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Monday, April 5, 1999 Published at 17:07 GMT 18:07 UK

World: Asia-Pacific

China's reform programme at a crossroads

By James Miles

China's reform programme is now at a crossroads.

In the last two decades, China has won universal admiration by steering its economy from a state of near collapse into one of the best performing in the developing world.

Now, however, it's tackling the most difficult phase of the reforms, and the man in charge of the economy, the prime minister Zhu Rongji, appears uncertain how to proceed. Mr Zhu hopes to find sympathy in America for the dilemma he faces.

Promising start, uncertain end

[ image: Zhu Ronghi hopes US support will aid his mission]
Zhu Ronghi hopes US support will aid his mission
A year ago, when Mr Zhu was made prime minister, he exuded confidence.

"No matter whether there is a minefield ahead of me or whether there is a deep ravine," he declared, "I will bravely forge ahead."

Mr Zhu pledged his commitment to a series of radical changes: cutting the civil service bureaucracy by half, turning round the fortunes of most loss-making state-owned enterprises by the end of the decade, and ending the system of virtually free housing.

But in March this year at the annual session of parliament, Mr Zhu admitted the impact of the Asian financial crisis had been worse then expected.

He said the economic environment was complicated and grim. Mr Zhu said he would press ahead with efforts to overhaul state owned industries and streamline the bureaucracy. But his mood was more downbeat than it was 12 months earlier.

There appears to be a general consensus among Mr Zhu and other top Chinese leaders on the goals of economic reform. Their aim is to cut most state-owned enterprises free of their government moorings and make them fully independent entities. The government would retain control over the largest enterprises and those of strategic importance.

With the vast majority of state owned enterprises now running at a loss thanks largely to bad management, a slowing economy and depressed consumer demand, the leadership is keen to rid itself of the burden of supporting them.

What next?

[ image: Chinese students protest]
Chinese students protest
The problem is how to achieve this without triggering major social unrest. The threat of instability has clearly weakened Mr Zhu's resolve.

In the last year, state banks have been given a green light again to lend money to loss making enterprises. Local officials have been told to put the breaks on a headlong rush in some areas to privatise smaller state-owned enterprises. Plans to privatise the housing market have been also been slowed down.

In order to head off a possible collapse of public confidence, the government has embarked on a massive spending programme aimed at pushing up the economic growth rate. This will cause the budget deficit to soar by nearly 60%.

Mr Zhu himself has acknowledged that if badly managed, the spending programme could result in what he called "serious duplication and shoddy engineering" and sooner or later trigger serious inflation.

But Mr Zhu apparently believes these risks are worth taking, even if it means piling up more problems for the future.

In America, Mr Zhu will hope to convince business leaders that China is still a good place to put their money and that its currency will remain stable. He knows that foreign investment in China looks likely to decline this year for the first time in a decade, and that this could exacerbate unemployment in major cities.

He'll also hope to gain American understanding of his government's unwillingness to press ahead with political liberalisation at such a volatile stage of the economic reform process.

The American government has strongly criticised what it sees as the stepped up repression of dissidents in China since late last year. Mr Zhu will doubtless repeat his recent plea that the West should not be too impatient with its human rights demands.

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