International experience shows that in the long run, increased foreign participation in the financial sector will have a positive effect on country’s development as a whole. However, in the period immediately following its WTO accession and the removal of protective measures in the financial sector, China may face one of its biggest challenges. There is a good possibility that the nation’s banks will suffer financially. Hence, it might be expected, the leader’s policy response to reform the current banking system will be a strong one. For example, financial sector officials are already mandating the government interventions fall, state banks recapitalize themselves, and nonperforming loans be transferred to asset management companies.While one might think the agricultural sector and poor regions in the rural economy could suffer from liberalization, it is not clear if things will be worse than before the reforms. In the past, agriculture in China was squeezed. Huang and Ma have shown how the financial sector has systematically shifted funds away from faming. Throughout the entire reform period, there was a net capital outflow by means of the financial system. Hence, it is hard to see how a reformed banking sector will treat agriculture any worse. Though,flood and drain table the experience of other countries most likely mean that in the short run small, poor farmers will be rationed out of financial markets.
Tax reform also is underway. In 2001, there were three major types of taxes levied on products and services: a VAT levied on goods and services for processing, maintenance and assembling; a Consumption Tax levied on some selected consumer products; and a Business Tax on services and the sales transaction involving assets . Both the VAT and Consumption Tax are applied to imported goods. Tax laws, however, have offered producers several exemptions. In many cases, part or all of the VAT is reimbursed when the goods is exported. All goods to be exported are not subject to the Consumption Tax. Although subject to a number of technicalities, there is some concerns are some of these tax rebates may not be consistent with the requirements of the 1994 GATT rules. Since, China has agreed that it would ensure that its laws, regulations and other measures relating to internal taxes would be in full conformity with its WTO obligations, some adjustments may have to be made. Perhaps the best example of this may be in the area of the assessment of the VAT on agricultural imports and the possibility that such an act may violate the national treatment clauses of the WTO accession agreement. Specifically, while the VAT is charged in full at the border for all imports . Although some observers in China have tried to argue that since farmers in rural areas already pay high land- and head-taxes, they can fairly be exempt, such a tax is not commodity specific and such unequal taxation of imports and domestically procured crops almost certainly violates WTO. If such a tax policy is challenged, China will have two options: assess the VAT on all domestic procurement or eliminate the VAT at the border on agricultural goods. More generally, as China attempts to make it economy more competitive in a post accession world, it has announced that in some areas it will lower taxes. The primary objective would be to lower the burden of domestic enterprises and attract new foreign investment. Tax cuts would also increase the competitiveness of its domestic products in the international markets.
Moreover, tax officials also have plans to continue to push on tax reform that shift China from a system that primarily uses a production-based tax system to a more consumer oriented tax regime. While desirable, it should be noted that the timing of implementing this tax reduction necessarily will depend on the impacts that the reform would have on the government’s revenue-earning capacity. An official from the State Council recently claimed that a major move to realign China’s tax system towards a more consumer-oriented one may begin as soon as 2003. To make the rural economy more competitive and to remove a set of institutions that have historically caused a lot of frustration among rural residents, officials have also begun to experiment with rural tax reform. The most bold experiment to date is based on a movement that seeks to “convert fees into taxes.” The earlier experiments began in Anhui province in 2000. The reform was implemented to reduce the burden of various fees imposed on farmers to a maximum level of 5 percent of the income of farmers. By reducing the tax burden of the farmer, officials hope to reduce the cost of agricultural production, since many fees are collected from farmers by local government and village committee on the basis of their sown area or level of livestock production. Originally, it was planned to extend this reform from Anhui to the rest of China within several years after the start of the experiment. The State Council hoped to spread Anhui’s rural tax reform in one third of all provinces in 2002. However, recent problems with the system have appeared in Anhui. Although fees and taxes have been reduced, the fall in local revenues have limited the ability of the local government to implement a number of basic mandated expenditures, including the support of schools, health systems, and basic infrastructure maintenance. Recent government pronouncements have actually put the Anhui experiment on hold.
