mok@fortsc.enet.dec.com (Charles P. Mok) (02/09/91)
Inflation Fear Returns in China; Government Blames Inefficieny Investor's Daily (World Economy Section). February 6, 1991 BEIJING (Reuter) - The specter of renewed inflation has returned to haunt China, recalling memories of the panic buying that helped to spark the social unrest in 1989. The main culprit is inefficiency in the economy, according to a report from the State Statistical Bureau published in official newspapers yesterday. "Social demand is gradually recovering, production is increasing by the quarter, but making progress in improving economic efficiency has been slow," the Economic Information Daily said. "Within economic development, the potential for inflationary pressure has increased," it said in an analysis based on the bureau's report. Loss-making state enterprise continue to make products that no one wants to buy, Western diplomats say, and even efficient industries are hampered by chronic shortages of energy and raw materials and by a transport network that has trouble moving goods to where they are needed. If demands picks up, supply may not be able to keep pace, resulting in higher prices, the diplomats say. "The old problem of low economic efficiency has not yet been changed. Add to that the new pressure of potential inflation, and out economic task will still be arduous," the newspaper said. Fierce inflation in 1988 and the first half of 1989 - approaching 30% in cities - contributed to the publci anger at Communist authorities that resulted in pro-democracy demonstrations and unrest. The army crushed the challenge to the party's leadership in June 1989 when it cleared Tiananmen Square with tanks and guns. Economic authorities clamped down on inflation with an austerity program that brough price rises down to 2% last year while stifling economic growth. "People in government are talking about 8% inflation this year, which people can live with," said a Western diplomat. "If it goes over 10%, however, that's when you get into trouble with rekindled inflationary expectations starting massive demand that can't be met with increased supply." "If they can manage inflation, they could have a very good year. If they don't manage it correctly, it could be disastrous since there's so much cash in the system," he said. Diplomats say they anticipate a sharp tightening of credit to try to head off inflation. The government relaxed credit last year to stimulate the economy, resulting in a huge amount of new lending. But much of the new lending was not used productively. "Loans were thrown out with reckless abandon...but the funds were stagnant," said Economic Information Daily, adding that credit often did not go where it would do the most good. Another key problem was China's lack of a system for rewarding good enterprises and letting bad companies fail, it said, quoting a State Statistical Bureau analysis. Many poorly managed enterprises were simply taking new loans in order to pay off old debts, it said. The State Statistical Bureau was encouraged by the upturn in demand, however, and cited a 10.1% increase in investment by state-owned enterprises in 1990. It pointed to investment in 200 key construction projects.