By Eva Cheng
China is plagued by high inflation, an overheated economy, growing budget deficits, a crippling debt service burden, a destabilised rural population and dwindling food production. The just-concluded National People's Congress (NPC) has revealed that China is ill-prepared to confronting possible major instability in the post-Deng Xiaoping era
The problems are daunting. Mad competition in capital spending among provinces has prevented the long overheated economy from cooling. Growth stayed at the worrying level of 11.8% last year, while inflation more than doubled government expectation to 21.7%.
Partly because of this budget deficits have persisted, with last year's shortfall swelling to 66.68 billion yuan, or one-tenth of the revenue base. China has been meeting the shortfall by borrowing for years, but unfavourable exchange rates and other factors inflated the debt service bill last year by 57% to 86 billion yuan.
Shrinking production of staple foods has sounded another warning bell, not a small problem when there are 1.2 billion stomachs to fill, with 80 million more every year. China has begun to question its ability to feed its population, and according to minister of agriculture Liu Jiang, this could threaten "national security".
Heavy taxes and low — and often unpaid — prices for produce have led to rural riots, including in Sichuan, Hebei and Hubei. More than 100 million of China's 800 million rural population are on the move, according to official estimates, flocking to richer provinces and cities to look for work.
Toward solving these problems, the NPC had little to offer. On inflation, for example, which Prime Minister Li Peng described in his report as the "most urgent task" in 1995, the "solution" was a grab bag of mostly already failed measures. Fiscal and monetary restraint were mentioned, as were accelerated enterprise reforms, increases in agricultural investment, a more selective approach to foreign investment and yet another clampdown on corruption.
Nor was there diagnosis of the causes of the problems. Increases in procurement prices and currency reform were blamed for fuelling inflation. Yet both measures were planned and, therefore, they contribute nothing to explaining the excesses in inflation over and above government expectation.
China's economic problems are inextricably linked to the turn to "market socialism" since 1978, a move taken in face of the devastation resulting from the decade-long Cultural Revolution.
The monopoly of state power by the Communist Party (CCP) was left intact. Workers continued to be denied control of production and the country, but economic control was decentralised. Control has become indirect, through prices and fiscal measures (government spending and taxes). This requires a market system, so the CCP set out to build one, with the overhauling of 100,000 state enterprises — at township level and above — as the centrepiece.
Enterprises can run their own business under the new system so long as profit tax or "lease rent" are paid. They have to be incorporated as legal entities, however, and be responsible for their own losses. Only the "management rights" are contracted out, the CCP emphasised, but the state retains ownership.
But the introduction of shareholding companies is threatening the integrity of state ownership. Shares can be issued to individuals and foreign entities, as well as to the state and incorporated enterprises. Though shares of individuals are limited to 5% of any particular company, a limit has not been imposed on foreigners. In addition, publicly listed companies are required to reserve no less than 25% of their issued shares for the "public".
This development is worrying, given China's aim to "convert gradually state enterprises into shareholding companies".
The ownership question apart, many enterprises aren't viable business entities. Seventeen years of reforms have left one-third of state enterprises still struggling and heavily indebted. They owe banks as well as one another, in the latter case, to the tune of 400 billion yuan after a 70% increase last year.
A central aim of the reform is to make enterprises accountable so that those poorly managed can go under. But the enormous inter-enterprise debts have made that a distant possibility. One collapse could lead to another and even to a chain of them.
China's integrated welfare system is another obstacle to the turn to a profit-driven system. Enterprises since 1949 have provided not only jobs, but also housing, medical and retirement benefits. In the absence of a separate system to cater for those needs, enterprises going under could lead to explosive social problems.
The government is trying to set up retirement and unemployment funds to provide a safety net, requiring already poorly paid workers to help fund the schemes.
Poorly checked credit expansion and competition between provinces in fixed asset investments have fuelled inflation. These investments ballooned in a chase after a quick buck, often into speculative property projects rather than socially useful priorities. Loan size is a measure of political clout in China, and has a perpetual tendency to be inflated.
Inflation, in turn, has kept budget deficits high, as finance minister Liu Zhongli stated. Pay rises to China's enormous state bureaucracy will soak up 20.5 billion yuan in 1995 after more than 30 billion last year. Army expenditure, which got a 14.6% boost to 63.09 billion yuan, also hasn't helped to keep the deficit down. Deficits led to borrowing in the first place, but growing debt service costs lead to the need to borrow more.
Inflation and budget deficits have compounded the rural crisis. While the pay rises of bureaucrats and the army are prioritised, payment to procure produce from farmers is not. Higher returns on the free market have led farmers to sell their produce there rather than to the state.
There has been a shrinkage of farmland, often for more lucrative commercial developments. A growing number of farmers are driven off their land, moving to the cities in search for jobs that fall far short of demand. Many of the "lucky" ones end up in capitalistic sweatshops, in competition with workers in other Third World countries.
The solution of China's economic problems begins with ending the system that places higher priority on serving the bureaucracy and its army than on the needs of workers and farmers.