Economic boom on verge of bust, Chinese fear

June 20, 1993|By Robert Benjamin | Robert Benjamin,Beijing Bureau

BEIJING -- The highest-flying economy in the world is searching for a soft landing.

But in urban apartments, far-flung villages and the upper echelons of the Chinese Communist Party, fears are mounting that China's rapid economic expansion of the past year could descend into another bout of social and political chaos.

"I'm really worried that China's economy is about to collapse," says Guo Jiankun, a 38-year-old magazine editor who has just expressed his lack of confidence in China's currency by exchanging his entire life savings into U.S. dollars.

"You collect, I collect, he collects, and anxiety collects for the peasants," complains a scroll composed by a farmer in Sichuan province, China's most populous region, where some peasants this month went on a rampage to protest official fees that are squeezing them to the point of desperation.

"We must pay attention to lessons from the relatively serious economic setbacks of the past," a recently published speech by party boss Jiang Zemin warned in an apparent reference to the 1988 economic downturn and rising inflation that fueled the 1989 Tiananmen Square protests.

So far, such worries have not translated into a dimming of the Chinese economic explosion. The growth rate of China's industrial output remains above 20 percent. Overall economic growth likely will exceed 10 percent this year, for the second year in a row.

But the boom's underside is coming to the forefront: rapidly increasing inflation, a credit crunch from too much borrowing by failing state enterprises, uncontrolled speculation in real estate and black-market ventures, and plummeting faith in China's currency.

These warning signals have been building for months. But equally apparent have been the inability and unwillingness of the Chinese leadership to rein in the economy.

China's central government still lacks effective fiscal levers to control its free-wheeling provinces; its central bank can't even limit the lending of its provincial branches. Moreover, until just recently, no top leader would risk being cast as a political foe of Chinese patriarch Deng Xiaoping's accelerated economic reforms by issuing a go-slow call.

But even Mr. Deng, who set the current boom in motion early last year, reportedly warned this month: "In the course of quickening development, people should not be encouraged to seek unrealistically high speeds. . . . Violent ups and downs will not be conducive to the sustained and steady development of the economy."

Now, according to a Beijing-backed newspaper in Hong Kong, the party's Central Committee plans to meet within the next few weeks to try to figure out how to reassert control over the economy short of slamming on the brakes so hard that the country is sent into a tailspin as in 1988.

"They need to regain the driver's seat," says a European economist here. "Something has to be done to defuse the situation."

The central government has raised interest rates by a marginal degree. It also decreed an end to the founding of new development zones, hundreds of which have proliferated during the past year's speculative binge. Last week, it indicated that it may have to return to forcing citizens to buy state bonds in order to raise enough cash to meet mounting state debts.

But the moves to date have been too little, too late.

China's retail sales last month were 27 percent higher than in May of last year, the highest rate since the panic buying days of early 1989. Investment by state-owned companies during the first five months of this year was 70 percent higher. Chinese imports so far this year are up 27 percent and growing three times faster than exports.

A recent move to end controls on the currency markets used by corporations immediately resulted in a more than 25 percent devaluation of China's currency. The black-market exchange rate is now almost twice the state-set rate.

But the most closely watched figure these days is China's inflation rate, which many analysts consider the best barometer of the potential for social disorder here. After three years of relatively low inflation, the official rate in major cities has been more than 15 percent this year. Many think the actual rate has been much higher.

Some analysts say that with unprecedented economic growth, China can withstand this level of inflation.

They say many urban Chinese are somewhat buffered from inflation by the substantial amount of unreported income from second jobs, under-the-table payments and private speculation of all sorts. Additionally, nonstate wages in the very fastest-growing regions, such as Guangdong province, may rise 50 percent this year.

But there is a growing sentiment that inflation is bound to increase -- a mass psychology that could send prices and wages into a "potentially disastrous spiral," says the European economist. Panic buying is not evident; stores are full of goods. But many Chinese have higher expectations than ever, expectations that are not being met.

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