China’s strategy of economic development is encapsulated by the term “socialist market economy.” This means using market forces to improve the efficiency of production while retaining a managed, predominantly state-owned economy and authoritarian control over political activity. China’s leaders want to achieve “an economic system that integrates the basic system of socialism with the market economy in an organic way whereby, under macro-regulation and control by the state, the market mechanism plays a fundamental role in the disposition of resources and [the state achieves] a high degree of balance between efficiency and fairness.” That economy, as Ramon Myers has observed, should also be “firmly connected to a political and legal system managed by the Chinese Communist Party.”

Many pro-China Western analysts do not take the concept of socialist market economy seriously. They see it as a semantic fig leaf for reforms that are intended to move China towards Western-style liberal capitalism. All they can see in China’s reforms is China becoming “more like us.” Human rights and other political issues, they think, will take care of themselves as China develops. This belief in the inevitability of convergence has been aptly dubbed “reverse Marxism,” in that it posits a deterministic link between market-oriented “forces of production” and a particular kind of social, political, and legal order.

Let us leave the issue of “reverse Marxism” aside for now. In the long run, there may indeed be a contradiction between China’s exposure to market forces, the viability of large state enterprises, and political authoritarianism (although Singapore provides a sobering counter-example). In the short and medium terms, however, refusing to accept and understand the concept of socialist market economy is a big, and dangerous, mistake. Whatever one thinks about the long-term viability of the concept, China’s leaders really do believe in it. It remains the touchstone of the Communist Party-led reform process and defines its procedures and constraints. While there are forces in China who do want the reform process to converge with the West, these people are not in power; and besides, there are also minority elements in China who want to return to central planning or even Maoism. China is not Eastern Europe. Its mainstream ruling elites want to reform socialism and strengthen CP rule, not abandon them. To ignore or dismiss socialist market economy is to fundamentally misread the intentions of China’s rulers. And to misunderstand their intentions and policies is dangerous, because it is bound to lead to continual conflicts and disappointments when their actions fail to conform to the West’s misguided expectations.

Reform and the Telecommunications Sector

The tension between competitive markets and China’s reform socialism is nowhere clearer than in the telecommunications and information sectors. China's telecommunications sector is dominated by a traditional PTT monopoly and insulated from foreign competition in services and operation. China's leadership is corporatizing this monopoly and gradually introducing market forces into a variety of telecommunication markets. But it has no immediate plans to privatize its national service provider. China definitely wants to embrace the economic development potential of information technology and the global trading system, but it also wants to retain the traditional levers of control over national industrial policy and political and social communication associated with the monopoly structure of the past.

An open door and free market in telecommunications and information services would attract more investment, improve efficiency, and stimulate development. But it would also undercut the central government’s ability to build up national enterprises in that sector. An information and networking industry with too much diversity, free trade, and commercial competition would erode the government’s powers of surveillance and censorship, and work against its desire for a more geographically balanced distribution of wealth. China cannot, therefore, simply follow global trends toward a private, liberalized telecommunications order. It must carefully manage the introduction of market forces and balance development goals with its need for control and national protection. This tension is an inescapable byproduct of China’s commitment to the model of the socialist market economy.

China’s telecommunications sector is dominated by the Ministry of Posts and Telecommunications (MPT). MPT is a fascinating case study, so far successful, of the socialist market economy in operation. Unlike many large state enterprises, the post-1978 reforms have strengthened MPT and its associated business enterprises rather than weakening it. The industrialization process has created tremendous demand for telecommunication services and equipment. Although MPT, like most monopolies, has not been able to meet all of that demand, it has achieved impressive and even historic rates of growth. (See Table 1) Since 1992, in fact, the number of telephone main lines in China has doubled every two years. MPT has also constructed a fairly comprehensive fiber optic long distance trunk infrastructure connecting the capital cities in each province.

How did it achieve these impressive rates of growth? By administrative, managerial, and accounting reforms enacted within the framework of a state-owned enterprise system. It began with some decentralization of decision-making and profit, via the contractual responsibility system (CRS). The CRS was supplemented by a new nationwide accounting system in 1985. Further structural reforms, separating postal and telecommunication operations from each other and from governmental oversight functions, were implemented in 1988-91. The MPT is undoubtedly more efficient, more wealthy, more corporatised, and more technologically up-to-date than it was ten years ago. However, it is important to remember the following facts as well:

· It is not privatized and its Ministers and other government officials have made it clear that they have no immediate plans to privatize any parts of it.

