Losing Momentum

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TERRY McCARTHY ShanghaiWhen powerful men fly too close to the sun, two things can happen: they veer away in time, or they come crashing down. China's most daring high-flyer, Premier Zhu Rongji, has come very close. He likes the altitude--it energizes him--and over the last five years he seemed to defy gravity as he pushed his country's economic reforms further and faster than anyone thought possible. To his many admirers at home and overseas he was the enlightened mandarin who could single-handedly break through the red tape and propel China's economy into the next century. Even the regional economic crisis didn't seem to faze Zhu, as he laid out in March an ambitious program to make state-owned firms profitable, restructure the debt-ridden banking system, halve the bureaucracy and privatize the housing market--all by the year 2000.But six months later Zhu-phoria has virtually disappeared, and there is an unmistakable smell of scorched feathers in Beijing. Zhu has hit his ceiling.With the negative g-force of some 200 million urban and rural unemployed pulling at him, a sharp decline in exports and foreign investment, a change-resistant culture of corruption and an unfriendly economic environment in the rest of Asia, Zhu has been forced to reverse or put on hold all his key reform policies from March. Mounting reports of labor unrest around the country terrified his comrades in the leadership, whose fear of luan--chaos--approaches the phobic. With no functioning social welfare net, argues a Chinese economist, Zhu's reforms were suicidal.There has been no open criticism of the man known simply as the Boss. Sometimes silence is more ominous. At a meeting of the Communist Party leadership two weeks ago, the official topic for discussion was improving farmers' welfare--the issue of preventing state industry and the entire banking system from disappearing into a black hole was not even mentioned in the final communique. But everyone knows where the buck stops in China's economy--not least Zhu himself, who coined his own version of Harry Truman's motto before he became Premier in March: I have 100 coffins: 99 for corrupt bureaucrats and one for myself.The first hint of backtracking came in July, when the government officially denounced the wrong trend of selling small state-owned enterprises, because too many workers were being laid off by the new private owners. Instead, banks were told to continue policy loans to some loss-making factories just to keep people at work. So much for bank reform. Then it became clear that the lifting of state-subsidized rents (the average Chinese family pays $12 a month for housing) would have to be postponed because free-market house prices were unrealistic. In September minimum selling prices were imposed on a wide range of products, from cars to sugar, in an attempt to stop factories from dumping excess inventory at below cost (the controls are unenforceable, according to economists). The backtracking received an official stamp on Oct. 19 when authorities released a speech President Jiang Zemin gave over the summer on the need to stop widespread sell-offs of state-owned firms. When faced with uncertainty they hunker down, says David Shambaugh, a China expert at George Washington University and the Brookings Institution. Central planning, price controls--that's what they know. It is safer than the unknown.The steely hand of control is also reaching out into the political arena: the upbeat talk of new openness during U.S. President Bill Clinton's visit in June isn't heard much anymore. Surveillance of dissidents has continued, and in September police detained activists in four provinces for attempting legally to register the China Democratic Party, which would have been the country's first opposition political group. Two weeks ago Jiang issued a call for greater political control at the village level--a far cry from the rural elections China holds and sometimes hints are the first step toward democracy.If this summer's Great Leap Backward has forced Zhu to eat humble pie, few are gloating. In the long run it is simply too important for China and the world at large that the reforms succeed and the country remain stable. With economic recovery in the rest of Asia still tentative at best, any sign of a crash in China could plunge the whole region into worse chaos. Although the yen's recent rise has quieted talk of a renminbi devaluation for the time being, economists say that a continued drop in China's exports could force Beijing's hand anyway. This would not only represent a great loss of face for Zhu personally, but would probably cause havoc in regional currency markets as well.Nobody is arguing that the country is poised to return to central planning reminiscent of Mao's era. Nor, even if things go badly, is Zhu likely to be airbrushed out of the official line-up, as regularly happened in times past. Most people give Zhu the benefit of the doubt, says a Beijing official close to Zhu's advisers. They know he faces severe difficulties and are willing to give him time to reach his goals.PAGE 1  |  
