Boom and bust, then back again

PUBLISHED : Monday, 28 June, 1993, 12:00am
UPDATED : Monday, 28 June, 1993, 12:00am

HOW the current economic crisis compares with the events which led to the 1988-89 clampdown.

Before 1989: Inflation peaked in late 1988 at 20 per cent nationwide, but hit 30 per cent in many southern cities. Money supply fell from 1986 with M1 growth dropping from 28 per cent to 20 per cent in late 1988. Domestic demand, reflected by retail sales, surged in the wake of inflation fears and on the back of a sustained credit binge.

People rushed to buy consumer durable items, such as TV sets and refrigerators as a safety net against runaway inflation. 1987 and 1988 saw an 11 per cent and 12 per cent growth in real gross national product (GNP). The rate of increase in cost of living soared from 10 per cent to 20 per cent during the same period. Banking system reforms began in mid-1980s.

Previously, the People's Bank of China conducted all lending, then viewed as a function of the government's industrial policy. About 30 per cent of all lending was aimed at propping up loss-making state enterprises. The central bank gained freedoms to issue loans at market rates. Cash flooded the market sending banks into turmoil. Low deposit rates kept customers away, and negative real interest rates further fuelled a lending boom. The rise in economic expectations, and growing awareness of successes seen overseas fuelled unrest. The pro-democracy movement flared up, and was finally suppressed on June 4, 1989.

Post 1989: The austerity programme led to a dramatic slowdown in inflation. World Bank figures showed a fall from 18 per cent in 1988 to 2.1 per cent in 1990. Economic growth slowed from 11 to five per cent, over same period. The lack of fiscal controls saw money supply growth accelerate once more. By 1992 M1 growth was more than 30 per cent, its highest level since 1987. Inflation rebounded to 15.7 per cent in 35 major cities in the first quarter of 1993 to hit 20 per cent in April.

Official data showed average GNP per capita in 1992 to be 2,043 yuan, about US$350 (HK$2,695). Average incomes and living standards remained low. The abolition of subsidies slackened central government financial controls. Twice in 1992 Beijing cut subsidies on food items and industrial materials. Real GNP growth rose from four per cent in 1990 to an estimated 12.5 per cent 1993 while the cost of living soared by two to 20 per cent in the same period. The share issues experiment started, and private sectorindustrial output grew even faster.

Last year, the private sector accounted for 25 per cent of all non-rural jobs created in China. Industrial production and fixed investments grew rapidly (fixed asset investments up 65 per cent in April with non-production fixed assets up 97 per cent). Strong growth in consumption led to fears of panic buying. In real terms, retail sales grew by eight per cent in 1992.

The first priority of present banking reforms is to separate commercial lending from policy-directed lending. Tighter regulation has curbed the widespread practice of banks lending to their own commercial enterprises.

Interest rates have been raised to try to cool inflation and spending, but the move is seen as too little, too late.