· In an age of vertical disintegration of telecommunication services, MPT’s operational entities are still completely integrated, from terminal equipment manufacture, sales, and leasing to local service, long distance service, international service, mobile, paging, Internet access, and other value-added services.

· Although government functions such as regulation and policy making are departmentally separated from business operations within MPT, they are still part of the same ministry; that is, there is still no clear legal or institutional separation between the public and private sector.

Recently (in 1993 and 94), China formally authorized domestic competition with MPT entities in certain telecommunication markets. Most of this competition is in new wireless and value-added service markets such as paging, telephone information services, and cellular telephony. The wireless competitors got their start through an informal and unplanned commercialization of radio spectrum resources by enterprises controlled by municipalities, other ministries, or the Peoples Liberation Army. Another important pro-competitive initiative took place when the Ministry of Electronics, Ministry of Railways, and Ministry of Power joined forces to form a nationwide telecommunications enterprise known as Lian Tong or China Unicom. Unicom was sanctioned as a national competitor in 1994. So far, however, its activities are confined to mobile telephone and paging services in a few cities. Unicom is important because it is authorized to compete with MPT in almost all markets except for international service. Nevertheless, in any given telecommunication service market, MPT holds a dominant share. And in fact, true to the model of the socialist market economy, the controlled introduction of market forces has improved the efficiency of the existing telephone monopoly. At the same time, regulations and restrictions on foreign investment have kept new competitors from growing to a size that might threaten the MPT’s control of the basic infrastructure.

WTO: Disruptive Change or Next Step in Gradual Reform?

China’s accession to the World Trade Organization is one of the most important economic policy issues in the world. China’s relationship to WTO is an important test for all parties involved: a test of China’s willingness to take reform and opening to new levels; of the WTO’s ability to be truly global and universal in scope; of the meaningfulness and consistency of the WTO’s rules (making too much of an exception for China will undermine the world trading system).

China is prepared to make important concessions in traditional merchandise trade in order to gain entry to WTO. According to a recent study, the tariff reductions proposed by China would result in $21.9 billion a year in additional income by 2005 for China, and $17 billion a year for Hong Kong. But as is often the case, China and the Western world are not quite on the same wavelength. Western countries such as the US are interested in services trade, where it may have an advantage, as well as commodities trade, where China has a cost-advantage. In the advanced economies, services make up over 70% of GDP, whereas in China the percentage is only around 30%. The advanced economies, especially the United States, are particularly interested in freer trade in telecommunication and information services.

The WTO Agreement on Basic Telecommunications

The rest of the world is moving rather quickly toward a regime of free trade in telecommunication services. In 15 February 1997 the General Agreement on Trade in Services (GATS) of the World Trade Organization concluded its negotiations on basic telecommunications services. 69 governments, including the USA, European Union, Japan, India, Pakistan, Korea, and Malaysia, comprising more than 90% of global telecommunication revenues, made commitments to open up their respective telecommunication markets beginning January 1998. Commitments involved three basic areas: 1) market access, 2) foreign investment, and 3) acceptance of certain regulatory principles intended to make market openings meaningful. 53 governments made commitments to open up market access to international services; 56 governments permit foreign ownership or control of telecommunications to varying degrees; 65 governments committed themselves to observe the regulatory principles contained in the WTO reference paper.

China’s telecommunication regime is miles apart from the WTO agreement. China does allow the establishment of wholly-foreign-owned enterprises, equity or contractual joint ventures in manufacturing of communication equipment. But in all types of telecommunication services, China strictly prohibits foreign investors, or wholly-foreign-owned enterprises, equity or contractual joint ventures to operate, or take part in operations, whether they are provided as part of the public communications network or as specialized, dedicated communication networks. China’s restrictions on foreign involvement in telecom services are among the tightest in the world.

