Third, the problem of instability in the countryside has been mostly a result of the economy overheating. It is because the rural cadres want to create the same economic miracle of the coastal townships that they have taken funds earmarked for procurement of agricultural products from peasants for construction of industrial zones, factories, roads and other infrastructural facilities, hoping they would immediately generate revenues through the arrival of foreign and domestic investors.

When funds are inadequate, these cadres have been desperate enough or over-zealous in forcing peasants to contribute under all kinds of pretexts and excuses. And when prices of construction materials rise as a result of the investment drive, the pressureto squeeze money from the peasant and rural economy grows.

With the low income increase, the squeeze would naturally lead to resistance and later confrontation from the peasants. The exhortation of the peasantry is not part of the national economic policy, but rather a distorted outcome of the overheating economy.

Once the Chinese government is determined to cool down the economy, peasants and their natural economy would be able to relax once again under the constraint imposed on local investment projects, and the reverse policy of the government in diverting additional resources to the rural sector.

The situation in China is serious. Even though the government is willing to devote more resources to the rural sector, instability persists in the countryside. If no radical measure is undertaken by the government, further outbreaks of riots and widespread discontent would have negative impacts on China's economic and political stability.

The most immediate concern is rising inflation in the countryside, which since April has been at a pace faster than in the cities. In April, the average retail price index rose 10.1 per cent in the urban sector, but 11.4 per cent in the countryside, the first time in many years rural inflation has overtaken urban inflation.

In some of the nation's provinces, rural inflation reached an even more alarming peak. In terms of cost-living price index changes, which record more closely the impact of inflation on living standards, the year-on-year increase in April was 23.4 per cent in Hubei, 21.3 per cent in Yunnan, 20.4 per cent in Guangdong, 19.2 per cent in Guangxi and 17.1 per cent in Hunan.

The province of Sichuan, famous in the past few weeks because of the peasant revolt, had only a moderate rural inflation of 15.8 per cent, but 1.1 percentage point higher than the urban inflation there and 3.3 percentage points higher than the national average of rural inflation.

The cause for the sudden acceleration of rural inflation is complex. But under the present regime of price liberalisation, the peasants have no bargaining power vis-a-vis urban companies, which sell commodities made in the urban sector or from other rural localities.

Cadres are too busy with their investment projects or their personal money-seeking ventures to negotiate a better and lower-price supply of the daily necessities and essentials for farming.

The helpless peasants are left with two choices, either to yield and pay a rising price or reduce their buying. National statistics show most peasants opt for the latter. Sales of co-operatives catering for retail trade at the village level register a zero growth of 0.7 per cent for the first five months this year, compared with 2.5 per cent last year.

In real terms, the five-month average would mean an eight to nine per cent decline, compared with one to two per cent last year. In May, the increase in sales of co-operatives of 2.7 per cent made no improvement because of the higher rise in retail priceindex.

Sales of production inputs for agriculture fare no better. The average increase in the first five months was 1.8 per cent, or a six to seven per cent real decline. Even at the township level, many employees and owners of collective and private factories say the retail sales in the first five months was not strong, at 15.2 per cent or four to five per cent in real growth.

With the expected arrival of the adjustment policy of the central government, the overheated economy would not escape the fate of a gradual cooling down later this year. The cooling would not bring down inflation immediately, but only after several months.

Thomas Chan Man-hung is reader and co-ordinator of the China Business Centre, Hongkong Polytechnic