China's slower road to reform

The leadership's September meeting may signal desire for social

Four months ago, Premier Zhu Rongji charmed Americans with a vision of a China open to economic reforms. Donning cowboy hats and telling jokes on tour in the US, he was dynamic, assertive, and ready to give American businesses access to his 1.2 billion compatriots.

Now, he appears to be struggling to keep those reforms rolling.

Some diplomats and China watchers say that Mr. Zhu, battered by a string of international and domestic setbacks, no longer holds the reins of economic and fiscal policy.

"There's no question he's been brought down a peg or two, but exactly how much is not clear," says one Beijing-based Western economist who has regular contact with government officials.

China's gross domestic product continues to drop. Down from the double digits of the early 1990s, GDP reached 7.8 percent last year, lower than the government target of 8 percent. And the impact of a 200 million yuan ($24 million) government infrastructure spending that boosted growth in the first quarter of this year to 8.3 percent fizzled in the second quarter to 7.1 percent and is expected to continue dropping.

Analysts say that economic reforms will be slowed because Zhu has ceded power to more conservative officials in the leadership. While the basic outlines laid out by Zhu to make state-owned enterprises more responsive to market forces will likely remain, implementation will be compromised to soften the blows of restructuring, they say.

On Monday, China's legislative body, the National People's Congress, unveiled a new stimulus package. It will issue another $7.2 billion bond for infrastructure spending, increase unemployment benefits to some workers, and tax interest earned on personal savings accounts.

But that may not be enough, some analysts say. Falling exports, rising unemployment, systemic corruption, and nearly two years of deflation threaten to derail China's once dynamic economy.

Worried about job security and falling medical and pension benefits, normally thrifty Chinese are even more reluctant to spend the $720 billion they have saved in banks. Soaring domestic stock markets set off by encouraging government policies have weakened as investors have realized that the companies they're putting money into - nearly all state-owned enterprises - are fundamentally flawed.

China's Communist Party worries that with its ideology now only a shadow, its legitimacy rests on continued economic growth. Already, this year has seen a string of unprecedented protests by disgruntled workers, defrauded investors, and the Falun Gong sect. In response, the government has stressed the importance of party ideology among its members and cracked down on any form of dissent.

All this happens as the government prepares to celebrate its 50th anniversary, during which it hopes to show off its growing strength, even barring mixed-fuel cars from the capital during the week before the celebration to ensure Beijing's polluted skies are clear enough for fighter jets to be seen. While rumors that Zhu would be forced out or would resign first surfaced at the end of June, some say Zhu will remain in office until after the Oct. 1 anniversary.

"Even before his feathers were cut, the economy was being pushed and pulled between different points of view," says Nick Driver, head of the Beijing-based consulting firm Clear Thinking. "President Jiang Zemin had already reined him in because there were too many things going on too quickly and too many people not liking Zhu Rongji." Mr. Jiang took the economic and finance portfolios away from Zhu during the annual leadership retreat to the seaside resort of Beidaihe in mid-August, Mr. Driver says sources within China's cabinet told him. "It is safe to say that the Beidaihe beach strolls ... were not amicable chats," Driver says.

Zhu rose to power because of his economic acumen and ability to streamline government bureaucracies. But his failure to clinch entry into the World Trade Organization, the bombing of the Chinese Embassy in Belgrade, and his botched attempt to change the state's inefficient grain distribution system have weakened him.

When he was named premier in March 1998, Zhu promised to revive debt-ridden state-owned companies in three years, streamline government, and curb corruption. While he has cut the central government by about half, his two other goals remain distant.

State-owned firms have narrowed losses, but continue to perform badly. About 80 percent of goods are overproduced, and price wars have cut the costs of merchandise to the point where the government has ordered a ban on any new investment in the production of some electronic and luxury products.

Regional governments continue to ignore Beijing's orders to modernize and shut down inefficient plants. Factories making faulty products continue to receive protection from officials eager to keep workers employed. Government estimates say there are 200 million "surplus laborers" in the countryside, and official unemployment in the cities is 3.1 percent, though Western economists say the number is as high as 10 percent.

And state-run banks faced with billions of dollars in loans that will never be repaid are no longer able to hold up the deck of cards.

Whatever Zhu's situation, the government will work hard to at least maintain the appearance of stability. During a recent US congressional visit to Beijing, Vice Premier Li Lanqing did not show a great involvement in economic issues, indicating no change in command, diplomats say. And at a press conference last week, Singapore's minister for trade and industry, George Yeo, said that Zhu's role was "not at all" lessened. Zhu is widely respected by average Chinese who value his blunt, direct manner - a sharp contrast from the typical Politburo pap - and by investors who see him as the only man capable of fixing China's tottering economy.

The extent of the shift will be hard to gauge until this fall's plenary session of the Communist Party, where the next step in economic reform will be hashed out. Likely to be discussed are further layoffs and efforts to put a larger share of state-owned enterprise holdings into the stock market. A reorganization can only be inferred by subtle signals. Says one Western diplomat: "Everyone tries to read tea leaves."

(c) Copyright 1999. The Christian Science Publishing Society