China fights to get runaway economy under control: Unrest among the poor worries Peking, writes Teresa Poole in Hong Kong

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The Independent Online
TRY PAYING in Chinese currency these days on a visit to Shenzhen, just over the border from Hong Kong, and the taxis and street traders will demand Hong Kong dollars.

Travel a couple of hours north, and one can find luxury villa developments for China's new rich that have ground to a halt because of escalating costs. And in Hong Kong itself, the gold shops are full of mainlanders buying up pure gold jewellery as a hedge against runaway inflation.

Amid such signs that China's economy is spiralling out of control, the head of the Communist Party, Jiang Zemin, has issued a new call to party cadres to rein in corruption and obey central government.

'Some of the party's organisations are slackening in their discipline, and a tendency among some party members in worshipping money and pleasure and totally pursuing personal gains is growing,' he said in a speech to mark the party's 72nd anniversary. 'All party members should fully display the spirit of working hard and firmly opposing money worship, hedonism and outright individualism.'

The tough words come at a time when Peking has been forced to address three problems: an economy that is overheating because of the provinces' profligate investment and disregard for central controls; growing social unrest, particularly in the rural areas where farmers are suffering from inflation and high taxation; and confirmation of widespread corruption and fraud. Whatever the pleas of Comrade Jiang, a decade of economic reform has created an army of 'individualists' who like nothing better than to turn a quick profit.

Peking's leaders, who for months would not even use the word 'overheating' in public, are now broadcasting their growing concerns at the situation. Today they will identify the first scapegoat when Li Guixian, governor of the People's Bank of China, will 'resign'. He is expected to be replaced by Zhu Rongji, the Deputy Prime Minister, who is taking charge of cooling down the runaway economy, a task that may prove to be a poisoned chalice.

Mr Jiang admitted in his speech that 'in the process of transition from old to new systems, some profound economic and social problems are exposed'.

Corruption is one: a suspended death sentence was passed on a former branch manager in the China Industrial and Commercial Bank who took bribes to authorise illicit loans of about pounds 2.3m to a fraudulent company.

Tens of thousands of investors lost money with the Great Wall Machinery & Electronics High-Technology Industrial Corporation, which promised high interest rates on corporate bonds but squandered most of the money, a fraud that threatens to implicate a number of government officials. Another scam emerged when the Agricultural Bank of China said it had been cheated of huge sums in false letters of credit.

These criminal cases not only represent the breakdown of effective regulation, but illustrate in an extreme form the opportunities for people who want to take advantage of China's rush to embrace the free market.

However, the key cause of China's present economic problems is not corruption but the desire of local officials to jump on the bandwagon of economic reform. Across the country, numerous investment projects and speculative property deals have been given the go-ahead by officials eager to follow the exhortations of Deng Xiaoping, the country's supreme leader, to seize the opportunities of the new China - and to get rich in the process.

The result has been an alarming rise in bank lending, which has pushed cost-of-living inflation to around 20 per cent in the cities. Mr Zhu's self-declared task is to reimpose central authority on the regions and rein in the runaway money supply. Provincial governors have been summoned to an economic summit, where they will be told to put their fiefdoms in order.

Hong Kong economists who specialise in China are saying it may already be too late to avert a painful hard landing for the economy. 'The next two to three months are very critical,' said one. 'I think the economic situation now is worse than in 1988; the budget deficit is worse, the money supply growth is as bad as before, the balance of payments is much worse.' Retail sales and the prices of consumer goods started to jump in March on fears of rising inflation, recalling the panic buying when the economy was overheating in 1988.

Cooling the economy this time will be far harder, because central control over lending is much looser. If the economy suffers a sudden slowdown, during which over-extended projects collapse and unemployment worsens, then many will suffer.

Already the unemployed, the retired, and those working in loss-making state enterprises or for government departments that cannot afford their wages are seeing a huge gap emerge between the haves and have- nots of reforming China. In Sichuan, up to 10,000 people rioted in protest at inflation and unfair taxes.

Fear of widespread social unrest may be growing in the corridors of power. The 1989 democracy movement won support from people furious with inflation and corruption. This time both problems are accompanied by far bigger regional disparities in wealth and much broader dissatisfaction among the peasants. Added to that, poorly paid state industry workers are losing the old lifelong benefits of the 'iron rice bowl' system and becoming more strident.

Economic crises in China are highly political. At the beginning of last year the much-disliked Prime Minister, Li Peng, argued for slower growth, but lost out to Mr Deng. Mr Zhu, who has always been perceived as an enthusiastic reformer and as Mr Deng's protege, now finds himself firmly supporting a slowdown; but in being told to sort out the problems, he may become a scapegoat for future hardships.

He may also fail. One Hong Kong analyst said the provinces were unlikely to heed Mr Zhu's words unless they were backed by Mr Deng, who so far has shown little sign of adjusting his 'full steam ahead' approach.

(Photograph omitted)

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