CIA sees no shift in China's reforms

DESPITE growing social unrest, speculation fever and an overheating economy, there is no turning back on reforms for China's leaders, says the US Central Intelligence Agency (CIA).

Although a new report, prepared for Congress by CIA officers, is full of praise for an economy that has outgrown the Western powers during this decade, it contains many warnings of pitfalls that lie ahead.

Inflation, unemployment from the trimming down of state industry, lack of control over renegade local officials and growing corruption are listed as the price China is having to pay for the privilege of last year's 12.8 per cent growth rate.

The annual CIA report is an exhaustively researched analysis of the mainland's economic performance - and an indication of the growing respect being shown in the US for what is now one of its top foreign policy targets.

''Considering that we are talking about a nation of more than a billion people, China's economic growth carries substantial implications for East Asia and for the world,'' it says.

Despite its continued trade deficit with China - which the report predicts could rise 30 per cent to US$24 billion this year - there is now an awareness that it is a trading partner the US cannot do without.

America's exports to Beijing grew three times quicker than its overall exports and it still has an 11 per cent share of the Chinese market, spurred by growing demand.

The report's chief author, CIA director of East Asian policy analysis Martin Petersen, lists reasons for China's success: Local officials taking advantage of Deng Xiaoping's green light for economic reforms.

The growth in capital markets, including a 20 per cent rise in state bank lending.

A surge of 160 per cent in foreign investment, the majority from Hong Kong.

The expansion of ''entrepreneurism'', with a doubling of new companies last year to 480,000, the greatest rise coming in real estate and other service sectors.

A notable by-product of the surge in demand from China's new affluent middle classes is that imports have risen enough to give the country an overall trade deficit.

While exports rose 18 per cent in 1992, imports rocketed by 26 per cent.

In the first six months of this year, the deficit hit $3.54 billion.

Beijing has also become a net importer of oil for the first time in more than a decade, the report says.

Amid all the entrepreneurial success and stock market euphoria surrounding Mr Deng's reforms, progress is seriously threatened by inflation, which prompted Beijing's 16-point plan to cool the economy, and the elevation of Zhu Rongji as the czar in charge of retrenchment.

Inflation doubled to 13.3 per cent in 1992, with coal prices climbing 20 per cent, steel 40 per cent and cement 47 per cent, the report says.

''These inflation rates, of course, are far below those that many other countries endure, but they are shocking to a leadership that has always feared inflation,'' Mr Petersen says.

A lack of discipline and possible corruption within the bureaucracy also worries the CIA.

The agency warns: ''Local officials may make better on-the-spot decisions than central planners in Beijing, but they still skew economic development, create new layers of red tape, occasionally erect inter-provincial trade barriers, and - perhaps most damaging - raise corruption to new levels.

''Beijing's problems in managing local officials are intensified because, unlike in a federal system, there is little distinction between the powers and functions of the central government of local authorities . . . While the centre reserves the right to intervene in any local issue, Beijing cannot monitor everything, and therefore broad powers fall to local officials.'' Despite the retrenchment programme, ''China's economy is now more diverse and less subject to direct central control. Furthermore, local officials have become adept at side-stepping orders from Beijing that run counter to their interests,'' it says.

Nor has the CIA ignored reports that Beijing's grip on social order in the provinces has slackened, and cites recent disturbances in Sichuan and last year's mini-riot over Shenzhen stock sales as examples.

''Peasant discontent has highlighted the unequal distribution of the benefits of economic reforms that is at the root of many rural problems,'' says Mr Petersen, noting that Beijing's attempts to assuage peasant anger with tax breaks has done little tosoothe tensions.

Similar problems face the largely unregulated boom in China's service sector, which accounted for three-quarters of all new companies formed last year.