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China bets on No. 7, and for good reason

By William Pesek Jr
BLOOMBERG, BEIJING
Thursday, Mar 14, 2002, Page 19

A Chinese man smokes as he waits for work as another lists his skills on a makeshift advertisement at an illegal labor market in Beijing Tuesday. China says more than five million workers laid off from state firms were jobless at the end of last year, but others put the number between 45 to 60 million. PHOTO: REUTERS

As China's power structure joins hands and heads to plot the future, a particular number keeps coming up: seven.

No, folks here aren't playing dice or mulling deadly sins. In fact, China would probably like to see growth come in closer to 8 percent, since eight is considered lucky here.

What they're trying to do is divine how to maintain stability as Communist China morphs into capitalist China. While the transition is already under way, officials are under no illusions it will be pretty or smooth. It will be anything but.

For all the uncertainty about the future, the consensus has centered on the need for at least a 7 percent growth rate. The ongoing National People's Congress (NPC) in Beijing leaves little doubt that 7 percent is a make-or-break level for the world's most populous nation. Such output, it's believed, is needed to absorb the shock of opening China's economy.

Will healthy growth be enough? Beijing seems to think so, and that's why it will continue throwing money at the economy. A record 309.8 billion yuan (US$37.4 billion) has been proposed for this year. The spending will go toward welfare programs aimed at cushioning job losses and smoothing the transition from a controlled economy toward a free-market one.

A vendor calls out to shoppers along a street market in Shenyang, in China's northeastern Liaoning Province Monday. PHOTO: AFP

Yet China faces an absolutely daunting list of economic problems that will only get worse as it lives up to its agreements under the WTO. For example, the livelihood of China's 800 million rural residents is at risk as WTO entry ends import tariffs that shield industries from foreign competition.

Beijing must figure out how to help these masses.

At a minimum, it will hog up much of the state money that traditionally has been used to prop up ailing industries. The government now needs to channel it into a safety net as millions of steelworkers, coal miners and other state workers lose their jobs in the push to make industries more competitive. Today, only 11.2 million of China's 1.3 billion people are covered by government welfare programs.

These challenges reflect the extreme complexity of balancing Beijing's socialist vision for the nation with a global economy that holds its future. There's clearly a limit to how much economic liberalization one-party rule can handle and Beijing is struggling to figure out where the boundaries lie.

"The heavy lifting of Chinese development is about to begin," says Stephen Roach, chief global economist at Morgan Stanley Dean Witter.

If you're looking for a primer on the difficulties of governing China as it steps from its rigidly socialist past into a free-market future, check out Premier Zhu Rongji's (朱鎔基) March 5 speech.

It spelled out the dizzying array of problems gnawing at the transition to a market economy. Among them are surging unemployment, plunging incomes, official corruption and backlogs of payments owed to state workers.

Yet stability is the watchword here in Beijing, and the NPC wants to ensure it at all costs. Herein lies the biggest risk for China -- that the government's preoccupation with stability pushes aside economic reform. Hence the boost in fiscal spending Beijing is planning for the year ahead. It's a move some analysts regard is risky, but unavoidable at the moment.

Surging government bond sales are increasing China's public debt load and draining investment from private companies. Already, small and medium-sized companies are having trouble getting financing. Last year, for example, Chinese companies raised 41 percent less money from initial share sales.

That's not to say China doesn't have more room to borrow.

Japan's government debt is more than a third larger than its economy; China's is still far less than one-third of gross domestic product. Finance Minister Xiang Huaicheng (項懷誠) last week said China's national debt is still "within safe limits." And with the global slowdown hurting Chinese exports, Beijing will continue to borrow and spend.

The larger concern is that key reforms will be put on the back burner as Beijing focuses on short-term pump priming. Efforts to modernize, deregulate and shore up the financial markets aren't getting as much attention as investors would like. Ditto for initiatives to increase the efficiency of capital markets. These issues, and others, will get more scrutiny as the nation tries to converge with other WTO members.

Too bad Zhu and other Chinese officials haven't done more to articulate how the government will proceed here. Zhu's recent comments certainly got at the downsides of China's hard-won WTO membership. But the government's fear of social unrest in these uncertain times looms large and will color all decisions.

Rightfully so. China's economy is the second-largest in Asia and seems huge according to some measures. But when viewed on a per-capita income basis, Chinese purchasing power is quite weak.

Add to that the specter of tens of millions losing their jobs in the years ahead and you have some idea of the magnitude of the task.

Exacerbating the risks of social unrest in China is public corruption, which undermines trust in the government. Zhu made some unusually pointed comments on the subject last week. What he didn't do, unfortunately, is suggest a mechanism for ridding China of rampant corruption. Many think the best way to do that is transparency, competitive elections and a freer press. Zhu dropped no hints that such changes are being considered.

Bottom line, 7 percent growth may help lubricate China's historic transition. What it won't do is ensure the process will go smoothly. Only bold, steady and forward-looking policy moves now can do that.

William Pesek Jr. is a columnist for Bloomberg News. The opinions expressed are his own.
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