China in desperate struggle to master inflation

China in desperate struggle to master inflation

BEIJING (AFP): China launched yesterday its latest campaign to control prices and investments in an effort to rein in galloping inflation, but experts doubt it will be effective and consider the target of 10 percent set for this year greatly underestimated.

"The rise in prices has reached alarming proportions," an Academy of Social Sciences study warned, a viewpoint almost certainly shared by Chinese leaders.

Since the start of the year, official inflation has exceeded 20 percent, with the rate in major cities surpassing 25 percent.

Desperate to halt this threat to stability, the government has cranked up the propaganda apparatus and, from Friday, will dispatch squads of inspectors across the country in a three-month operation to monitor prices and fixed capital investments.

"The government has resorted to the classic tactic of communist countries, but it will not be enough," a western diplomat, who is an economic expert, said.

Chinese and foreign analysts believe Beijing's hesitant crusade -- cautious economic reforms and semi-austerity -- will not be enough to slay the dangerous inflationary beast.

"The authorities have trouble coordinating their actions and have a knee-jerk reaction," said one foreign banker in Beijing.

"The result is we're approaching hyper-inflation, like that of 1988, which only a real austerity drive can get rid of," he said.

Modest attempts last July to brake property investment when inflation was hovering around 20 percent were dropped in November after failing to yield results, and under pressure from more liberal factions in the communist party.

Investment

"Control of fixed capital investment is already an austerity measure but it remains to be seen whether it will lead to a tightening of credit," the banker said.

Achieving a slowdown in investments, held largely responsible for last year's overheating and which have soared more than 70 percent in the first two months of 1994, is above all a problem of political authority, observers agree.

But it appears that the government -- to avoid stoking social problems -- is not ready to cut the lifeline to heavily-indebted state enterprises, which continue to invest and import materials. Beijing's authority is also being increasingly challenged by the provinces.

Again the authorities appear to be heading for an ineffective strategy in the long-term -- slowing liberalization and delaying reforms such as listing of state companies and turning banks into commercial entities.

This conservative orientation prompted Zhu Rongji, vice- minister in charge of the economy and an architect of openness, to defend market liberalism, declaring "the reforms are not responsible for inflation."

But with perceived economic incoherence and political friction, most analysts believe inflation will continue to rise.

They cite three reasons: higher agricultural prices due to falling production and speculation, strong consumer demand in the cities, and the irrational behavior of state-owned enterprises as far as investment is concerned.

Few people in China believe the cost of living will rise by less than 10 percent, in spite of Prime Minister Li Peng's recent insistence.