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A landmark agreement that would have left Chairman Mao spitting fire

CHINA TOOK the plunge yesterday and signed a deal with the United States that promises to clear the cobwebs of Communism from its economic system. In a landmark agreement that would have had the late chairman Mao Tse-tung spitting fire, Peking agreed to dismantle almost all of its state monopolies, cut import tariffs and open its agricultural sector.

The pay-off was US support for entry into that most capitalist of institutions, the World Trade Organisation (WTO). Membership will result in reduced tariff rates for China's increasing exports and an irreversible step for Peking into the world's mainstream.

"Entry into the WTO is the most important move since the opening up of China with its economic reform programme in the late Seventies," said Shawn Xu, head of research at a Morgan Stanley joint venture investment bank in Peking.

The deal, reached after six days and nights of talks in Peking, means that tariffs on imported cars, wines and other consumer goods will fall as soon as China is granted WTO membership. Foreign companies will also be permitted to own a controlling stake in telecommunications ventures, invest in the Internet and open bank branches. Right up until Mao's death in 1976, any private sale of goods, including hawking peanuts on the roadside, risked being labelled a crime of counter-revolution.

More significantly, the principle of open competition will be firmly enshrined in Chinese thinking. For a nation that has been attempting to square Communism with market forces for decades, it is nothing short of a minor revolution. Since China emerged from the isolation of extreme socialism in 1978, its more liberal leaders have been forced into convoluted linguistic gymnastics to extol the virtues of what was once "stinking" capitalism. Privatisation has to be disguised as "asset reorganisation" and sackings at over-staffed state factories are "reassignments". These deliberately hazy explanations mean legal clarity and official transparency are hardly the order of the day.

China's surge into the modern economic world could come as early as the end of the year if Peking manages to complete the remainder of its bilateral WTO negotiations quickly. Given that the US deal took 13 years, this is hardly a foregone conclusion, but even the European Union - which is the main outstanding negotiating party - has few quibbles with the deal reached between Peking and Washington yesterday.

But don't think a few pieces of paper and newly enshrined principles will transform China overnight. Some of the WTO provisions are to be phased in over five years. Also, Mao stood for far more than pure socialism. He stood for one-party rule and the dictatorship of the proletariat. Much of his legacy is firmly in place.

What is more, Peking's control of the media and information has emerged virtually unscathed from the WTO deal, and the leadership has made clear with its crackdown on the fledgling China Democracy Party and the Falun Gong movement that it has no intention of loosening its grip.

For Friedrich Wu, chief economist at the Development Bank of Singapore, this lopsided progress is the only way forward for Peking. "At this stage I am convinced that it cannot afford a Western version of democracy. That would only spawn chaos. What China needs are firm, even authoritarian, but enlightened leaders who have a good understanding of the wealth creation process," he said. "As wealth spreads among Chinese citizens, they will demand their democratic rights."

Others, such as Jean-Pierre Cabestan, the director of the French Centre for Research on Contemporary China, believe that China's increasing integration with the rest of the world means Peking cannot separate economics and politics. "I don't see any democratic transition in the foreseeable future. The pressure for more freedom and democracy will continue to increase in China. In the post-Cold War era, political regimes like the ones of China, Vietnam, North Korea, Cuba or Burma look more and more like exceptions. They will sooner or later disappear."

What is for certain is Cuba, Burma, North Korea and Vietnam are not anywhere near joining the WTO.