China: Working Out For The Wto

The Chinese economy is beginning to feel a "WTO effect" even before China joins the World Trade Organization. Industries are starting to reform themselves, companies are restructuring, and the government itself is changing its tax policies to prepare for entry. Any doubts about the positive economic impact of China's joining the global trade group should be dispelled.

Take the example of FAW, First Auto Works, China's oldest carmaker. Based on the old Soviet model, it not only produces all kinds of trucks and autos but provides housing and welfare for tens of thousands of people. Lack of productivity and profits has put it deeply in dept.

Until now. With China promising to cut auto tariffs from 100% to 25% in five years to enter the WTO, FAW is beginning to streamline its operations, paring the workforce by a third through early retirement, overhauling management, and focusing its business goals. The company is selling the least productive of its 33 factories and tying pay to performance. Last year, FAW's sales rose 24%.

The China National Petroleum Corp. (CNPC) is also undergoing major streamlining. Hoping to float stock on global markets, it hired some 2,000 outside advisers for a makeover. The giant energy company, now called PetroChina, merged 13 divisions into four and consolidated control from provincial fiefdoms to Beijing. The 300 managers who survived the downsizing will have their compensation tied to performance.

Beijing is pressuring companies to change. The State Development Planning Commission recently gave an unambiguous nod of approval to the private sector. Private companies will now enjoy the same treatment as the state sector.

In short, China's big industries are beginning to get into shape as the country prepares to open its markets to competition. After years of saying it wants to get into the WTO, China is now facing up to what that really means.

Before it's here, it's on the Bloomberg Terminal.