Furthermore, there are indications that China is simply not prepared to offer any additional opening in the telecommunications sector. At a November 1996 meeting in Manila, APEC members prepared detailed “individual action plans” on trade and investment liberalization. With regard to merchandise tariffs and non-tariff barriers, China prepared specific, substantive proposals for short-term (1997-2000), mid-term (2001-2010) and long term (2010 on) change. In services such as banking and insurance, China also set out specific plans for gradual liberalization over the next 20 years.

China’s APEC proposals for telecommunication services, on the other hand, are notable for their lack of substance and the absence of any long-term agenda. All China offered in telecommunications was this:

Short-term ( 1997-2000):

Work out a programme for compliance with the international rules for trade in value-added network services.

The language suggests that trade in telecom services will be confined to “value-added network services,” which comprises only about 10 percent of services markets, and leaves the domestic operator in total control of the infrastructure. The action plan contains no long-term plans for further opening.

Institutional Change and the Regulatory Principles

The most jarring disparity between the WTO agreement and China concerns the reference paper on regulatory principles. This is where the conflict between the Western world’s liberal-capitalist legal/regulatory order and the socialist market economy comes into full view.

The WTO agreement on basic telecom services was based on 20 years of experience with the liberalization of telecommunication markets around the world. The negotiators recognized that incumbent telephone monopolies enjoy certain structural advantages that can nullify or minimize competition, even when markets are legally open. In addition to opening markets, therefore, the negotiators sought to define certain aspects of the regulatory environment in the signatory countries that would be required to make competition effective. In particular, the WTO agreement defined 6 basic regulatory principles. An enumeration and brief explanation of each follows:

1. Competition safeguards. The principles call for “appropriate measures” to be maintained to prevent anti-competitive practices by a dominant supplier. Anti-competitive practices includes cross-subsidization, exploiting information obtained from competitors, and not making available to competing suppliers on a timely basis technical information about essential facilities and other commercial information required to provide services.

2. Interconnection. Because of the network externality, competing telecom networks often need access to existing networks to exchange traffic and allow intercommunication among users of the different systems. The WTO regulatory principles call for ensuring interconnection with a major supplier “at any technically feasible point in the network.” Interconnection must be provided on nondiscriminatory terms, in a timely fashion, at cost-oriented rates, with sufficient unbundling so that competitors need not pay for network components or facilities it does not require. Moreover, the procedures for interconnection must be publicly available and transparent. And to settle disputes about interconnection there must be recourse to an independent regulator with the power to resolve disputes in a reasonable period of time.

3. Universal service. Members of the agreement have the right to establish universal service obligations, but they must be administered in a transparent, nondiscriminatory, and competitively neutral manner, and not be so burdensome as to constitute a barrier to competition.

4. Licensing criteria. Where licenses to operate a service are required, the country must make publicly available all licensing criteria and the time period required to reach a decision about an application for a license. Signatories are also committed to make the terms and conditions of individual licenses publicly available.

5. Independent regulators. Regulatory bodies should be “separate from, and not accountable to,” any supplier of services. Decisions and procedures of the regulator should be impartial.

6. Resource allocation. Procedures for the allocation of resources such as telephone numbers and radio frequencies should be “carried out in an objective, timely, transparent, and nondiscriminatory manner.”

How does China stack up against the WTO-proposed regulatory principles? The following section goes through each principle individually to see whether China conforms or not.

Competitive Safeguards.

China passed an “Anti-unfair Competition Law” in September 1993. The law prohibits price-fixing, prevents predatory pricing, and protects trade marks and patents. Enforcement responsibilities, however, are vaguely assigned to “authorities above the county level.” There is no specialized agency to monitor, interpret, or enforce the provisions of the law. It is difficult to find any evidence that the law has ever been applied. Effectively, then, China does not have any substantive or predictable procedures in place to prevent anti-competitive behavior by the dominant operators associated with MPT. In support of this conclusion, there is already evidence of anti-competitive cross-subsidization. Confronted with new competition in cellular markets from Unicom, one MPT subsidiary reduced cellular prices drastically while increasing the price of international telephone calls. (International calls are a protected monopoly.) Furthermore, MPT’s accounts and technical information regarding the network are not transparent to an independent regulator or to its domestic competitors. It is difficult to imagine MPT making this information available to foreigners. Currently, the MPT will not even provide foreigners a copy of its statistical yearbook.

