Trade Reform Put on Back Burner

CHINA: DAMPENING THE DEFICIT

CHINA has halted the reform of its foreign trading system in an effort to reduce its swelling trade deficit and help forestall a financial crisis, analysts say. The pullback on trade reform is part of the price China must pay for its crackdown on liberal dissent, Western diplomats and other analysts say.

China's trade deficit has expanded at a record pace this year, in part, they say, because foreign buyers have canceled purchasing contracts out of fear that the repression and continued turmoil will disrupt future supplies. The trade shortfall logged $6.57 billion for the first seven months of this year, the Customs Administration says.

To stanch the loss of critical foreign exchange, China has recently increased restrictions on imports and shut down exporters who profit at the expense of China's export earnings. Such measures have reversed reforms that spurred a nearly five-fold jump in trade since 1978 by granting local officials and trading companies decisionmaking powers.

Since crushing the democracy movement in June, China has also faced a freeze in foreign lending and a severe drop in tourism revenues and foreign investment. These pressures on China's foreign exchange will hamper its payment on about $40 billion in foreign debt, Chinese officials say. Beginning next year, China must begin making markedly higher payments on its debt as the grace period for many of its loans ends.

To maintain its foreign exchange reserves, China could expand its barter trade with the Soviet Union and Eastern Europe, said a Central Intelligence Agency report released last month on China's economy. Beijing could seek from the East Bloc the fertilizer, iron, steel, and other raw materials it has purchased with hard currency from the West, the report says.

Chinese officials acknowledge that the overseas reaction to China's anti-liberal campaign has worsened problems for the domestic economy.

``We are facing severe financial difficulties,'' Vice-Premier Yao Yilin told leaders of China's nominal parliament last week. He pointed particularly at China's weak monetary controls, high inflation, and yawning budget deficit.

``We have no choice but to vigorously raise revenue and cut spending.... The whole country must undergo a period of austerity,'' Mr. Yao said, according to the party newspaper, People's Daily.

Beijing is likely to squeeze imports for the remainder of 1989 with the same hard, centralized grip that it used in 1986 and 1987 to reduce large trade deficits, Western diplomats say.

Wielding strict control over foreign exchange, Beijing can effectively curb the volume of its imports. Consequently, with one stroke it can recall the powers it delegated to lower-level officials during reform.

Yet China has already drastically reduced its imports of consumer electronics, luxury items, and other nonessential goods. So it must cut back on purchases of the sophisticated, high-technology goods and machinery from abroad that would raise its competitiveness in manufacturing and eventually help expand exports, says a Western diplomat on condition of anonymity.

``China can probably bring its trade back into balance with the same strong-arm practices it has used before. But it will be very painful,'' the diplomat says.

Beijing plans to stimulate its export earnings by closing down many of the 5,000 companies licensed to sell goods overseas, says Liu Xiangdong, spokesman for the Ministry of Foreign Economic Relations and Trade.

In a gambit of market economics that hurt China's trade balance sheet, exporters have competed fiercely to offer foreign buyers the cheapest price for domestically made goods. By limiting the number of foreign traders and regulating such transactions, Beijing plans to eliminate the competition that has reduced its earnings, diplomats say.

Beijing will also enact a ``foreign trade system'' that will strengthen state regulation of exported goods, from research and development to final shipment, says Mr. Liu. While this system may improve the quality of China's exports, it is likely to wrap such shipments in an entanglement of red tape that will hamper export growth, the diplomats say.

Chinese officials acknowledge that the ultimate solution to foreign trade difficulties is also the measure that would streamline the domestic economy: price decontrol.

For instance, imports swelled four times faster than exports in the first half of this year as companies rushed to buy overseas fertilizer, steel, and other production goods that are chronically scarce at home. Such goods sold domestically at low, state-fixed prices would be in ample supply in China if prices reflected market forces, foreign analysts say.

Also, before Beijing renewed controls on exports late last year, many traders rushed to sell these same regulated goods overseas, profiting from the wide gap between the low state-fixed price and the higher international price.

Meanwhile, many domestic manufacturers cut back production because of severe shortages of these raw materials.