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Like Russia, China is trying to create a market-based economy out of one that had been planned and commanded from the center for decades. It is running into some of the same problems Boris Yeltsin and his reformers have encountered, including a shortage of capitalist institutions and a surplus of recalcitrant bureaucrats. In principle, the way to privatize a socialist economy is to get the government out. In practice, the market cannot function well if large parts of the economy are controlled by the state. And in China the banking system still functions in response to political rather than economic rules.
Because leaders have not institutionalized capitalist tools like interest rates and money supply to control growth and inflation, the country repeatedly goes through periods of fast growth followed by frantic clamps on credit to slow down inflation. Through most of this year inflation has been in the double digits, and above 20% in the cities. In June, Beijing ordered a freeze on new bank credit and called in $17 billion in loans. Howls of protest erupted from regional officials and bosses of the big state corporations -- two-thirds of which are unprofitable -- that had to cut back production because they ran out of credit. So the austerity program is being eased even though urban inflation is still over 17%.
This lesson jolted the central leaders into the realization that Beijing's ability to control the country is far more limited than it was a few years ago. Those who take over from Deng, whether in the next weeks or months, will face two immediate challenges. They will have to make sure his reforms and the growth they bring survive, and they will need to hold the country together while the economic revolution is completed.
Two weeks ago, a Communist Party Central Committee plenum adopted a 25-page, 50-point reform outline they called "a program of action to restructure the economy." The plan focuses on two central problems: the hugely inefficient state-held factories and the chaotic fiscal and monetary systems. The state owns and operates more than 50% of China's industry and dominates machinery production, transportation, energy and finance. The party plan calls for turning some enterprises into stock corporations and allowing competition to drive some out of business. Resistance from managers and local officials will be furious, because shutting down the giant corporations will bring large- scale unemployment and possibly civil unrest.
The second part of the program lays out the need to reform both the tax system, which now shortchanges Beijing and weakens its hand with the ( provinces, and the central-banking operation, which is essentially unregulated. "China suffers not from too much central control but too little," says Richard Margolis, corporate finance director of Smith New Court Ltd. in Hong Kong.