CIA Details Bleak Outlook for China

Beijing is failing to come to grips with the economic woes that prompted protests, study says. REFORMS GONE AWRY

THIS year's mass demonstrations in Beijing were rooted more in economics than in politics; they were not so much ``pro-democracy'' as they were ``anti-inflation.'' Moreover, the Chinese government's crackdown did not bring the country's economic problems under control. Instead, it will probably only make those problems worse.

These are the conclusions of a new report by the US Central Intelligence Agency (CIA), which has just been released by Congress's Joint Economic Committee.

The report reflects what many analysts in Washington have been saying privately for weeks: China's economic woes will likely get worse before they get better, and the Chinese government's ``cure'' is only aggravating the situation.

``Even just a year ago, the conventional wisdom was that China was doing it right,'' says a US analyst, referring to economic reforms there.

But in 1988, things began to go wrong. Just how wrong is detailed in the CIA study: It draws a picture of an economy that was so overheated by governmental manipulation that it overshot growth targets. Shortages became endemic, and inflation surged to the highest level since the Chinese Communist Party came to power in 1949.

One figure stands out from the report. In 1988, the CIA says, the amount of currency in circulation leaped 47 percent over the previous year. That, in turn, fueled an inflation rate of 19 percent for the country and almost 30 percent in the cities.

The CIA has some fairly bleak projections for China's short-term future. It concludes:

China's leaders are likely to be so preoccupied with consolidating power and ridding the government of supporters of former party secretary Zhao Ziyang that they are unlikely to come up with new solutions to the country's economic problems.

The government faces pressure to increase spending and ensure that wages in urban areas keep pace with inflation. But more government spending will, in turn, only increase the inflation rate.

The government also faces pressure from rural interests, particularly farmers. Starting in 1988, the government began issuing IOUs to pay for crops. If farmers refuse to accept these in the future, the government might be forced to divert money from other projects to pay food bills.

The Chinese military, in return for putting down the demonstrations in Tiananmen Square earlier this year, might press the government for a larger role in politics and more money for defense.

In a statement accompanying the declassified report, Sen. Jeff Bingaman (D) of New Mexico said, ``The clock is turning backwards for the Chinese economy. A decade of economic reform may have effectively come to a standstill with the crackdown in Tiananmen Square.''

One analyst explains that many of China's problems stem from the fact that the leadership allowed two separate economic systems to compete within the country - one market-oriented, the other subject to government control.

The market reforms were the result of nearly a decade of economic restructuring that's been undertaken by the Communist Party.

Not surprisingly, many producers were drawn to the market economy, where they could charge more for, and earn higher profits from, their goods. Farmers, vendors, and entrepreneurs in rural areas especially benefited.

Meanwhile, large state-owned industries, still restricted by central economic planning, found they had to compete for the food and raw materials that they needed. In the first quarter of this year, rural enterprises grew three times faster than key state industries, according to the report.

Worse, government employees, such as teachers and bureaucrats, were still paid according to fixed wage scales. Consequently, while inflation went up 30 percent in the cities, inflation-adjusted urban incomes rose only 1 percent in 1988.

THE government, perversely, encouraged industries to make more goods for export, further exacerbating shortages inside the country. It gave economic credits so that export-oriented businesses could expand. And to meet growing consumer demand, it allowed more imports.

The report says, ``Imports grew five times faster than exports in the first five months of 1989; China's trade deficit grew from less than $1 billion between January and May 1988 to nearly $5 billion for the same period in 1989...''

Much of the CIA report relies on Chinese government statistics. In an appendix, the report concludes that notwithstanding a number of problems with government statistics, they probably ``provide useful indicators of the direction and magnitude of economic growth.''

One analyst says that the next 18 months to two years will probably bring more upheaval to the Chinese economy.

Transition to a market economy from a centrally planned one ``is inevitably destabilizing,'' the analyst says.

``It's going to be very disruptive.... There are more problems ahead for 1990.''

``Inflation has been one of the key contributors to social unrest,'' the analyst says, adding, ``We expect to see more of that.''

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