China squeezes state firms in drive to curb inflation: Peking's policy of freezing wages could cause unrest, writes Teresa Poole from Hong Kong

A GOVERNMENT cadre in Canton, when recently asked about the social impact of China's rising inflation rate, smiled and said there were few problems as yet because wages were going up faster than the prices of goods in the shops. The average growth in salaries over the first five months of the year in Guangdong province had been 29 per cent, well ahead of increases in the cost of living. 'So we are ahead,' he said.

Millions of China's poorest state- enterprise workers may not be ahead for much longer, however. Under the government's latest strategy to rein in soaring inflation, workers in loss-making state enterprises will no longer receive wage increases and bonuses, which could prompt urban unrest as pay starts to fall behind prices. On top of this, state firms that make no effort to pay off their debts will gradually lose their subsidies, which could theoretically leave many facing bankruptcy.

Peking's struggle to bring the country's overheating economy under control comes when the gap between rich and poor is widening sharply and unemployment is growing. The latest measures, outlined in the official China Daily yesterday, are designed to attack the inflationary spiralling of the state wages bill and to cut the drain on central resources of propping up loss-making industries. But they risk hitting some of the country's poorest workers, who already feel left behind by the economic reforms. Complaints about inflation were one of the main grievances of workers who supported the pro-democracy movement in 1989.

So far this year, most workers have been cushioned against inflation and against the removal of subsidies for basic foodstuffs. In the first half of 1993, bonuses paid by state-owned enterprises rose by 38 per cent to 41.3bn yuan ( pounds 3.5bn) and subsidies rose by 28 per cent to 47.7bn yuan. This was despite the fact that up to 40 per cent of state industries make losses, and many more only break even.

Salaries in the public sector kept up with cost of living increases which averaged 22 per cent in the biggest cities. But these wage increases were well ahead of the economy's 14 per cent growth, and in the case of loss-making factories the government had to foot the rising wages bill.

In the shift to a market economy, the loss-making state factories are one of Peking's most challenging problems. Last week, the government announced that one-third of state firms would be transformed into 'companies with limited liability' and would no longer be bailed out if they ran into deficit.

The danger is that there is no social safety net for urban workers made redundant, and the burgeoning private and collective sectors are too small to absorb those who might lose their jobs.