China gets tough as inflation and money supply race away: Crackdown on provinces blamed for overheating economy

CHINA has decided on a tough austerity programme to try to cool its overheating economy which is suffering from high inflation, out-of- control money supply, and excessive investment by provincial governments in speculative deals.

The measures, outlined in a Peking-controlled newspaper in Hong Kong over the weekend, include raising interest rates, clamping down on how companies issue shares on the stock exchanges, calling in loans attached to speculative schemes, and suspending price-reform measures. There will also be a 20 per cent cut in government spending and a ban on new imports of cars.

One proposal from China's cash- strapped central government that will not prove popular is to force workers to buy all unsold government bonds, which offer far inferior rates of return to the new shares and bond markets.

State employees may be unhappy at filling the breach while China's new rich and its entrepreneurs continue to profit from the opportunities of the economic reforms.

Details of the austerity package emerged just one day after the head of the People's Bank of China was sacked and replaced by the Deputy Prime Minister, Zhu Rongji, who has been put in charge of slowing down the economy.

The government's fear of social unrest is behind one particular measure, the banning of any more letters of credit, or IOUs, which provincial governments that do not have the cash to pay for crops have been issuing to China's farmers. In recent months, there have been several cases of rural riots and protests by farming communities hit hard by inflation.

China's highly cyclical economy last reached boiling point in 1988 and an austerity package introduced at the end of that year put the breaks on economic growth. However, this was not in time to stop public anger at inflation and official corruption from fuelling support for the 1989 Tiananmen Square pro-democracy protests.

This new bout of economic growth was given a kick-start by China's paramount leader, Deng Xiaoping, in early 1992 when he made a key visit to the fast-growing south and told people to push ahead with the economic reforms and open door policy.

Since then economic growth has exceeded targets. In the first five months of this year it was running at an annualised 14 per cent, compared with the planned 8 to 9 per cent. Inflation is now running at about 20 per cent in the cities and heading upwards, and money supply is increasing by a yearly 50 per cent.

The blame this time for the overheating is being laid on the provinces, which have achieved much greater autonomy since Mr Deng's visit. Perhaps the key point in the 16-measure package is to send inspection teams to ensure that the provinces obey orders.

Economic analysts in Hong Kong say it is still doubtful whether the centre can impose its will on the regions in the way it could in the late Eighties. The mushrooming of quasi- private sources of funds, including a flourishing bond market, will be difficult to dismantle. Semi-official issuing and trading of shares has expanded hugely in the past year and will be difficult to halt.

(Photograph omitted)