July 01, 1999	atimes.com

China EDITORIAL: China's economic policy jumble If the confusion and contradictions evident in a June 29 Xinhua-released analysis of the Chinese economy are any indication of real policy confusion among Beijing policymakers, the outlook for the economy is bleak indeed. Thus, let's hope the Xinhua inconsistencies are more due to a combination of the writer's and translator's lack of understanding than to inconsistencies in the Zhu Rongji policy team approaches. Happily, there's some evidence to that effect. Chinese government bureaucrats themselves have complained that growth figures for last year submitted by provincial governments were inflated, unreliable and self-serving - intended more to please central authorities than reflecting the real pace of economic activity. Moreover, even if actual value-added in 1998 was close to the 8 percent figure found in official statistics, a hefty portion of added output went into inventory and is rotting in state-enterprise warehouses. Neither domestic consumption and investment nor export figures in any way, shape or form support an 8 percent sustainable rise in GDP. So far this year, domestic consumption and investment are falling year-on-year, with exports flat at best. Falling as well is the consumer price index, signalling an ever more severe deflationary environment. The only thing up is bank savings by residents, rising at a nearly 20 percent clip. This situation, which uncomfortably reminds one of similar miseries in Japan, is ultimately the result not of confused economic policies in the technical sense but, rather, of political compromise. For years now, state-enterprise and financial system reform have been the stated top priorities of the Beijing leadership, notably President Jiang Zemin and Prime Minister Zhu Rongji. Those goals were reiterated and reinforced by relevant resolutions of the March 1999 National People's Congress. However, Jiang and Zhu still lack the political clout and standing once enjoyed by elder statesman Deng Xiaoping - clout that is indispensible when it comes to making hard decisions with potentially severe social consequences. By best independent estimates, nearly 80 percent of all Chinese state-owned firms are operating at overcapacity, are way over-staffed, produce goods few want and are writing red ink by the gallon. Keeping them alive are politically directed loans from state banks. Those banks, in turn, are nearly all technically insolvent - but continue lending to the state firms while starving productive cooperatives and the private sector of urgently needed credit. To compound a bad situation, the over 200 provincial ''ITICs'' (investment trusts) have been and are continuing to channel foreign credit into loss-making undertakings and are themselves nearly all bankrupt and in for painful reorganization. The problem that Jiang, Zhu and their team face is that phasing out, downsizing and debt restructuring (again as in Japan) will all cost jobs but (unlike in Japan) with virtually no social net for the newly unemployed or the millions unsuccessfully trying to enter the job market for the first time. Thus, early last year, when it became evident that the Asian crisis and a downturn in global demand would all but eliminate the Chinese export sector as a growth engine, massive deficit spending was cranked up to make up for the export sector contribution. Lower interest rates (lowered again for the sixth time since 1997, effective June 1) were instituted to support growth. But in effect those measures, though it was unspoken, amounted to suspension of state-enterprise reform and strengthened the very hand of political opponents of market reforms. Further, faced with job insecurity and seized by fear of an economic downturn, consumers stopped spending and - with a vengeance - started and are continuing to save for a rainy day. This very Japan-style mess is what Jiang and Zhu are now confronted with and must attempt to clean up. Much as in Japan, we believe that neither further monetary easing nor added deficit spending is the answer. To the extent that discussion in Beijing now appears to be centering on just such measures, the short-term outlook for the economy is negative. Throwing more money at bankrupt companies and banks will turn around nothing while at the same time beginning to undermine the sound (to date) fiscal position of the government. Jiang and Zhu must realize that only resumption of a determined reform push will restore foreign and domestic confidence. As we wrote in a recent editorial, they may want to consider a one-time, approximately 20 percent yuan devaluation to help restore the export sector to reasonable health. They may also want to seriously consider proposals for a guaranteed minimum income for Chinese families to ease unemployment fears. But any such moves must explicitly signal the policy objective of restoration of reform momentum.

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