It is likely that successful implementation of such a policy will require substantial reforms in other areas and a basic change in the way that government fiscal resources are shifted to poor areas to support basic services.In one of its most fundamental concessions , China agreed to phase out its export subsidies in the first year of WTO accession. Such subsidies have played considerable roles in assisting with the export of maize, cotton, and other agricultural products into international markets and in this way indirectly supporting domestic prices. In fact, after phasing out export subsidies, several of China’s sectors will likely be subject to much intensive competition from imports. Besides the elimination of export subsidies—which are “Red Box” investments, WTO also puts strict controls on the types and amounts of certain investments. In particular, domestic support to agriculture is divided into “Green Box” and “Amber Box” ones. As is the case with other WTO members, China faces no limitations in the amount that the nation can invest into those activities classified as Green Box, but face carefully circumscribed rules regarding the amount that can be invested into those activities listed as Amber Box policy. Hence, WTO will most likely force China to shift the composition of their investment portfolio. In planning their Amber Box investments, China accession protocol allows a de minimis level of investment that is equal to 8.5 percent of agricultural gross value product. After intense negations this level was set somewhat below that enjoyed by other developing countries but above that allowed to developed countries . Moreover, the list of items that are used to in the computation of China’s AMS is wider than that used by other countries. For example, certain investment subsidies are not counted in the computation of AMS in developing countries. Developing countries also frequently can classify input subsidies for poor farmers as Green Box investments. Hence, on paper, China’s hands appear to be quite firmly tied in the scope of the investments that they are able to make after their WTO accession. However, when one begins to add up the amount of fiscal funds that China has historically invested in these areas, it may be that the de minimis limits will not be binding.The biggest impact could be sometime in the future after China grew and its budget constraint was somewhat relaxed. At that time, however, China’s agreement should be thought of as fairly limiting as it closes future options to support its rural areas in ways that its neighbors in East Asia have done . In a post-WTO environment, China’s leaders will give more thought to how it can best use its de minimis budget. Most recently, a study by Huang and Rozelle shows that although most labor intensive agricultural commodities,rolling bench such as livestock and horticulture, had negative NPRs in late 2001, the time just prior to China’s WTO accession, many land intensive products, including maize, wheat, oil seed crops and sugar, had NPRs ranging from 5 to 40 percent. Moreover, the crops with the positive NPRs are almost all under TQR management, a finding that has important implications how China may want to use its scarce AMS funds. Instead of continuing to support or subsidize these products, China may want to promote these crop productions through productivity enhanced investment measures, such as more agricultural research or transportation and communication investments. Since many of such investments have long gestation periods, the sooner leaders make the investments, the smaller the shock will be after China’s TQR management regime is removed. Although there are no limits on Green Box investments, fiscal constraints will make it so leaders must carefully allocate its investment into non-distorting procuctivity-enhancing activities.
Recent increases in the government’s support to enhance agricultural productivity growth indicate that China already has begun to respond to the challenges posed to China under the WTO regime and believes that investment-enhancing investments will play an important role in making China’s farmers competitive. For example, total agricultural research expenditures in real terms grew annually at more than 10 percent. Growth of these expenditures has grown during the late 1990s . Moreover, China currently considers agricultural biotechnology as one of the primary measures to improve its national food security, raise agricultural productivity, and create its competitive position in international agricultural markets. Public agricultural research investment in plant biotechnology has increased at a rate even faster than the rest of the research sectors . However, despite the growth in spending on agricultural research, investment intensity was only 0.44 percent in 1999, one of the lowest levels in the world . Much more needs to be done. Complementary investments are also needed. For example, financing agricultural technology extension is even more problematic . During China’s reform period, the expansion of the output of agricultural production due to the increased incentives from decollectivization ranks as one of the nation’s great achievements, though a significant portion of that gain arose from the mobilization of inputs. China’s future agricultural production increases, however, may not be able to rely on inputs as much as in the past. Other correlates of development, such as rising wage rates, environmental awareness, resource limitations, and recent China’s WTO accession, mean that there will be pressure on farmers to reduce input use and their production costs. As the nation’s farmers near input plateaus, further growth in output must begin to rely more on technological change and systems must be in place to generate the technology and extend it to farmers. The nation needs to continue its recent trends of investment into rural infrastructure. Over the past several decades, tremendous improvements have been made in areas such as transportation, irrigation, and flood control. These projects should be continued in the future. Recent decisions to improve marketing infrastructure, including attempts to set up market and price reporting information and the standardization of agricultural product, are moving the emphasis of officials in the right direction. In other words, it is exactly these types of investments that the government is supposed to and is capable of making. These are all Green Box policies, meaning there is no limit to the support China can give its domestic agriculture through such productivity-enhancing investments. Such investments may have a number of indirect effects, also. A better environment for China’s producers mean that investors, both domestic and from abroad may be will to transfer in better technology. The government should also invest in the activities that will help promote the import of technology and investment. In some case, productivity-enhancing technology can be more easily obtained by importing new technologies and inputs. In the WTO environment, opportunities exist to reduce the barriers that have been keeping China’s farmers from having access to the lowest cost technology in the world. Restrictions on the imports of seed, pesticides and herbicides and barriers keeping out foreign direct investment in the agricultural input sector should be expected to be gradually removed.