Interconnection.

Physical interconnection of the MPT-administered public telephone network and the alternate networks administered by Unicom does exist. However, Unicom spokespersons have expressed a great deal of dissatisfaction with the timeliness with which interconnection facilities are offered and the limited scope of interconnection. There is still no firm agreement as to the commercial arrangements (i.e., the price charged and level of unbundling). MPT has not defined a transparent template for interconnection arrangements. China has set up a “Leading Group on Economic Informatization,” and this group serves as a rudimentary hearing and dispute resolution body in matters of telecoms policy. But this leading group is basically a committee that contains representatives of all Ministries interested in telecommunications and “informatization,” not a full-time, professional, independent regulator with a formal, timely decisionmaking process. Because it represents the main stakeholders within China, it is difficult to imagine foreign competitors obtaining a fair hearing from the Leading Group.

Universal service.

In telecommunications as in other sectors, China’s leadership is concerned about geographic disparities in its development. It thus attaches importance to the concept of “universal service.” Indeed, MPT’s revenue accounting system is structured to cross-subsidize high-cost areas in a manner similar to the pre-divestiture separations and settlements system of the Bell system. This kind of universal service subsidy, which is embedded internally into the monopoly provider’s accounting, does not conform to the WTO regulatory principles. It is not transparent, explicit, or competitively neutral. At the same time, however, China does not impose any specific universal service contribution upon competing service providers. So in this area, China neither complies nor fails to comply--it is off the map. It is likely that if enough competition developed to threaten MPT’s internal cross-subsidies, then this issue would have more salience.

Licensing criteria.

MPT Directive 675 has defined licensing criteria for the open value-added services. China partially conforms to this principle. The licensing directive contains some explicit criteria to be used, and technically (at least to service providers within China) the criteria are “publicly available,” although foreigners attempting to get a copy of them will not have an easy time. China’s licensing regime notoriously does give the government considerable discretion, however. Various businesses, from McDonald’s to Jimmy Lai’s Giordano clothing stores, have discovered that licenses can be revoked or withdrawn in an arbitrary fashion.

Independent Regulators.

In this area China fails to conform to the WTO standards. MPT and its provincial branches are the primary regulators and policymakers for the telecommunications sector; the same entities are the dominant service providers in the sector. Although MPT and its PTAs have separated the functions of policy/regulation and enterprise operation into different departments, there is still a close financial and administrative connection between government and operator. China’s existing domestic competitors already complain loudly that MPT is both player and referee, and that they cannot expect impartial treatment from it. That is one reason why the Leading Group on Informatization was set up. But the Leading Group is simply a more representative body of supplier interests, not an independent regulator.

Resource allocation.

Allocation of radio frequencies within the PRC was, until recently, rather disorganized but conducive to domestic competition. Control was fragmented among local, provincial, and national authorities. This made it possible for entrepreneurial organizations to obtain licenses and start new telecom businesses. New regulations issued in May 1994 recentralized spectrum allocation in the hands of a State Radio Regulatory Commission dominated by MPT. This made the procedures for obtaining spectrum more explicit and orderly. But it also gives MPT, one of the major players in paging, cellular, and satellite services markets, direct control over who gets what resources. Numbering also appears to be totally in the hands of MPT.

Conclusion

In telecommunication services trade, compliance with the WTO agreement will require a level of institutional development that China currently has not attained. A close connection between government ministries and business enterprises is true not only of MPT, but also of its domestic competitors. China lacks the legal and regulatory framework required to implement interconnection agreements and prevent anti-competitive behavior. China’s main telecom infrastructure provider, MPT and its provincial PTAs, are too close to the government to freely and impartially provide information about their systems to competitors, especially if the competitors are foreign-owned or managed. All this says nothing about the political barriers to freer trade in information and communication services. China’s Communist Party and state apparatus both maintain a strong interest in monitoring and controlling information flows. Their recent enactment of Internet regulations and restrictions on foreign news reporting show that they are willing and able to exploit the monopolistic status of state enterprises to maintain this control.

All this leads to the 64 billion dollar question: Will integration with the global market economy through WTO force China to break with the socialist market economy model? If it joins WTO, can China maintain its current balance of state ownership and management, market forces, and political control?