As an economic consultant for Consulting InChina, I have been confronted with the task of evaluating the present state of the Chinese economy and providing advice to the Chinese economic ministries. China, with a population of 1.2 billion people, has seen enormous economic growth and elevated living standards from 1978 onward (Shuguang 3). Nowhere or time in history have so many people moved forward so fast as the last thirty years in East Asia. There seemed to be no limits on the torrid pace of economic progress. First the tigers industrialized and prospered, then the Middle Kingdom as well. China outgrew the Japanese economy early this decade. It is now over half as large as that of the United States.

China began to emulate and experiment with capitalism in the 1980's in certain areas of its coastal regions. Within these areas, liberalized trade and investment practices were permitted (Dzever 123). These "free enterprise zones" began to both flourish and take on increasing economic and social linkages to Hong Kong. It was not long before the majority of capitol flowing into Beijing was from these zones. On a slower pace the interior of the country began to follow the lead of the coastal provinces while the coast grew even more.

It is in the shadow of this dangerous and still looming crisis that Consulting InChina has to evaluate the state of the Chinese economy and offer solutions leading towards a stronger, more solvent, more dynamic economy. The banks in China are in dire peril. A Standard & Poor estimate sets the portfolio of bad loans at a stunning $200 billion (US News "Slow"). Only the deposits of Chinese with no where else to save have kept the banks from complete collapse. These banks will almost certainly need a government bailout, perhaps on a massive order. Any bailout would be imprudent without first reforming the entire banking system. China's banks have been notorious for loaning crony capitol to pet projects and industry. Often, these credits simply float under-productive, profit losing ventures and industry (Broadman 24).

The banks must begin to exhibit western systems of accountability in loans and debt. At the same time, not unlike the reformed "savings and reserve debacle" banks in the USA , they must begin to shore up reserves. One wild card is currency devaluation. At the time of this writing, Chinese President Jiang is confident that the yuan will remain stable (Inside China Today "President"). The temptation here, in devaluation, would be to make exports more attractive. There is a real danger of another round of domino effect collapse on a global scale if such a move is made. Any government bank bailout should come from real capital, not simply from an infusion of newly printed monies. The old practice of propping up state industry to make unwanted products or buildings must be ended. Bank reform ideally should go hand in hand with enterprise reform.

Although China has privatized a large portion of the industrial sector, the 300,000 state operated enterprises that are left present a drag of epidemic proportion on the economy (US News "Slow"). Over half of these companies are unprofitable and yet they continue to absorb as much as 70% of all bank credits, with almost no chance of repayment. The real trick here, in reforming these enterprises, is to do so without massive unemployment. State firms employ 60% of the urban work force. Many of these firms should simply be shut down. Others need to radically cut labor. What is needed as these firms restructure and privatize is a revitalized and quickly growing tertiary sector to absorb the labor loss in heavy industry. At the same time, heavy industry surely needs to increase productivity. This will come from modernization and mechanization. It will also come from privatization as a whole. The need to turn profits or be shut down will motivate any new company directorate to invigorate productivity.

The cloud of bureaucratic red tape in the Chinese business environment is stifling. There is need of uniform implementation of FDI legalities concerning property rights, and taxation. The elimination of illegal and corrupt fees and taxes levied at a local level is a necessity (Dzever 106). Local Chinese government cannot run like Mafia and attract serious foreign investment. FDI had already been a substantial engine in the Chinese economy. To date, most FDI has been comprised from other East Asian economies. Hong Kong invested heavily before the 1997 change of rule, and continues to influence China, hopefully more than China influences her. Taiwan has also been a significant contribution of direct foreign investment. Even so, the investment climate has to be improved to attract more western multinationals.

Western investment to date primarily looks to Chines raw materials and supply. Forward and backward links are exploited and a classic model of industrialization import substitution has been replicated. However, most of the goods "substituted" were not imported before anyhow(Dzever 95). More modern, technology driven industry, needs to evolve to move beyond the more primitive stages of the industrialization phases. As well, FDI, western and otherwise, is concentrated in the coastal cities. A concerted effort should be made to move investment (of all forms) to the interior of China. The interior has great ground to make up in rising to the standard of living of the coast provinces. Nevertheless, it will be absolutely necessary to do so if a strong middle class is to evolve. Already, Chinese leaders see the threat of these inequalities to stability (Economist "China's").

Lastly among equals is the consideration of tariffs and trade. China's wall to free trade is fitting, considering her isolationist history. The time has come, although, for China to become a partner in the body of WTO nations. At this time, China's barriers to trade significantly damage the chances for acceptance to the WTO (CND-Global "China"). China is one of the worst offenders in the arena of fair trade practice. Extremely high tariffs and markets closed to many goods and services are hurting China's trade positions with other large trading blocks. Hurting China more is the productivity and innovation that is lost by protecting industry with trade barriers. There are many Chinese who seemingly benefit from having their pet industries protected. It is the ones who stand to lose the most that want no change of status quo.

Many arguments can be made for some degree of industry protection and subsidy. The infant industry argument is common, and not without merit. Japan and South Korea have protected fledgling industry to maturation with great success. Many inferior Chinese products would be hard pressed to compete outright with foreign goods. Endless protection of industry is not the answer, however. There is no substitute for competition and market driven innovation (Shuguang 10). Sheltering fledgling firms is one thing, subsidizing continuous profit losing ventures is quite another. The move to tariff reduction and ultimately, free trade, would in the short run be an immediate boon to the Chinese consumer. In the long run, free and fairer trade would lead Chinese industry to competitive innovation and the growth and new technology that comes with market competition. In any case, it is clear that some large move to a reduction of trade barriers must be made to join the WTO. This should be a Chinese priority.

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