It is going to be a grim year for the Communist Party and the millions of workers who will join China's army of unemployed. In Liaoning, one-third of the 10-million strong workforce have already lost their jobs, 800,000 having been dismissed in the first half of last year alone. Another two million jobs are scheduled to go within three years. Even in Beijing, party secretary Jia Qinglin has warned that another 300,000 workers will be laid off in the next three years, in addition to the 170,000 made redundant in the past few years. The central Government's absolute priority will be to provide enough extra cash and goods to stop the unemployed from rioting over Chinese New Year. Tens of millions of workers and pensioners have been scraping by on not much more than HK$100 a month for some time now. Spring Festival is when the hardships are at their most acute, though, especially in the bitter cold of the northeast. Liaoning's party secretary, Wen Shizhen, has been publicly comparing it with the Great Leap Forward famine when 30 million starved to death in China. 'We still cannot erase that situation from our heads even though decades have passed . . . On many occasions, when I saw that several courses were served at the same time, the situation in the difficult period would spontaneously appear before me and remind me of those poor people who do not have sufficient food if there are not subsidies,' he said in a recent speech reported by Liaoning Daily. Most of the unemployed in the northeast have been out of work for at least a year and still look to the Government for help. A recent survey of 1,000 redundant workers in Jilin province found that most still depended on the 'iron rice bowl' to provide their next meal ticket. The party has been promising the worst will be over in three years but it is hard to see how things can be turned around so quickly. In the northeast, the crisis has been growing for at least five years. New jobs are not going to spring up except in those areas, like Pudong in Shanghai, where state subsidies are concentrated. Even supposedly profitable big state enterprises such as Beijing's Capital Iron and Steelworks (Shougang) are in financial difficulties and unable to pay its workers on time. Some of its pensioned-off workers are not being paid at all. The ranks of the new urban poor extend beyond laid-off state workers. China also has millions of former political prisoners who spent decades in labour camps until they were released after the death of Chairman Mao Zedong. None of them are going to be getting their pensions either. It is hard to see how entire sections of the populace are going to cope if they are obliged to pay commercial rates for basic services such as housing, health, heating, electricity and transport. This crisis provides the first severe test of loyalty for the Communist Party's most faithful followers. In the past the party could always rely on the militia of state workers, such as those at Shougang. In 1976 they were armed with clubs and sent out to beat up demonstrators in Tiananmen Square. Similar groups were deployed in Tianjin and Shanghai during the 1989 demonstrations. In Beijing student demonstrators tried in vain to persuade the workers to come out in support during the massive streets protests that year after some leaders called for a general strike. This year we may see what has so far been regarded primarily as an economic problem transformed into a political crisis. The first signs of that may be seen when the National People's Congress (NPC) meets in March. It is due to appoint the replacement for Premier Li Peng and a raft of other ministerial nominees. Zhu Rongji, despite the praise lavished on him by foreign observers, is deeply unpopular with many people and groups in China and may face open challenges, or at least criticism. President Jiang Zemin, who has been touring the world - going from international conference to international conference, boasting of how successful China's economy is - will be another who has not endeared himself to the disaffected at home. His air of self-congratulation could easily anger the many victims of this economic crisis. China is not immune from the economic crisis in the rest of East Asia and the effect was already visibly hurting business confidence in Beijing even before Mr Jiang had returned from his latest overseas trip, to the ASEAN summit in Malaysia last month. Korean restaurants in Beijing were already slashing prices by half. New luxury hotels and department stores in the capital were bereft of customers, and prices even for daily goods have been dropping steadily. China is now entering the most painful period of its reform era at the worst possible moment. Foreign investment and exports are set to slump in 1998 just as domestic demand continues to drop. The government has announced its priority will be maintaining social stability and keeping prices affordable, which will mean maintaining subsidies on all key commodities. This will not help basic industries such as coal or power generation turn in profits. The NPC will have to preoccupy itself during its two weeks of meeting with legislating decisions already passed at September's 15th party congress. Yet it must also pass new laws that give China a new pension system, accounting systems and other essential means of diverting money from bank deposits into corporate equity. In particular the NPC must pass a securities law. China's macro-economic policies may also have to be adjusted. The impact of the currency crisis in the rest of the region will show through in economic figures published in the second quarter of 1998. These, together with a bout of social unrest, could prompt the government to slash interest rates and ease monetary policies. China is likely to devalue again, although this will not necessarily create more jobs where they are needed, such as in the hard-hit areas of the northeast. The nation's export industries are concentrated in a few coastal regions and they will benefit, but other sectors such as steel will have to be protected from dumping by South Korea and other neighbours. The central government will almost certainly have to increase subsidies to certain parts of the country to stave off unrest. If China does reflate the economy in the first half of this year, economic growth as well as inflation can be expected to pick up in the second half. Such measures may or may not be enough to restore domestic and foreign confidence in the government. If the economic crisis is mishandled, it could force the government to postpone many reforms and once again ease back on the trend to opening up the economy. It will certainly influence negotiations with Taiwan, China's staged entry into the World Trade Organisation and the planned visit of United States President Bill Clinton, and other key events scheduled for the year.