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From the vantage point of his sleek Beijing offices, James Ding has reason to be optimistic about the future.

AsiaInfo, the Nasdaq-listed Internet company he founded with a group of fellow Chinese students in the US in 1993, can expect strong growth in the coming year in the two areas it has focused on - building Internet infrastructure and creating e-mail and accounting software for the Chinese market.

Though his company's share price has fallen along with the general plunge in US-listed technology stocks, Mr Ding predicts a 40 per cent growth in revenue next year.

'The crash [on Nasdaq] is not bad for us, it will give us an opportunity to grow,' he said.

But there is one potential cloud on his horizon. 'The tension between the US and China over the spy plane is bad news . . . this is the one thing that is affecting China-related stocks right now. Businesses like ours require a peaceful, non-confrontational environment.'

There are fears that public anger against the US could be directed at companies having some association with the US, even if it is only a Nasdaq listing.

Jack Gao, chief executive of Microsoft in China, recalls the public anger against the company, which was regarded as symbol of the United States, in the aftermath of the Nato bombing of the Chinese Embassy in Belgrade in May 1999. 'It is important that this issue is resolved quickly, and good relations are restored,' he said.

The current row over the spy plane will be resolved but business people and academics in Beijing emphasise the importance of US support for China at its present stage of development.

Stable relations between the US and China are important in more fundamental ways than the performance of businesses with links to the US. 'The way relations with the US develop could have a very big impact on the pace of reform in China,' observed one well-known economist.

'If the US is perceived to be taking a hard line on China, as the Bush administration seems to be, this will fuel nationalism and could lead to demands to slow down reform.'

One way that hardening US attitudes could have an impact on economic reform is through further delays to China's entry to the World Trade Organisation (WTO). Though there is a general belief that the negotiations should conclude by late autumn, this is by no means certain. While ostensibly about trade, the accession negotiations are at heart about politics.

An early indication of US attitudes will be seen in the run-up to the June 3 congressional vote on the annual renewal of China's status as a normal trading partner of the US. If tensions escalate, hawkish legislators will try to block the June vote, putting further strain on relations between Washington and Beijing.

If WTO entry is delayed, and trade relations with Washington come under a cloud, it could deal a mortal blow to China's modernisation programme.

Without the external stimulus of having to face competition from abroad, it will be difficult to muster the political will to overcome the inevitable opposition to reform from the interest groups which have prospered from China being a closed economy.

'We need some push for the transition of the Chinese economy to a market economy, and that push is the WTO,' said Shawn Xu of China International Capital Corp, a joint venture investment bank controlled by Morgan Stanley and China Construction Bank.

'After 20 years, the central Government no longer has the resources to push through the reform process - it needs help, and that help is the WTO,' he said.

However, most analysts remain optimistic that the reform process is unstoppable. 'There is no return from reform now,' said Professor Li Yifu of Beijing University. 'It is impossible to take back what has already been given.'

A Western investment banker in Beijing concurred. 'I can't see them ever turning back,' he said.

China's modernisation programme is at a critical juncture. It has gone too far along the road to a market economy to turn back, but to proceed further, it requires external help. Without this, the reform process would be left in a strange no-man's-land, exhibiting the worst elements of a state planned economy and a free market economy.

The social shocks caused by the transition to a market economy, as well as the inevitable income disparities that have been created, have resulted in a questioning of the reform process.

Conservative and nationalist voices have also asked why outsiders should be allowed to operate in the Chinese economy. As long as the reforms do not lose momentum, these voices will remain on the margins. But any events which slow this process will allow opponents of reform to gather force. Hostile US-China relations, and a delay to China's WTO entry bring this danger.

One respected economist laid out a worst-case scenario in which a slow-down of reforms could lead discontented rural farmers and laid-off workers from the state-owned enterprises to join forces and form a conservative, anti-reform bloc.

The modernising, pro-economic reform forces require a stable, external environment as well as support from the world's sole superpower to carry through their agenda. Equally, if the United States is interested in change in China, the best way to do this is to provide a stable international environment for economic reform in China.

Rationally, it is in the interests of both governments to resolve this issue speedily. The danger is that hardliners in Washington and Beijing will prevent this from happening.



US help and competition essential to nurse reform