Vice premier Zhu Rongji continues to enjoy the confidence of foreign analysts and the support of his colleagues in his efforts to engineer a soft landing for the over heated Chinese economy. He has intensified his efforts to rein in free-wheeling provincial and local authorities, restructure the banking and. taxation systems, and redirect investment toward vital infra structural development particularly in interior provinces. Zhu's press at home and abroad has been favourable overall with regard to these initiatives and there seem to be no signs of disunity among the top leadership, all of whom are backing Zhu's policies to the hilt.
The present optimism is based on the fact that, one, the Chinese leadership is displaying a united front, and two, Zhu's initiatives seem to be taking hold. The economy is cooling down, the RMB has strengthened (and stabilised for the time being) and. personal savings are up. Zhu also succeeded in the forced sale of~30 billion yuan worth of Treasury bonds and has made headway in. the clampdown on speculative investments, particularly those by hanks to enterprises in which they have vested an interest.
There is in addition the appearance, at least, of a reassertion of central government authority over the provinces. This has been achieved by groups of senior cadres led by General Secretary Jiang Zemin and. Zhu Rongji which toured the provinces to ram the message home.
The visits by Jiang and Zhu were followed immediately by 10 investigative teams dispatched. to 20-key provinces and centrally administered cities. Some of these cities such as Xian and Guangzhou have lost their right to report directly to Beijing and have been returned to provincial supervision. The logic of this is not immediately apparent, as it would seem a move in the direction of further decentralisation. In reality, the opposite is true. The' right to report directly to the capital conferred provincial-style autonomy on. these cities, autonomy- which has been greatly, expanded ? and abused — in recent nears. This kind of rapid follow-up is partly responsible for Zhu's high reputation abroad.
The investigative teams will monitor the implementation of austerity measures, assess the extent of corruption, and evaluate the impact of certain market reforms which hamper Beijing's goal of establishing macro-economic control over the economy. Fears exist among local reformers that these teams will abrogate autonomous powers which have already been granted and that market reforms will be stopped. Such fears are exacerbated by the tact that many of the team leaders are perceived to be followers of hardline party elders. Understandable as these anxieties are, they are exaggerated, and no doubt reinforced by fear of exposure for criminal activities.
Zhu has repeatedly underscored his commitment to market reform and has given unequivocal assurances that there will be no retreat from the overall objective of this process, i.e. the transition to market economy. He has also stated that no one except the overtly criminal will be punished for activities undertaken before the announcement of his sixteen point austerity plan. By the same token, anyone who persists in forbidden activities from now on can expect harsh treatment.
In the medium term most observers are more cautious. The impact of the austerity measures have not yet been felt, problems in the countryside are far from being resolved, and provincial resistance is still stiff, particularly in those provinces which feel Guangdong has been given special treatment. The continuing barrage of propaganda from the central government stressing the need for provincial cooperation suggests that this has not been altogether forthcoming.
The August 15th deadline for the recall of 100 billion RMB (US$17.3) worth of unauthorised loans has passed without full recovery. Some reports indicate up to two-thirds of the money has been returned. Recovery of the remaining third may be more difficult: much of it has already been spent on projects which have been completed or are near completion. Attempts to recoup these funds will result in massive losses and generate intense resentment. While it is widely assumed that Zhu never expected full recovery by the deadline, and announced it as a gesture to demonstrate his seriousness, he must weigh carefully how aggressively to pursue the outstanding funds, as there are obvious downsides to both courses of action.
The central government has also ordered the closure of 1,000 (out of 1,200) unauthorised development zones, mostly in the coastal provinces. As a draconian measure to discourage further establishment of unauthorised zones it will probably be effective. Zhu issued warnings about the uncontrolled proliferation of development zones (as well as speculative investments) in January and February. However, Deng forbade substantive discussion of the economy in the run-up to the Eighth National People's Congress held in April of this year (and at the NPC itself), effectively precluding any attempt to address the negative aspects of China's tremendous economic expansion. While the reformers succeeded in incorporating market reforms into the constitution, they lost several months in which the problems they must now address intensified. The closure of zones will bankrupt the investors, often without producing reciprocal benefits to, for example, the farmers. In many cases the zones cannot be returned to farmland, and in those cases the money invested must be regarded as lost.
Although these closures may be the only way to prevent further abuses, and are not in that sense necessary, they will create additional discontent without alleviating that which already exists.
Added to all of this is the government's intention to cut its workforce, both centrally and locally, by 20-25 per cent, reduce further the size of the PLA, and reform the state-owned sector ? a move guaranteed to increase unemployment. Taken together these factors indicate that a certain amount of discontent and unrest is likely in the medium term (sa y h to 12 months).
In the longer term, there are grounds for optimism. One of Zhu's highest ariorities, along with the reform of the banking system, which he and his aides are currently working on, is the incorporation of the state-owned sector into the market economy. As a first step, 13,000 medium and large enterprises (roughly one third of the state sector) have been instructed to make this transition over the next three-to-five years. Rationalising the taxation system and creating a western-style regulatory framework for economic activity are also high on his agenda. These measures would underpin the stable and increasingly progressive development of China. The question is whether and at what pace they can be implemented. *
Batey Burn is an investment consultancy specializing in China with offices in Hong Kong, Beijing, Shanghai, Tianjin and Shenzhen. The company's principal business is the identification and structuring of China investments, China market research, and economic and political analysis.
Batey Burn, 701 California 'Tower, 30-32 D'A oirlar Street, Central Hon Kong. Tel: +852 810 0211, Fax: +852 8101'788.