Recent news has given Mao and others reasons to urge hitting the breaks and taking a radical new turn towards the WTO era.

At a January meeting in Shanghai, presidents of 10 Chinese automobile manufacturers decided not to lower the prices of cars although China's entry into the World Trade Organization is pending.

Chinese people, who earn one-tenth of what workers make in developed countries, now buy outdated car models for twice the price of those available in other countries. Therefore, as China opens the doors to the WTO, Chinese consumers have been watching prices slowly go down.

But because of an auto industry decision earlier this year, buyers may not see prices fall as dramatically as they expect.

On January 20, the Chinese Automobile Industry Association publicized a decision by the 10 Chinese automobile manufacturers not to fight a "price war" by lowering prices.

The backdrop: In 1999, auto sales reached their lowest point in three years. An auto center in Beijing could sell about 90 cars a day in 1998 but just 70 a day last year.

Chinese automobile manufacturers believe they can earn more money keeping the current prices than by increasing sales volumes by cutting car prices.

This sort of pricing "conspiracy," dubbed the "self-disciplined prices of a profession," has become a trend since 1998.

It limits competition, intervenes in the operation of natural market mechanics, protects poorly run enterprises and hurts efficient enterprises.

"When a non-monopolistic industry becomes a monopolistic industry through price collusion, it can make money by harming the interests of consumers, which is harmful for the development of society," said Mao, chairman of the board of the Unirule Institute of Economics in Beijing.

In 2006, tariffs on foreign automobiles are expected to decline 75 percent. Not many potential consumers want to wait six years to buy a car. Therefore, manufacturers have hot-boxed customers by fixing prices.

"In this way, Chinese automobile manufacturers will not have much impetus to enhance technology or services or to improve proficiency but instead make efforts to consolidate their 'alliance'," Mao said. "It will do no good to China's economic development."

Another researcher from the Institute of Industrial Economics said auto industry price collusion is "understandable" given China's economic situation.

"A large number of China's State-owned enterprises are faced with economic crises in the transitional period between the planned economy and the market economy," said researcher Zhao Ying.

And someone other than automakers may be to blame. Unduly taxes and fees charged by government departments have increased the cost of making cars and forced manufacturers to keep prices high to keep earning profits, said Zhao.

More than 50 car parts are taxed. The taxes and fees are 15 to 30 percent of a car's price, said Zhang Shiduan, a member of the Ninth National People's Congress and deputy general manager of China's Dongfeng Motor Group.

Zhang said the taxes and fees, not a car's true price, have deterred consumers.

Therefore, he wants governments to adjust policies to promote car purchases and help automakers compete in the WTO era, the Beijing Morning Post reported yesterday.

Auto manufacturers also cited intense competition as another reason for "price collusion." Economists reject this argument.

Competition is so vicious in China because some State-owned enterprises do not mind lowering prices below cost and losing money, said Mao. He said non-State companies cannot absorb this sort of price cut for very long.

China should make more systemic bottom-line changes instead of encouraging price collusion, Mao said.

Because many State-owned enterprises are poorly run, they cannot reach an economy of scale and reduce production costs. They transfer the costs of their inefficiency to consumers.

This trend explains why Chinese buy the most expensive cars.

A price war is inevitable after China's WTO entry, Mao said.

The best systemic auto industry changes cut to the core of China's modern-day economic policy of reforming SOEs.

For one thing, China does not have an anti-monopoly law, which is regarded as the "constitution of a market economy," Mao said. China's law on unfair competition does not contain specific clauses on price collusion and other monopolistic behavior.

"It is difficult for China to issue an anti-monopoly law for now because the State has a monopoly, which is in decline, in certain industries and fields," Mao said. "However, the government should pass laws and regulations against price collusion."

Auto industry regulators are stuck: They do not endorse price collusion, but they want to see the industry they are managing develop.

Although the government's silent approval for price collusion may help State-owned enterprises get out of temporary financial trouble, it will not solve the real problem.

Chinese industries destined to compete with foreign ones should play product improvement and competition instead of self-preservation.

Protecting the national automobile industry does not mean protecting companies that lag behind and those with a monopoly. Neither does it mean protecting a specific enterprise at the expense of consumers, said the two economists.

"For a socialist country like China, protecting the interests of the majority should be the top priority for the government, especially when this activity is in line with rules of market economy," said Mao.

A State Development Planning Commission official who oversees the auto industry declined to comment on the price collusion in China's automobile industry.

But the unnamed official said that "any unfair monopolistic activity will be negated by the government even without a law for anti-monopoly."

The official did not explain how the government will take on price collusion, simply that it will "find the right tools."

But Mao said any price collusion among more than two companies is due to fail because someone will not be able to "resist the temptation of seizing more market share by cutting prices."

Zhao, however, expected that the 10 automobile could retain their "alliance."

(China Daily March 8, 2000)