A writer rails against corruption
The obstacles to reform are immense. The Asian crisis came at a bad time for Zhu, but his problems are home-grown, starting with a pervasive climate of corruption and a destructive get-rich-quick attitude that has led to a frenzy of state-owned-asset sales by cadres who show little concern for laid-off workers or for new productive capacity.Zhu Rongji is a good man, honest, with good ideas, says a mid-level government official in Suzhou, an old silk-producing city 80 km west of Shanghai. But even he is too weak to take on all the problems in China. The official details the extent of corruption, industrial inefficiency, nepotism and financial chaos that plagues his city, a microcosm of the mess China is now in. Top cadres routinely steal houses for their children, he says, while others divert business loans to their own accounts and then walk away from the repayments, declaring bankruptcy. It goes right to the top. The local party secretary's office was so expensively decorated--they say it cost $200 per square meter--that it was better than President Jiang's office. So when Jiang came for a visit they had to arrange a meeting in a hotel instead.The extent of corruption at the national level emerged a few weeks ago in a report on state grain purchases: of the $65 billion set aside to buy grain from farmers since 1992, $25 billion, or nearly 40%, had disappeared. Investigators found much of the missing money had gone into luxury condominiums, futures trading and purchases of cars and mobile phones--the kind of graft that makes the short-tempered Zhu go ballistic.So how far backward will China leap? The answer, say economists, depends on how much the world economy continues to deteriorate. China's exports fell 6.7% last month, and foreign investment is predicted to shrink 30% for the year. To stimulate demand and keep people working, Beijing has embarked on a huge program of domestic spending. This New Deal strategy calls for investment in infrastructure, notably highways, railways, irrigation and telecommunications networks, and is being financed both with bank lending and government bond issues. Already Beijing is proudly pointing to an 8% rise in industrial production for the first nine months. But economists say much of the increase is going into warehouses as unsold inventory, and they question how long such investment can continue.Meanwhile prices continue to drop, despite the imposition of minimum price controls designed to counter deflationary pressures: the retail price index shrank 2.5% in the first three quarters. Officials have pledged to achieve the Holy Grail of 8% growth this year, set as a national goal by Zhu in March. But with growth just 7.2% in the first nine months, the chances of hitting 8% for the year are receding. Zhu knows better than anyone that China cannot keep propping up loss-making industries, but for the time being his hands are tied by his control-minded colleagues.It is the old pattern in China, says Joe Zhang, head of China research for hsbc Securities in Hong Kong. Three steps forward and two steps back. At the moment we are back-tracking. Others are even less sanguine. Government investment was 25% of the economy last year and will be 27% this year, says Andy Xie, chief China economist for Morgan Stanley Dean Witter in Hong Kong. If they continue, they will end up renationalizing the economy. And that's not the way China needs to go.If Zhu's meteoric rise--from tending livestock in a period of disgrace during the Cultural Revolution in the 1970s to becoming China's economic czar in the 1990s--mirrors the country's own stunning growth over the past two decades, his future now looks as unsettled as the economy overall. Insiders say his position is secure for the time being, not least because nobody in his right mind would aspire to take over the economic portfolio now. But if the economy keeps worsening, Zhu's joke about building his own coffin could come back to haunt him. Zhu, says Shambaugh, has no natural constituency to support him--not in the military, the provincial party system or the central bureaucracy. Zhu has stepped on a lot of toes to get to the top, and he's alienated a lot of people. He has numerous vulnerabilities.According to a source close to Zhu's family, the Premier is still far from panicking, although he is concerned over the health of the U.S. economy, where China sends more than a third of its exports (according to U.S. figures). A visit to Washington is on the books for next spring. One thing Zhu will have in common with his probable host in the White House: a pair of visibly clipped wings.With reporting by Jaime A. FlorCruz and Mia Turner/Beijing  |  2
A writer rails against corruption