International Business Outlook
CHINA: THE YEAR OF THE INFLATION DRAGON
Beijing's efforts to slow China's inflation clearly are not working. In March, the government set an inflation target of 10% for 1994. However, the State Statistics Bureau has reported that nationwide consumer prices in August were soaring at a 25.8% yearly rate, up from a 22.6% pace in July.
Despite the August data, China's Finance Minister Liu Zhongli on Sept. 21 told an institutional investment conference in New York that inflation should slow to 15% by yearend. That's still way above the target and more optimistic than many private forecasts. DRI/McGraw-Hill, for instance, expects inflation of 17% this year (chart).
Food prices are leading the surge. Severe flooding has damaged rice crops, and the loss of arable land is raising production costs. Vegetable prices jumped 22.5% from July to August, and pork and grain prices are up 61% from a year ago. To fight price hikes, the government has ordered localities to release inventories of grains and meat. Another contributor to inflation overall: State businesses simultaneously raised wages by 30% and 40% early in 1994.
What's fueling the wage-price spiral? China's rampant growth. Industrial output rose 17.6% in the year ended in August. And state economists now say the economy will grow 12% this year, up from a March forecast of 9%.
A few signs--notably, stable retail sales growth--point to some slowing. Still, the government has not moved very decisively. Interest rates have not been raised, in part because government-run companies that are already having difficulties meeting payrolls could not afford higher payments.
The government is reticent to hit the economic brakes hard because that will impair efforts to create enough jobs for China's swelling workforce. The Labor Ministry has laid out a two-year plan to hold the official unemployment rate in urban areas below 3%. However, the Ministry has warned that the rate will rise to 4%-5% within five years, and by 2000, the labor force will grow by an additional 268 million.
The government's conflicting goals of slowing inflation while creating more jobs is a potentially explosive brew, especially in a climate of political corruption. Beijing has not forgotten that a similar combination set the stage for the Tiananmen Square protests of 1989.JAMES C. COOPER AND KATHLEEN MADIGAN