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Experts Optimistic About China's Economic Outlook - 2002-11-21


December will mark the first anniversary of China's accession to the World Trade Organization. Under WTO agreements, China promised to reduce tariffs and loosen restrictions on foreign firms. China specialists are optimistic about the country's outlook.

Howard Chao runs the Shanghai office of the law firm O'Melveny & Myers, and has guided major Western companies in acquiring Chinese assets. More than 100 international law firms, like Mr. Chao's, have offices in China. Until now, each has been restricted to one city, but that will change next month when limitations on foreign law firms are loosened just a little, in accordance with the WTO timetable. China has also agreed to ease restrictions on other professional services, from insurance to automobile financing, over the next few years. Mr. Chao, who spoke to a Los Angeles civic group, said China appears to be growing at a rate of seven to eight percent each year in recent years.

Economist Nicholas Lardy of the Brookings Institution, a Washington policy studies center, says some analysts question the numbers, but he thinks they are accurate. He notes the figures are consistent with China's growth in imports, which surged by 80 percent in a recent four-year period, and growth in tax revenues, which soared even higher. He says both measures are reliable, and show the rising income of Chinese consumers. Mr. Lardy says China remains a bright spot on the global market. "Just for example, last year for the first time in 20 years, global trade declined, and China's trade grew by about 10 percent," he says. "Global trade this year is recovering extremely slowly, and China's trade in the first nine months is up 20 percent."

Mr. Lardy adds that China may account for more than half of the expansion of global trade this year. But China faces difficult problems, such as bloated bureaucracy and a huge number of non-performing loans piling up as banks continue to prop up failing state enterprises. Brookings' Mr. Lardy says bad loans may add up to 35 percent of China's gross domestic product.

"Some people believe that if China's economic growth continues, then maybe China can grow out of this problem, because after all, it's money," says Mr. Chao. "And if the government can come up with enough money to re-capitalize the banks, and it won't otherwise affect or impact too adversely the overall fiscal condition of the Chinese economy, then perhaps that will happen." He cautions, however, that no other country has solved a problem of non-performing loans through growth alone. He says it generally takes quick and aggressive action to address a banking crisis, and he hasn't seen much of that in China.

America's huge trade deficit with China is growing. In August alone, the U.S. trade deficit reached a record $10 billion, and it was nearly as high in September.

Mr. Lardy says the growing trade imbalance may raise political problems in Washington because it suggests China keeps its markets closed to American imports. He says that's not the case as China continues to implement WTO rules. He notes half of Chinese exports are produced by foreign firms, such as Taiwan computer-makers, that are taking advantage of low labor-costs on the mainland.

China's cheap labor may be hurting other countries, such as Mexico and some of its Asian neighbors, Mr. Lardy says, but low-cost Chinese goods are helping to keep retail prices down for U.S. consumers.

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