HALF of the population of China has crashed through the vital US$1,000 (HK$7,700) per capita annual income which inaugurates people into consumers of more than the basic necessities of life. At this stage, they want luxuries and higher value added products. Monetarily, 1993 has been a difficult year for China and Central Bank Governor Zhu Rongji has wisely placed a credit squeeze to cool down the overheated economy. However, his tough credit control measures have come under intense criticism from Beijing, financial markets, and both government and private corporations. From June to September business growth dropped 20 per cent. Fixed asset investment dropped 15 per cent. Under intense pressure, Mr Zhu has relaxed the policy for infrastructure programme, but has continued the austerity programme to bring down inflation and improve currency stability. Mr Zhu is endeavouring through his monetary policy to rotate between money tightening and easing, so economic progress stays on track, while inflation falls and the renminbi strengthens. It is in everyone's best long-term interests for the tight money programme to continue until inflation is down to two to three per cent even though the process will cause pain. In the event Mr Zhu's money programme is not allowed to stay on track, inflation may get out of control, forcing a more painful extreme tightening than his present policy. Mainland's money woes A REVERSAL of the China's austerity programme will probably cause a major negative impact on Hong Kong, including the stock market. China's reserves have been mainly stable in 1993, but they could not have been without the approximately US$16 billion of foreign investment, which entered the mainland from January 1 to September 30., 1993. If a loose money policy should be is allowed to prevail again soon, the currency will depreciate unless the Central Bank intervenes. This will result in a heavy drain on reserves. The domestic sector will start heavy hoarding of foreign currencies, especially the US dollar, as well as domestic consumables. Free market way to go PROFITS of Chinese corporations have been excellent for the last four years, averaging about 19 per cent return on investments (allowing for inflation) which almost exactly matches China's growth rate. Unfortunately, the return on investment differs widely in different industries. This has no doubt been caused by the fact that only part of China is a free market while a major part is Marxist-centrally planned. The range extended from well over 150 per cent (after inflation) for the beverage industry down to five to 18 per cent for coal mining. The free market system will have to become better understood and followed before an investor can plan for proper profit. High profits will be made in China. The first step is disciplined monetary control, then government privatisation of industry, tax reform, a steady lowering of bureaucracy, and elimination of central planning. Leon Richardson is a well known financial commentator and investor
