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Monday, August 23, 1999 Published at 20:18 GMT 21:18 UK

Business: The Economy

China bans new investment

Shanghai's shops are cutting prices

Vistors and consumers in China have never had it so good. Big screen TVs sell for less than £100 ($160), while shirts can be bought for less than £2 ($3). But for the Chinese government it is part of a deflationary spiral that is threatening to undermine its attempts to modernise its economy.

The retail price index has fallen by 2.6% this year, its second year of decline, and the price of popular consumer goods like refrigerators, washing machines and bicycles has fallen even faster.

The decline in prices has made it harder for China's mainly state-run industries to move into profit, and has led to fears of more factory closures.

And the fear of unemployment has meant that Chinese consumers are not buying, even at the low prices.

In an attempt to boost profits, China on Monday banned new investment in plants producing household electrical goods, with the official China Daily's headline 'No More VCRs!'

Investment bans on a wide range of goods, including bicycles, toothpaste, candy, and microwave ovens, were announced last week. The bans take effect on September 1.

And the government says it is also planning to block the construction of new department stores and luxury hotels to counter a real estate glut.

The moves are a desperate attempt to stabilise prices by restricting output.

The government has already tried stimulating the economy by raising the wages of state officials, by increasing the government's budget deficit, and by spending more on infrastructure projects.

Backtracking on modernisation

Meanwhile China's President, Jiang Zemin, has been visiting factories, exhorting the workers to reinvigorate state companies.

"The good performance of state enterprises is not only a major economic issue .. but also a major political issue," said Jiang as he toured factories in the industrial Northeast.

But many economists believe that the campaign to restrict output is a heavy-handed approach which will ultimately backfire.

"Money is going only to those who know how to destroy capital. They can keep pulling all the levers, but until the basic mechanism changes, the economy won't recover," said Ken Courtis of Deutsche Bank Capital Markets.

Slower growth ahead

Many economists are predicting that China's economic growth rate - which the government would like to keep at around 8% to ensure a rising living standard - will inevitably fall back this year.

China's export-led growth slowed significantly this year, as the Chinese maintained the value of their currency, the yuan, against the dollar, while other Asian currencies plummeted, making their goods cheaper.

According to Ye Zhen of the State Statistical Bureau, growth could drop to 6% by the fourth quarter of 1999.

"This is unfavourable both to the country's economic takeoff next year, and its effort to maintain a long-term, stable and sustained growth rate," he said.

Particularly worrying is the social unrest that could result from not enough jobs for new workers and those who may have to be laid off from the state factories.

Trade wars

The ban on consumer investment projects is bound to discourage foreign investment in China, which has dropped off sharply this year.

China's appetite for engagement with the West in modernising its economy seems to have faded since the United States rejected its proposals to open more sectors of its economy to foreign competition in return for support for Chinese membership of the World Trade Organisation.

The main architect of that approach, Premier Zhu Rongji, has been noticeably absent from the recent economic campaign.

Managers say that valuable work time has been used by the government's "three stresses" campaign which calls for emphasis on theoretical study, political consciousness, and 'healthy' trends.

The recent crackdown on the Falun Gong sect has also distracted attention from the economic difficulties.

How China resolves its current economic difficulties could shape its political as well as economic path for years to come.

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