A Chill Wind Blows From Beijing

To keep control, its leaders are cooling risky reforms

Hu Angang, an economist at the Chinese Academy of Sciences, is one of the government's favorite intellectuals. His is a distinctly conservative voice. Educated at Yale University, Hu, 42, promotes policies intended to preserve social stability in China rather than achieve rapid economic reforms. For instance, to spread wealth to poor interior regions, Hu wants to end privileges for special economic zones on the coast once favored by Deng Xiaoping.

With the ailing Deng, 91, increasingly out of the picture, Beijing's insecure leaders are heeding the words of people such as Hu who argue that China can't afford the bold moves Deng long advocated. "If a leader of 1.2 billion people makes one little mistake, it could end up being a big danger," Hu says.

That's just one example of the chill winds blowing from Beijing as the country prepares for the Chinese New Year. Intent on preserving their control in the post-Deng era, Communist leaders are retreating from many risky economic policies. That means no major reform of state enterprises or the banking system--long seen as crucial to completing the transformation of China's economic system.

The new mood is spilling over into China's relations with the outside world. As he tries to consolidate power, President Jiang Zemin is hanging tough on such sensitive issues as Taiwan and human rights. Beijing's decision to slap rights activist Wei Jingsheng with a 14-year sentence in December is a reflection of the new hard line.

For Washington, the tough tone has troublesome implications. China had a record trade surplus of nearly $40 billion with the U.S. last year, and the two sides are making little progress in resolving difficult trade issues. Given the imprisonment of Wei, the Clinton Administration will likely increase its efforts to have the U.N. Commission on Human Rights censure China in March. Moreover, China's use of military maneuvers to intimidate the Taiwanese, who vote in their first direct presidential elections in March, is likely to add to tensions in Congress.

DEAL KILLERS. American companies also have new worries. Now that Vice-Premier Zhu Rongji has engineered a "soft landing" of China's once-overheated economy, the government wants to ensure a "soft takeoff," economic growth without the dramatic swings of the Deng days. That's good news. But Beijing's plans to scrap some preferential tax policies for foreign companies is causing them to think twice about moving ahead with projects in China. "The changes will kill a lot of deals in the New Year," says Anne Stevenson-Yang, Beijing director of the U.S.-China Business Council.

Although China remains a lucrative market in sectors such as telecommunications, many companies are concerned with plans to eliminate duty-free status for imported machinery and to abolish tax rebates for exports of high value-added goods. General Motors Corp., for example, which recently secured a $1 billion deal to produce sedans in Shanghai, could be affected unless it wins an exemption. "These kinds of tax swings are to be expected in an emerging economy," says GM Chairman John F. Smith Jr. "You have to flow with the changes."

A slowdown in foreign investment may not trouble the leadership if it helps to keep inflation under control. Since Zhu launched an austerity program in 1993, inflation and economic growth have moderated. Growth in 1995 slowed to about 10%, from 12.6% a year earlier, while retail prices eased from a 21.7% rise in 1994 to around 15% in 1995.

SCATHING. One reason for the leadership's conservative mix of policies is the fear that poor inland provinces are falling too far behind. Signs of restiveness are everywhere. Workers have been demonstrating over unpaid salaries, rising unemployment, and falling standards of living. In early December, 500 migrant workers from the interior clashed with police in a bloody riot in Guangdong. To minimize unrest, Beijing's leaders want to recentralize power. The government, for example, is beefing up a new tax system to ensure that Beijing gets a bigger slice of the pie from the richer provinces, which would allow it to pour more funds into inland areas for infrastructure, agriculture, and education.

Provincial leaders in Guangdong and Fujian provinces are fighting to keep their privileges. The party chief of Shenzhen, the special economic zone adjacent to Hong Kong, wrote a scathing article in the local press attacking the new policy proposals. Guangdong officials also are upset about the central government's decision to cancel tax rebates for value-added exports.

The changing signals in Beijing are disheartening to reformers. "There will be no big push for change," says Hai Wen, deputy director of Beijing University's China Center for Economic Research. Change is especially needed in the state sector, one of the biggest drags on the economy. Since state-owned factories employ some 50% of the urban population, the leadership isn't willing to let them go bust. But they won't let the larger factories privatize, either.

Instead, modest experiments are the rule. Beijing is selecting 1,000 big enterprises to run their own operations free from government interference. The government will also help forgive massive bank loans by allowing them to swap equity for the debt. In 1996, the number of enterprises involved in such experiments may reach 4,000, accounting for 50% of the production value of all state-owned companies.

The best hope for major reform is for China to get into the World Trade Organization. As a member, China would be forced over a designated period of time to liberalize its economy by dropping many trade barriers. But Chinese officials involved with the negotiations aren't hopeful. "Recent negotiations have not made any progress," says Li Zhongzhou, a director general at the Ministry of Foreign Trade & Economic Cooperation. "I'm very pessimistic." While Jiang announced in November that China would lower tariffs on 4,000 products by no less than 30% in 1996, Chinese officials have yet to disclose which goods will be included.

Clinton Administration officials question whether China's leaders seriously want to join the new trade tribunal. They note that Beijing has not fully responded to the "road map" for membership that Washington provided in November. China also has failed to crack down effectively on piracy of U.S. intellectual property. In an election year, rising economic nationalism doesn't give the Administration much wiggle room. "The political reality is that WTO accession will be colored by overall relations," says Charlene Barshefsky, Deputy U.S. Trade Representative.

No one believes China is returning to the era when state planners ruled supreme. But the recentralization is clearly an attempt to enable Beijing to set the pace of economic development rather than cede that power to the coastal provinces. Some analysts even argue that China has outgrown the go-go Deng days and now needs time to consolidate after 15 years of rampant growth. Whatever the case, China's leaders are determined to play it tougher at home and abroad.

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