China's entry into the World Trade Organization would risk economic contraction and inflation in the short term, and pose problems for state-owned enterprises (SOEs), a leading China expert in Hong Kong said.
"In the short term, a WTO deal will be extremely contractionary and inflationary for the Chinese economy," said Merrill Lynch's head of North Asia economies, Ma Guonan.
"I doubt the export potential will be enhanced much more as a result of the WTO issue. But WTO will mean reduced trade barriers and, therefore, increased import competition which will mean trouble for many SOEs," he said.
"In the short term they have to pay the price of increased competition and, therefore, there will be some pressures on the currency," he added.
"I would not be surprised if some of the sectors in China ... are not happy about the deal," he said. "But overall I think the leadership in China finds it's in China's interest to clinch a deal soon on reasonable terms."
China broke off WTO talks with the US in May after NATO planes bombed the Chinese embassy in Belgrade. The two sides resumed discussions last Monday but failed to make headway.
Time is running out for China to join the WTO before a new round of global trade negotiations starts in late November.
Ma said the market tends to believe that China's expected WTO entry will be positive.
"I think in the long term that could be true because WTO will force the pace of the SOE reforms and, therefore, improve the efficiency of resource allocation in China for the long term."
He believed Washington and Beijing were close to a deal on China's accession, with only small differences left.
"However, time's running out and we all know the time's very tight and both sides will have to make an effort to close a deal. My sense will be that both China and the US, the Clinton administration, have [the] desire to close a deal," he said.
State enterprises and the banking sector hit by non-performing loans would hamper long-term growth potential.
"I think the Chinese government could afford to recapitalize the entire banking sector overnight, if necessary. So existing non-performing loans are not a problem," he said.
"The problem is what will happen down the road or after the recapitalization. Will we see more new non-performing loans? So that's a very important question the government will have to answer before it goes ahead and recapitalizes the entire banking sector," he said.
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