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Aug 31, 1999 | 05:00 GMT

China Attempts Social Control With Economic Tools

Summary

China has announced a series of initiatives designed to improve its economy: increased spending on infrastructure, stimulation of consumer spending as well as moves to encourage domestic industries. But many of these actions are artificial attempts to stimulate the economy and to protect state-run enterprises from competition. Much of the government's plan appears more focused on maintaining social stability than improving the economy.

Analysis

Beijing announced a huge government stimulus package today aimed at reviving China's economy by increasing spending on infrastructure projects. The move is to be financed by a 60 billion yuan (US$7.25 billion) bond issue. China also announced a plan to tax interest accrued in bank accounts. Last week Beijing said it would block foreign investment in certain manufacturing industries.

Together, these initiatives give the impression that China is taking active steps to maintain its growth rate; last year the economy grew by about 7 percent. While this may maintain a high growth rate on paper, much of the investment will go into comparatively unproductive sectors of the economy.

On closer examination it appears that Beijing is using economic tools to address social problems. Infrastructure projects would immediately create more jobs, while better roads, dams and telecommunications will take years to build. Funds from the bank interest tax would go to public welfare. Blocking foreign investment in certain industries is meant to preserve state-run enterprises and workers' jobs. Finance Minister Xiang Huaicheng said that the upcoming bond issue could stimulate the economy to the tune of 300 billion yuan (US$36 billion).China's economy suffers from severe infrastructure problems. Beyond the port cities on the coast, lack of transportation and telecommunications threaten the growth of China, according to the World Bank. Investments in both areas have lagged far behind manufacturing. But so much needs to be done - by one estimate US$750 billion worth of work over the next decade - that much of the immediate funding will not yield increased productivity. Instead it will pay for hiring work forces and the possibilities that it will be inefficiently spent are large.

The new tax on interest accrued in bank accounts is a move that the government hopes will encourage domestic spending. China is drowning in a sea of consumer goods. Merchants are slashing prices and on September 1, a sweeping new ban on the additional production of consumer goods is set to take effect. A disparate range of products - from video compact disc players to candy and liquor - will officially be banished from production lines.

Similarly, the government announced that it will block any further foreign investment in 17 manufacturing industries. The ban is intended to protect largely inefficient state-run enterprises and workers' jobs. This appears to be part of a larger strategy to protect state-owned companies and avoid further labor troubles. On a recent tour of northeast China, President Jiang Zemin called for continued central control of some industries instead of privatization.

A good example of Beijing's dramatic tilt towards protecting domestic industries can be found in the story of mobile phones. The government has blocked further foreign investment in mobile phone manufacturing while planning to spend 400 million yuan (US$48 million) to prop up domestic mobile phone makers - although most Chinese don't seem inclined to buy these phones.

But neither move seems like it will quickly stimulate consumer spending. First, the Chinese are nervous about their future and have been holding on to their cash rather than buying consumer goods. Between 1989 and 1997, savings deposits reportedly accounted for 35 percent of China's gross domestic product. Classic economics suggests that the tax may prompt everyday Chinese to spend more and save less, but they have defied the pattern to date.

The ban on additional foreign investment is likely to encourage inefficiency in state-run enterprises. Without competition from leaner companies, they will continue to employ oversized work forces.

Protectionism can work. In the 1950s, Taiwan and South Korea restricted imports so that domestic firms could develop enough to compete in the global marketplace. And they did, effectively. But Taipei and Seoul were focused on making their industries competitive with the rest of the world.

China, on the other hand, is not preparing its industries for global competition. Instead, the government appears concerned with keeping its population employed. Unemployment - a figure the government closely guards - hovers anywhere between 10 and 20 percent. State-owned companies have already become the focus of controversy for their inability to pay back salaries and pensions.

Prime Minister Zhu Rongji's efforts at reform have come too late in the current economic cycle. The leadership in Beijing knows there is no Chinese miracle in the works. Real reforms would need to alter the very structure of the economy, closing entire industries and sending the country into a deep recession. Beijing isn't prepared to take that kind of risk, especially with a citizenry that is already grumbling. It is quietly taking the nation back to an essentially centralized, state-directed economic model while attempting to scrape up any last bits of investment that may come its way.
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