No pain, no gain
China economic policy makers can pat themselves on the back for successfully managing an economic slowdown beginning in the summer of 1993. The austerity programme, despite complaints from various sectors, has borne impressive results. Inflation is falling below 10 per cent. Economic growth is running at an ambient 10 per cent. Money supply growth is under control and national foreign reserves are some of the largest in the world.
The country's yuan currency is on target for convertibility on the trade account soon and full convertibility some time around the year 2000. This would bring China a step closer to international economic integration. China's central banker, Dai Xianglong, has suggested the country is likely to beat laid-down targets for the economy and inflation in the coming year. That is a piece of good news not only to the Chinese, but also to the six million people of Hong Kong. The local economy is very much intertwined with the mainland's.
Few of the region's central bankers, gazing at China's bulging foreign exchange reserves, can boast this accolade. Many of China's Asian neighbours are struggling under increasing foreign debt burden, excessive monetary growth and ballooning trade deficits. The economic malaise has raised the prospect of a series of speculative attacks on a number of Asian currencies, similar to the raid on the Mexican peso in early 1995.
Tough part to come Tough part to come Yet, this is no time for complacency. Celebrating China's economic reform effort would be misguided. Politically there appears to be intensifying tension in Beijing policy-making circles over the extent of economic reform ahead and the level of foreign participation in investment and the economy overall. There is a growing body of opinion in favour of slowing reform and hindering foreign participation.
Economically, many economists point out, so far, China has only undertaken the easy bit of reform. Enterprises reform, for instance, are scarcely making any meaningful progress. While some sectors of the economy have been freed up and prospered, many with the aid of massive foreign investment, not to mention money pouring in from Hong Kong, the tough part of the job of economic reform remains.
Daunting task Daunting task Reforming the state-owned enterprises remains the main nut for policy makers to crack. One must admit this is a daunting job. Overall the state sector has become less important as a proportion of Gross Domestic Product, falling from more than 70 per cent of GDP in the early 1980s to less than 45 per cent today. The sector remains a chief employer, makes huge losses and absorbs large volumes of loan capacity in the banking system. To fully shake this sector up would require a strong political will.
Policymakers must be able to move forward in the face of the backlash that will follow the expected factory closures, mass unemployment and general social dislocation that a hard policy towards reform would inevitably entail. Without significant transformation of state-owned enterprises, which remain an albatross, any other attempts to reform the economy would be merely tinkering with side issues.
Policy makers in Beijing need to maintain their current course in economic liberalisation and consideration needs to be given to pursuing further deepening of reform to tackle the inefficiencies of the state-owned enterprises. This can largely be achieved without major social dislocation in a period of buoyant economic activity, to buffer the worst consequences of reform.
Policymakers in Beijing hopefully will realise that market reforms and foreign investment participation are part of the solution in achieving this objective, not the problem.
