The proponents of global free trade welcome a new and formidable ally today: China.


Desmond Wong,
National Director for China,
Ernst & Young

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Predictions of China as the next economic juggernaut gained credence on Nov. 10 when the World Trade Organization announced a breakthrough accord in Qatar. Highly prized as a source of 1.3 billion potential customers, China becomes an official member of the coalition today 30 days after ratifying the 1,500-page pact binding it to the values of free trade.

There is no denying the significance of China's newly acquired status as a WTO member, says Desmond Wong, partner and national director of China for Ernst & Young. According to Wong, who specializes in helping Western companies succeed in the Chinese market, there will be broad economic, commercial and social implications of implementing free trade in China.

For one, the jostling among international players for a hearty slice of the Chinese pie already is under way. U.S. multinationals, which already have a presence there, will be the natural beneficiaries of an open and liberal China, Wong says.

Wong also believes that China's entry into the WTO will kick off a march of progress. Sure, it'll take a few years for foreign companies to penetrate certain commercial sectors in China, just as it'll take a long process of growth and liberalization to firmly establish the Chinese equity market.

But U.S. firms and investors alike should pay heed to China, whose enormous potential lies in its billion-plus citizens vying for middle-class status, according to Wong.

TSC: How significant is the entry of China into the WTO?

Wong: It's very significant from China's standpoint. The Beijing government really pushed very hard for it, and it has broader implications other than economics and commerce; this is really going to open the whole country to not just commerce but also Western ideas. I think China's leadership really wants to be part of the international trading community, so I feel it's a very good thing for China and the rest of the world as well.

TSC: On that note, how will the U.S. stand to benefit?

Wong:

The U.S. is in a very good position. There are companies like the

Dow

30 companies, such as

General Motors

(GM) - Get Report

,

Procter & Gamble

(PG) - Get Report

,

McDonald's

(MCD) - Get Report

and

Coca-Cola

(KO) - Get Report

, which have invested significantly and have a very strong presence in China as we speak.

I think these companies will be in an advantageous position now that the starting pistol, so to speak, has sounded. I really see it as a race. People better warm up their engines if they're not already at the starting block. This is because American companies will really be competing with European, Japanese and Latin American companies to get into China.

People sometimes just think of China as 1.3 billion people. That is correct; however, out of the 1.3 billion people, about 400 million live in cities. And the city folks are making personal disposable income that's increasing year after year. The formation of a huge middle class is going to drive the Chinese economy for the foreseeable future. And these folks are going to be the ones to buy a lot of consumer goods that Western economies take for granted.

So anybody that focuses on the middle class is going to benefit. General Motors, in particular, is in a very good position because they have a joint venture with China's very prominent auto-manufacturing company, called

Shanghai Auto

. Companies that have paid the dues, committed the capital and committed management attention will be in a good position.

TSC: Like American International Group (AIG) - Get Report? Recent reports announced that the insurance giant has ended a long-running dispute over its ownership status in China, which will allow it to operate wholly owned insurance operations in four Chinese cities.

Wong:

Yes, AIG is a very prominent company. It started in 1906 before China was even communist. They got way ahead of other insurance companies. They are in a very good position as Chinese folks remember that AIG has been there so long. They have a very strong relationship with China. But other insurance companies have other chances to compete as well -- that's where the 1.3 billion people come in.

TSC: What about sectors like telecom and wireless? That seems really big in Asia right now.

Wong:

Absolutely, particularly in China. I think China overtook the U.S. earlier this year as the world's largest wireless population. And that's one of the earliest signals of what may come.

Things that have a relatively low unit cost, like cell phones, will sell a lot in China because they meet the consumer's purchasing power. A lot of people criticized China for its one-child-per-family policy that started in the late '70s. But the thing is, if a child born is into a Chinese family and if both parents are still working, and the grandparents are still young enough to be working, it means that six working adults are buying things -- investing in education, clothing, toys and what have you -- for that one little child. In China they call it the "little emperor syndrome." So anything that caters to that should be in a good position.

TSC: What about U.S. telecom firms that are already invested in or looking into China?

Wong:

Motorola

(MOT)

has been in China for a long time, and I think they are the single-largest foreign investor in China. Basically, everybody's trying to sell to China, but the Ministry of Information Industries in China is still very tightly controlled. And that is where WTO will make an impact.

Different industries have different transition periods. Banks, for example, have to wait two years before they can collect consumer deposits. But within two to five years, the advantages that Western companies will get, by virtue of China's membership, will be in effect.

TSC: What are some of the other implications of China's entry into the WTO?

Wong:

I think China's entry will change the global competitive dynamics. That's really not an exaggeration because China has roughly 800

million to 900 million people living in rural areas. These people are all aspiring and hoping for a US$1,200-a-year industrial job in the cities. That's the average wage in the cities and you're talking about such a low base. And because China has so many people, the US$1200-a-year wage is not likely to go up very fast because of the supply of labor.

So China is likely to become the world's factory; anything you'd want to manufacture, from plastic toys to consumer electronics. China's going to take a huge share especially in light manufacturing, low-tech, labor-intensive industries. If you're a European and Latin American manufacturer of these items, how can you not afford to go to China and manufacture when your competitors do?

What you're talking about is applying economic resources in a most efficient way to improve living standards for the entire world. People will get lower-cost consumer goods, and Chinese folks will have the economic benefits of employment; the middle class will become consumers themselves.

TSC: What about Chinese financial markets? Is the WTO going to change anything there?

Wong:

The WTO will move that along. But the impetus really comes from Beijing; they want to liberalize and privatize the markets as much as possible. A lot of China's companies are still state-owned and they're trying to go from being state-owned to being privately owned.

In the transition, state companies issue stocks, but the state becomes the majority shareholder. But at least now, they can take their time, watch the market and slowly release the state-owned shares into private hands. That's been the privatization

process of big companies like

China Telecom

. So that's going to be a big equity market, but right now it's still fairly early for fund managers to talk about investing big time in China.

TSC: How long do you expect the transformation of China's equity market to take?

Wong:

I think it depends on Beijing's decision on how fast they want to go. I think a lot of companies are not ready to go yet, because you're not just talking about jumping into an actual market. You have to have the internal systems, the legal structure, the accounting, the disclosure, the transparency. And all that is still developing.

The answer really depends on how those things get put in place. But the direction of moving forward toward a large equity market in China, made up of Chinese companies that are currently state-owned, is unmistakable.