NATO's Mistake Also Wounds Trade Talks in China

The blunder gives conservative opponents more ammunition to fight reformers.
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The NATO bombing that destroyed China's embassy in Belgrade may have also crippled -- but not stopped -- efforts by Premier Zhu Rongji to heal and transform his country's troubled economy.

Conservative opponents of Zhu, who last month offered far-reaching trade concessions to gain China's entry into the

World Trade Organization

, now appear less inclined toward reconciliation after an American bomber hit the embassy Friday.

The blunder gives the opponents, who worry that the country's massive state-run industries will lose if exposed to global pricing competition, more ammunition to fight reformers wanting to shepherd the world's most populous country into the international trading system. Investors now have to judge just how large a setback the reformers have suffered.

"There's no question that reactionary elements in China are hoping this incident will block moves toward the WTO," says Ross Munro, China specialist and co-author of

The Coming Conflict With China

.

Ultimately, however, the hardliners, centered around

National People's Congress

leader

Li Peng

and

Minister for the Information Industry Wu Jichuan

, will not be successful, says Mark Groombridge, fellow at the

American Enterprise Institute

. The strike on the Chinese embassy "is not going to fundamentally alter the nature of the reform effort," he says, adding that economic changes continued even after the 1989

Tiananmen Square

massacre, of which the 10th anniversary falls in June.

Even though the U.S. turned down China's WTO offer last month during Zhu's U.S. trip, the two countries continued negotiating up until the embassy bombing. Last week, however, China seemed to back away from some of its earlier concessions, especially in the banking and insurance industries. And after NATO's blunder, China seems to be indicating that it is backing still further away from previous concessions.

Over the weekend, Chinese trade officials told Japanese counterparts that the original WTO offer no longer served as a basis for negotiations, according to a report in Monday's

South China Morning Post

, which quoted an anonymous source from China's trade team.

Shi Guangsheng

, the Chinese foreign trade minister and an ally of Zhu, spoke angrily this weekend of NATO's blunder, calling it a "barbarous" attack.

The large anti-U.S. protests in China could be largely artificial, government-inspired events that will soon peter out, allowing Zhu and his followers to reassert their agenda in a few weeks. Under that scenario, a WTO deal with significant Chinese concessions could be expected by the fall, says Groombridge.

But if reactionary forces within the Communist Party are capitalizing on and aligning themselves with a genuine upsurge in nationalist feeling, then the reformers may be in trouble.

"The protests are ominous because it's the first black-and-white case of this regime's willingness to play the xenophobic card," says Munro.

The hardliners do seem to be gaining the upper hand. Another sign of this was last week's government order that cable TV companies stop broadcasting foreign satellite programs.

China, according to many economists, cannot afford to slow down its reforms.

Zhu has promoted some critical measures to deal with the country's bad-debt-laden banking system and inefficient state-owned enterprises. For example, he wants nonperforming loans, estimated at 25% of

gross domestic product

, or $250 billion, to be shifted into special asset management companies that are somewhat comparable to the

Resolution Trust Corp.

, which organized the restructuring of the U.S. savings-and-loan industry in the '80s.

Zhu desired WTO membership partly because he believes it will force inefficient domestic firms to compete with cheaper imports. And, in some industries, membership would probably spur greater exports, which have recently been worryingly anemic. After a WTO agreement, Chinese garment exports could double, says Nick Lardy, scholar at the

Brookings Institution

.

Mainland Chinese stock exchanges plunged Monday on fears of a backlash against the reformers. This sort of weakness in the markets will do much to persuade the anti-Zhu officials to try to quell the protests and soften their opposition to reform, says Groombridge.

In other words, anti-American demonstrations are fine as long as they don't affect stock prices. Clearly, the speed with which the current uproar passes will be a good indicator of just how capitalist the old-style communists of Beijing really are.

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