Irish software company to the Beijing office of Mr Edward Zeng, the Chinese Internet entrepreneur who is transforming his pioneering Internet cafe company, Sparkice, into an e-commerce business network.

On the way in he met the representative of another Irish software company coming out. Interest in China from high technology companies in Ireland, now the world's largest exporter of software, has been hotting up, especially as China prepares to enter the World Trade Organisation (WTO) and commits itself to lower tariffs and an end to restrictive practices.

To the global high-tech industry, China is a vast, virtually untapped market, where the Internet still only reaches 1 per cent of the population but which is poised to become one of the three largest world markets for software.

With 55 million subscribers already, China is also set to become one of the world's largest markets for hand phones.

"Ireland is producing software for every aspect of the Internet business, including Internet portals, encryption and middle ware," said Mr Garvey, who believes that there are opportunities for all sorts of applications in Internet and e-commerce in the world's most populous country. "This country is moving fast," he said. "It's now forecast that there will be more people on the Internet in China in 10 years than in the United States."

Many Irish-based software companies - like Baltimore Technologies, which specialises in security software for banks, telecommunications companies, Internet service providers and government departments - have already positioned themselves to take advantage of China's opening.

For such enterprises, there is a double attraction. China is about to embrace second generation mobile communications technology in a big way. At the same time, in order to secure entry into the WTO, it is undertaking to dismantle many of the barriers and impediments to foreign companies inherited from the centralised state-controlled economic system.

Telecommunications companies in particular stand to benefit greatly, as WTO membership will enable the deployment of multiple access technology for mobile phones and other wireless devices.

China, with an oft-cited potential market of 1.3 billion people, however, has an image problem, which makes many foreign business executives think twice about marketing or investing in joint enterprises. It is often criticised for over-regulation, inadequate property-rights protection and a cavalier attitude towards contracts.

Analysts in Beijing, therefore, sound a note of caution: change will take place slowly and will meet internal resistance. For a start, entry to the WTO will not actually come about for at least six months.

Mr Long Yongtu, Chinese vice-minister of foreign trade, acknowledged last week that some "rather knotty problems" still had to be sorted out, and his optimistic estimate was membership by the end of the year. Even then, in industries like banking, years will pass before the WTO revolution comes.

"Ten years ago, if a foreign investor in China wanted to send a telegraphic transfer in US dollars to New York, or to transfer renminbi (the Chinese currency) from Beijing to Guangzhou, it took a week," said Irish banker, Mr Malachy McAllister, who is corporate banking manager in Beijing of the Hong Kong and Shanghai Banking Corporation (HSBC).

"Now one can transfer money to New York in 24-48 hours, but it still takes a week to transfer renminbi to Guangzhou. The reason is that local banks are not exposed to foreign competition. And it will be some years yet before they are."

After accession to the WTO, it will be two years before foreign banks will be allowed to take renminbi deposits from, and lend to, Chinese businesses, and five years before foreign banks will be allowed to do personal banking in renminbi which means the vast reservoir of private savings in China will be unavailable until then to use as loan capital.

The delay will enable state banks to continue giving preferential bank loans to ailing state industries for a long time. China will be most cautious where change threatens state interests and carries the potential for unrest.

Some Chinese economists believe that the two to five-year period for the lifting of restrictions in the motor vehicle industry for example is too short. The 100 or so vehicle assembly plants throughout the country face bankruptcy, which means mass lay-offs, when reduced tariffs begin to bring in cheaper imported cars.

The imperative is for domestic enterprises to modernise and become competitive, which is one of the effects of WTO membership in other nations, and is the compelling force behind Premier Zhu Rongji's argument that China has no alternative.

But this takes time. The Chinese pharmaceutical industry will also be under pressure to modernise and invest in research and development rather than, as in the past, using mostly copies of foreign drugs made in defiance of intellectual property rights.

In its WTO deal with the US, China agreed to strengthen its patents and other copyrights, but enforcement is a problem. Last year, Beijing gave Pfizer exclusive rights to sell its anti-cholesterol drug Lipitor in China, but soon afterwards allowed a Chinese drug company which may have got the patent illegally to enter the market, causing Pfizer to withdraw.

In 1995, China signed an agreement to protect US intellectual property rights, but fake computer software and pirated US films on compact discs are available on every street corner, with no official interference.

The WTO deal envisages China taking action against pirated products, which Microsoft says account for as much as 95 percent of China's software market, as well as lowering Chinese tariffs of up to 30 per cent on imported software.

Problems are also piling up in Chinese agriculture which will put enormous pressure on the Beijing government to counter some of the effects of WTO membership.

Under WTO rules, for example, China has to lift quotas on imported edible oils, which are already hurting Chinese farmers, as the foreign products are cheaper and of better quality than home-produced rape seed and soybean oil.

The importation and free sale of more foreign fertilisers will put thousands of small fertiliser factories - there is one in almost every Chinese county - out of business.

According to the Chinese Academy of Social Sciences, prices for Chinese grain will be higher than that available on the world market for the next 20 years, as China cannot contemplate a switch to the highly-mechanised type of farming used on the US plains.

With US farmers hoping to sell millions of bushels of surplus corn and soybeans to China over the next few years, Beijing is likely to draft anti-dumping laws to protect its own industries, just as the US imposes duties on Chinese exports of clothing and materials judged to be below cost.

It can also point to the EU's protectionist attitude to imported bananas and the devices Japan has put in the way of importing foreign rice, to make a case for protecting its threatened agriculture sectors.