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IN CHINA: SPEND, SPEND, SPEND (int'l edition)Its plan to keep growth humming is fraught with riskLast spring, when the Asian financial crisis started taking its toll, Chinese Premier Zhu Rongji announced a bold plan to keep the economy on track. He vowed to make the collapsing state sector profitable in three years and to pump $750 billion into infrastructure by the end of the century. A confident Zhu predicted Asia's big domino wouldn't fall; he could keep China growing at 8% a year. But Zhu didn't foresee just how bad the global economy would get. As the U.S. and European stock markets shudder, the rich export markets that have been China's one economic hot spot could cool. Beijing leaders have all but given up hope that a paralyzed Japan will help matters. At the same time, Russia's sudden collapse is a chilling reminder of the frailty of China's own state sector. And Hong Kong's losing battle to fight off speculators is heightening fears that Hong Kong and China may be next in line to devalue their currencies. BOND BONANZA. To keep the financial devastation at bay, Zhu is rushing to open China's financial spigots and slow down the kinds of reforms that have hurt its Asian neighbors. The government announced that it will issue an additional $12 billion worth of bonds to fund power, telecommunications, transport, housing, and irrigation projects before yearend, a steep increase over last year's sum. Economists say government infrastructure spending may now reach $398 billion this year. Beijing also announced in late August that it would raise this year's total bank lending quota from $108 billion to $120 billion. While most analysts agree this move will get Zhu closer to his growth target, there are dangers. Bureaucrats are under intense pressure to approve massive projects without giving them the proper scrutiny. Officials at the State Development Bank need to know little more than a project's name and its size to sign off on it, says one source. And Zhu is clearly out of his element: A master at fighting inflation by curbing wayward bankers, he is now trying to fight deflation and falling consumer spending by urging commercial bankers to pick up the speed of lending. Some officials fear this headlong rush to spend will waste scarce resources while real reforms are put on the back burner. They point to government plans to construct more toll roads around Beijing, despite the fact that only one existing tollway to the airport is profitable. ''I don't think this kind of artificial stimulation can improve China's economic fundamentals,'' says Mao Yushi, chairman of the Unirule Institute of Economics in Beijing, a private think tank and consulting group. WHAT REFORMS? But Zhu and his cohorts realize that tampering with the fundamentals could burn them badly as the crisis intensifies. So Zhu is opting to delay some reforms to avoid further swelling of the ranks of the unemployed, which are already growing due to the ongoing privatization of state-owned enterprises. And in an effort to maintain its firewall, which has shielded it to date against currency speculators, China will not make good on its promise to make the yuan fully convertible by 2000. ''Why should [China] throw more gasoline on the fire?'' says Carl E. Walter, a director at Credit Suisse First Boston in Beijing. But delaying key reforms isn't without hazards. As Zhu keeps liquidity flowing into the economy, poorly performing enterprises will be thrown a lifeline just when the economy can scarcely afford to prop them up. And Zhu risks increasing nonperforming bank loans and new strains on China's wobbly banking system. Even Zhu's plans to sharply reduce the size of the state bureaucracy are running into obstacles. One reason: Leaders want to avoid scathing attacks from those losing their jobs. Zhu is not abandoning reforms altogether, of course. He is pushing through some financial fixes, such as a Western-style credit-rating system and tougher asset requirements at China's banks. He is also trying to school the top government officials in accounting techniques so that they can better manage state enterprises. Chinese economists believe that as long as the West keeps growing, they can buffer the country from the worst effects of the global market. ''We have confidence that the U.S. economy is healthy,'' says Qian Ping, an accounting lecturer at Tsinghua University. But after the market shocks of recent months, China's insulation may finally be starting to wear thin.
By Joyce Barnathan and Dexter Roberts in Beijing RELATED ITEMS
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Updated Sept. 3, 1998 by bwwebmaster
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