The recent appearance of the leading economic figures in China at the world's largest gathering of financiers in Hong Kong, at which they preached the precepts of capitalism, may well come to be seen as one of the defining moments of the 20th century. The same Beijing leadership, which less than a decade earlier turned the guns on students and workers in Tiananmen Square, promised to revive the country's moribund state enterprise sector, and to provide incentives to foreign importers and businesses in preparation for China's membership of the World Trade Organisation which promotes free trade.

The assertion by the country's foremost economic policymaker, Zhu Rongji, that 'China's economy has not been so good for many years', was greeted without dissent from the assembled financial experts and bankers. Beijing has established a degree of credibility that would be the envy of its counterparts in the former Soviet Union.

By the second decade of the next century China could be well on its way to one of the most remarkable economic transformations of the modern era. This populous nation will have moved from low income status -- where it is bracketed with the poorest countries in the world -- to a middle income country with standards of living similar to Argentina or Portugal. To achieve this it will have switched from a rural to an urban society and from an agricultural to an industrial/services economy. With its enormous human resources and purchasing power it will have become the world's second largest exporter and importer, accounting for some 20 per cent of global trade.

This scenario -- which was given added weight by the state enterprise reforms outlined at the five-yearly Communist Party congress in Beijing in September -- is at the core of a new report by the World Bank entitled China 2020: Development Challenges in the New Century. The study forms the basis of a blueprint which seeks to build upon the astonishing economic success story of the last two decades. It envisages lifting the 200 million Chinese still living on less than one dollar a day out of their poverty.

The Bank scheme includes radical ideas for the transformation of the state enterprise and banking system. Bank officials estimate that China, which already absorbs more foreign direct investment than any other nation in the world, will need infrastructure and other investment of $80-$90 billion a year to sustain the growth momentum. As such it will become the world's most attractive target market for the overseas business community and air routes into China could become as valuable as those across the Atlantic.

The principal weakness of the World Bank report is that it makes no attempt to assess whether the huge migrations of population caused by economic change will lead to strife between more prosperous coastal and poorer inward provinces. Nor does it look at how a liberalised market system can be compatible with a rigid Communist party structure with a disdain for democracy and human rights. These are the risks which inward investors into China will have to live with.

The report notes that China has been through two remarkable shifts: from rural to industrial society and from command economy to a market-based system. The latter is perhaps best demonstrated by its peaceful absorption of the most rampantly capitalist province in the globe -- Hong Kong. The transformation of a country has brought with it extraordinary GDP growth of 9 per cent a year. Between 1978 and 1995 real GDP grew at a 'blistering rate' which 'lifted 200 million Chinese out of absolute poverty.'

However, the Bank recognises that past success does not guarantee that this trend can be sustained without some radical changes in China's economic governance. It will have to learn to deal with periods of macro-economic instability (of the kind being seen among China's east Asian neighbours) without retrenchment and with increased employment and income insecurity. It will also need to tackle environmental problems, manage the higher cost of food self-sufficiency, and meet the challenge of inequality and poverty levels.

At the core of the Bank's blueprint is the reform of state enterprises. The PRC has no fewer than 305,000 such entities of which 118,000 are industrial. The record of these businesses is decidedly mixed with a very low return on assets. Almost half lose money: accumulated deficits in 1996 equalled 1 per cent of total wealth. The Bank's view is that the top 1,000 entities, which may eventually be ripe for privatisation, need to be invigorated. But this will require a huge reorganisation.

A key to macro-economic stability will be to sort out the banking system, as has been vividly demonstrated in east Asia. Some four state banks account for 90 per cent of China's banking assets but their financial performance has been weakening as a result of 'woefully inadequate' risk management and credit analysis systems. Some estimates suggest that bad loans could be as high as 20 per cent, which would in effect give the banks negative net worth. Matters could get worse since the shakeout in the state enterprise sector could add to the bad loans.

Despite these structural problems, the Bank remains optimistic about China's capacity to transform itself. The report notes that the country has 'a remarkably high savings rate, a strong record of pragmatic reforms, relative stability, a disciplined and literate labour force, a supportive diaspora and a growing administrative capacity.' But there will be considerable risks, which could be exacerbated if China is blocked from the WTO and forced to indulge in guerrilla warfare on the commercial front.

China is a commercial opportunity which cannot be ignored, despite the enormous challenges.

Source: Airline Business