China Pulls Hard on Reins To Slow Runaway Inflation

IN recent days, Beijing has declared a war on inflation that analysts say carries high political and economic stakes for China's ruling communists.

After months of wavering over steps to curb inflation and runaway growth, a cash crisis in the banking system and outbreaks of rural unrest forced the government to act.

In a report by Wen Wei Po, a pro-China Hong Kong newspaper, Beijing detailed 16 belt-tightening measures aimed at taming 20-percent urban inflation. Some Chinese analysts claim the measures are harsher than those taken in 1989.

At that time, rising prices and hoarding of consumer goods precipitated government economic tightening and a power struggle that led to the Army massacre of pro-democracy demonstrators in Beijing and other cities. To defuse new turmoil, the plan calls for tightening bank credits, freezing price reform, cutting government spending, and restricting real estate speculation.

Last week a senior Chinese cadre was summoned urgently to a briefing where leaders of work groups were asked to play down economic trouble and ``concentrate on propagandizing the positive side and the very good situation so as to avoid social shocks,'' the official said.

Zhu Rongji, the government's economic troubleshooter and new head of the People's Bank of China, has taken steps to create a Western-style institution that implements monetary policy and operates with a measure of political independence. In the past, political dictates drove Chinese economic policy. Mr. Zhu has blocked banks from raising interest rates independently, barred payment of commissions for loans, and ordered an end to bank-funded businesses. In addition, the government has raised interest rate s for the second time in two months.

The bank has hinted its intention to rein in two chaotic infant stock exchanges. In recent months, financially troubled state enterprises have scrambled to avoid collapse and rushed to issue shares as a way out of insolvency.

Zhu, a driving force in Deng Xiaoping's market-style reforms, achieved an unprecedented consolidation of economic power when the previous governor, Li Guixian, was blamed for the financial turmoil and ousted from the bank. Mr. Li was linked to communist conservatives headed by the ailing premier, Li Peng. Since taking over the bank, Zhu, a former mayor of Shanghai, has promoted moderate technocrats and political allies to key posts.

`IT'S a power struggle. They had to do something about the financial mismanagement,'' says a senior Western banker in Beijing. ``They intended to send a message to officials in the provinces that if they don't shape up, they're next.'' But Chinese and Western analysts caution that Zhu is exposed politically with the economy in crisis and could become expendable like former Prime Minister Zhao Ziyang. ``Don't place too high a hope on Zhu Rongji,'' a Chinese analyst says. ``He was educated in the school of

the command economy and under pressure may not turn out to be a 100 percent market-economy supporter.''

Chinese observers also warn that China will face a new cash crunch later this summer when the financially strapped government must purchase quotas of summer grain from farmers. This year, provincial and local officials prompted outbreaks of rural violence when they used agricultural funds for real estate speculation and were forced to issue IOUs to farmers.

When desperate peasants were unable to cash the IOUs, they rioted in several provinces. Farm observers estimate that there have been more than 200 rural antigovernment disturbances since late last year. Economists also warn that the new belt-tightening program will restrict enterprises' ability to get loans. Those factories provide crucial jobs to millions of unemployed farm workers. ``The point of the measures is to protect the large- and medium-sized enterprises. Rural enterprises will suffer unless th ey can find ways to get loans,'' a Chinese farm expert says.