Emergence as a Global Economic Power } 689
and SOE performance. China’s top leaders recognized that the sluggish and
inefficient operations of China’s SOEs constituted a major drag on develop-
ment and a major obstacle to China’s becoming a leading global economy. In
1994–1995, a major reform of the banking and finance systems was launched to
address the SOE problem. With the exception of three specifically designated
policy and development banks, plus the People’s Bank of China, which served
as the central bank, all banks were turned into independent, profit-seeking
entities responsible for profits and losses and lending money on a purely
commercial basis. The intent was to compel SOEs to increase efficiency and
thus generate profits to repay their bank loans. Banks were to choose lending
projects with the greatest prospect for repayment. In fact, these reforms had
only limited effects. SOEs continued to use their connections to local political
elites to secure loans that often went unrepaid. The specter of closure of local
factories and layoffs of workers frequently prompted local governments to tell
banks to do whatever was necessary to keep enterprises running. As the lim-
ited results of banking reform became apparent by the late 1990s, economic
liberals favoring WTO entry gained an additional powerful argument.
Both economic nationalist and liberal positions attracted support across
all segments of China’s society. The outcome of the protracted debate was
essentially a compromise between the two positions. China would accede to
WTO under terms that facilitated the flow of FDI into China. But it would
also secure lengthy deadlines for market-opening measures and would marry
them with indigenous innovation policies designed to address many of the
concerns of economic nationalists.
From the standpoint of pro-reform leaders General Secretary and para-
mount leader Jiang Zemin and Vice Premier Zhu Rongji, the very competi-
tive pressures that so threatened China’s SOEs were exactly what made WTO
entry a virtue. The SOEs organized under the state ministries were mam-
mothly inefficient and inflexible, and they made chronic and huge claims
on the state’s resources, preventing those resources from going to other
areas that would produce more growth, jobs, and wealth. Several attempts to
address the SOE problem had been made in the 1980s and 1990s, but with lit-
tle effect. China’s reform-minded leaders realized that unless the industrial
SOEs could become more efficient, dynamic, and profitable, the command-
ing heights of China’s economy would remain a major obstacle to China
emerging as a globally competitive economy. Opening China’s domestic
markets to foreign imports would finally force the SOEs to become more
efficient—to swim or to sink.^25
International negotiations throughout the 1990s over China’s GATT or
(after 1995) WTO access were complex and difficult. Initially, China was
not familiar with GATT mechanisms and had much to learn. Beijing did
not initially understand, for example, that re-entry into GATT would
require substantial negotiations with each of that organization’s major