Three months after implementing an austerity programme designed to engineer a 'soft landing' for the overheated Chinese economy, powerful figures including President Jiang Zemin and Vice-Premier Zhu Rongji, governor of the central bank and one of the plan's principal authors, have decided to suspend many of these measures indefinitely. Instead, the central government ? apparently with the full support of Deng Xiaoping ? is now endorsing a goal of "sustained, high-speed and healthy development".
Two main reasons lie behind this shift in emphasis: the austerity measures have had some effect on out-of-control growth but not as much as originally expected and Zhu, in an effort to consolidate power in preparation of the leadership vacuum should Deng Xiao-ping's health suddenly deteriorate, is seeking to appease provincial authorities, many of whom wield tremendous power.
The support .of the provincial leaders for central government policies is essential to the, long-term stability of China's power structure. During the austerity drive, provinces were extremely short of capital because Zhu heavily restricted borrowing by enterprises and projects other than those which passed stringent requirements and were deemed essential to the country's development. Even some vital infrastructural projects suffered. Funds earmarked for profitable enterprises went dry and unhappiness at the provincial level spread. Some powerful local cadres deliberately flouted austerity directives from the central government because their provincial economies were in danger of bankruptcy. In an effort to appease them Zhu relaxed lending regulations and reconnected their umbilical cords to capital from central government coffers. Reportedly as early as last month Zhu had already made capital available to select provinces, including Anhui and Jiangsu which have been pledged funds up to US$1.8bn each, 10 per cent more than they had requested.
Besides severing capital lifelines to projects, the austerity measures had not, as had been hoped, lowered economic growth, predicted to be 13.5 per cent this year. This is a half point more than Zhu's forecast only last month and 0.7 per cent higher than last year. While growth has at least somewhat stabilised, the foreign trade deficit continues to expand with little hope of any relief. Total volume climbed 17.7 per cent in the first three quarters of 1993 to US$129.5bn. Imports surged by 29.9 per cent to US$68.2bn over the same period last year, outpacing exports which only rose a modest 6.6 per cent to US$61.3bn. The cause is an increasing thirst for foreign products which will be difficult to curb without employing draconian trade barriers. To do so, however, will be to risk consumer revolt, something which the authorities naturally want to avoid after the disturbances at Tiananmem Square in 1989.
Even though the larger issue of economic growth remains to be addressed more effectively, there have been some positive signs: year-to-year industrial growth in September dipped below 20 per cent for the first time in 14 months (the year-to-year figure in June was 30.2 per cent before the austerity drive began) and the Chinese financial system is attracting more savings. Bank deposits in July and August rose by US$13.4bn, up US$9.2bn on the same period last year.
To achieve a delicately balanced goal of healthy but rapid growth, the central government is moving away from its authoritarian fiats and regulations to embracing a 'socialist' version of the market economy, now endorsed by both the Party and the government. To this end, President Jiang, in a recent speech on economic development held in Guangzhou, stressed the need to reform the banking, financial and taxation systems.
Progress has been swift so far: a revolutionary and sweeping economic reform plan, addressing Jiang s concerns, was introduced by the State Commission for the Restructuring of the Economy (which reports to Zhu), and is to be put before the Third Plenum of the Central Committee next month. Successful market-economies, such as Japan and Singapore, were reportedly used as models.
The plan calls for a boost in the power of the People's Bank of China to make it a central bank with true monetary control, much like of the Bundesbank of Germany. As well as strengthening the regulatory authority of the central bank, loans for large infrastructural projects, previously the domain of the state-owned banks, will be shifted to sleeker 'policy-lending' institutions to speed-up vital development. Along the same lines, and perhaps more importantly, measures will be taken to screen and evaluate with more discretion applications for loans to enterprises requiring cash to operate or expand.
In an effort to improve the financial system, China announced a first step to unify the dual currency rates, a move that was expected for some time and that will draw international approval. At present there are actually three rates for the yuan: the official rate at about 5.7 to the US dollar, the swap centre rate at about 8.8 to the US dollar and the black market rate, commonly 10-15 per cent higher than the swap centre rate. The central government aims to standardise rates at swap centres around the country by linking them with a quotation mechanism, possibly with Shanghai as the hub. Currently, rates vary at all swap centres because communication is poor – an arbitrager's dream. But in order to change the money, the amount exchanged must be fixed before the beginning of the working day, which makes the process extremely inefficient.
A unified currency will be a first step in making the yuan fully convertible and will give credibility to China's bid to re-enter the General Agreement on Tariffs and Trade.
Under the economic reform plan, a new tax system should become effective on January 1 1994, which would double Beijing's current share of revenue from taxes. Taxes will be unified under the new legislation making all provinces pay the same proportion to the central government. Under current laws provinces such as Fujian, Hainan, and Guangdong, all home to the Special Economic Zones and the latter home to three, have thrived as they enjoy the double benefit of attracting foreign capital and significant tax breaks because of their special designation. On the other hand provinces such as Shandong and Shanxi have goliath money-losing industrial enterprises which receive no comparable tax concessions, only subsidies which encourage inefficiency. Not surprisingly the central government is encountering the stiffest opposition from the provinces with the most to lose, and these provinces are usually home to influential party cadres accustomed to operating in relative autonomy.
On a recent visit to China, Morgan Stanley's chief strategist declared the US investment bank to be "maximum bullish" despite the mixed signals coming from the economy. On the heels of his remark hundreds of millions of dollars flooded the Hong Kong stock market sending the Hang Seng index through the unprecedented 9,000 barrier. Last year the market toiled in the 6,000s and did not break through the 7,000 level until May 1993. If the Hong Kong upsurge is any indication of confidence in China this should be seen as a sign of encouragement for the Chinese central government to ease restraints and continue to pursue a market economy as an only practical means. *
Batey Burn, 701 California Tower, 30-32 D'Aguilar Street, Central, Hong Kong. Tel: +852 810 0211, Fax: +852 81 0 1 788