Problems threaten China's economic miracle Crushing inflation, high unemployment confront leaders

November 13, 1994|By Ian Johnson | Ian Johnson,Beijing Bureau of The Sun

BEIJING -- These should be happy times for Fang Guanghua. The 34-year-old accountant has seen his monthly income rise 35 percent over the past year. Gone are the days when he used to stock up on the winter cabbage that is now flooding into markets here; now he buys fresh, imported vegetables all winter long.

Yet Mr. Fang feels uneasy. Inflation in urban areas is now 27 percent, and his employer, a steel company, is threatening layoffs. True, his fat pay increase means he's still ahead of inflation and the layoffs are probably a long way off, but he can't seem to shake nagging doubts about the future.

"I guess I can stand the price rises, but things are changing for us so quickly. No one knows where one stands anymore," he said.

That uncertainty has spread beyond ordinary Chinese citizens.

Many economists and commentators are starting to paint an increasingly pessimistic portrait of Asia's economic miracle. While few believe that China is headed for serious turmoil or economic collapse, the country is being challenged by serious problems such as unsustainably fast economic growth, chronically high inflation and rising unemployment.

"What's amazing isn't that China is having these problems. It's the suspension of disbelief that took place in the West last year. Growth rates were projected out linearly, and conclusions drawn that China would be the most powerful country in the world in a few years," said a high-ranking Western diplomat in Beijing.

Complicating these problems is what some see as an ambivalence among top leaders toward reform. The state, for instance, recently canceled futures markets for rice and rapeseed, saying that people were speculating on the grains' prices. Local government officials, meanwhile, are pressuring the state to give up its year-old program of fiscal austerity that was supposed to cool China's overheated economy -- but which has been only partially successful.

The result has been not an end to reform, but a slowdown.

"Because of unrest, slow reforms are happening now whereas before fast reforms took place," said Lu Jianhua, a sociologist at the Chinese Academy of Social Sciences.

The problems that have slowed reforms are nowhere more evident than in China's bustling food markets. Last fall, the government increased the amount it pays farmers for their grain crops by 44 percent to help offset their declining standard of living and as a move toward removing controls.

The predictable result was that food prices skyrocketed. Pork prices, for example, increased 50 percent.

Prices also shot up because of a string of droughts and floods, as well as a new 17 percent value-added tax.

Economist Daryl Ho with Jardine Fleming Securities Ltd. in Hong Kong says that once those one-time factors work their way through the system next year, the overall rate of inflation should slow rapidly.

But longer-term core inflation may not shrink so rapidly, Mr. Ho said, and may even be set to increase, despite the government's official policy of tight money.

The reason: Tight money in China doesn't rely on higher interest rates like in the United States. Instead, China tightens the money supply by ordering banks, which it controls, to make fewer loans. At the same time, however, it tells the banks to continue making low-interest, long-term loans with loosely defined payment schedules to China's biggest employer, the state-run enterprises, many of which would go bankrupt without them.

The result: Cheap money continues to flow to the money-losing state enterprises even though the effect is inflationary.

Mr. Ho predicted earlier this year that Beijing would succeed in squeezing credit and bringing inflation under control, but now he's not so sure.

"My analysis assumed the central bank would continue a tight monetary policy. We're not sure that's happening now. The whole scenario will be different if they really are easing up. If this happens, then inflation will build back up after it drops sharply next year," Mr. Ho said.

Indeed, a 24.3 percent surge in industrial output in October -- the highest month-on-month rise for more than 10 years -- reinforced concerns about the impact of the government's efforts to keep the state industries afloat.

Bears predict higher inflation based on recently released money-supply figures. They showed that the broad M2 money supply -- which includes money in bank accounts as well as in circulation -- grew 37.1 percent during the first nine months of 1994 over the same period last year.

Other figures also point to a country that has evaded the government's year-old austerity program. Local city and provincial governments still seem to be building roads, airports and other projects at a record clip. Fixed-asset investment soared 43.9 percent during the first three months of this year.

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