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CHINA; Entering a new economic era

"Readjustment" is the key word in the Chinese economy this spring. It is a euphemism for a series of daunting tasks China's communist leadership must perform if it is to keep the economy for plunging into an inflationary spiral, while meeting at least the minimum expectations of their billion people for a better life.

The Communist Party itself is on trial. Concerned editorials in party newspapers talk openly of a "crisis of faith" -- faith in the bility of Marxism-Leninism-Maoism to deliver the goods.

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Why is it that, within four years of the fall of the notorious "gang of four" headed by Mao Tse-tung's widow, Jiang Qing, China again faces so profound and multifaceted a crisis? Why, after the spurt given the economy by the liberal incentive policies of China's new leaders after the 10-year nightmare of the Cultural Revolution (1966-76), must the nation be told once again that sacrifice and hard work are required of all to make "readjustment" a success? The reasons are complex and the answers not very reassuring.

"Our economy is sick," says a leading member of China's intellectual establishment. "We have to retreat far enough so that we can go forward again in a healthy way. This requires courage and determination. If we retreat only three steps when we should go back five, this won't be enough."

It is an unusually frank admission for a country that used to talk in terms of revolutionary fervor being sufficient to sweep all before it.

But that is the mood of China's leaders today, including the dominant one, Deng Xiaoping, and his proteges Hu Yaobang and Zhao Ziyang. (Mr. Deng is vice-chairman of the Chinese Communist Party, Mr. Hu Yaobang is general secretary of the party, and Mr. Zhao is premier.)

All are hardheaded pragmatists. And that goes for Chen Yun as well. Mr. Chen, whose rank as vice-chairman is equal to that of Mr. Deng, and whose career in the party and government is just as long, is in overall charge of the economy , although from behind the scenes. "Readjustment" above all is a policy identified with Mr. Chen, who once before, in the early '60s, was called upon the rescue the economy from almost total collapse after Chairman Mao's disastrous "Great Leap Forward" of 1958 and '59.

What are the tasks that these leaders -- communists all, but realists willing to admist mistakes and to innovate if they can be convinced that results will follow -- have set themselves to do?

First, they must curb inflation, which is no longer a taboo word in the communist lexicon. Officially, the inflation rate ir running at something like 5.8 percent a year. In some cities, the actual rate is said to be three times as high.

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The tasks that follow are largely a means of carrying out this first-priority task.

The gang of four practiced an ultraleft line, with Chairman Mao's blessing, and abolished material incentives. One of the government's most popular acts after the gang's downfall was to raise the purchase price of agricultural commodities from farmers, while holding staple food prices stable in the cities. It also bestowed liberal wage increases and bonuses on urban workers. At the same time, it decentralized economic decisionmaking and enabled central government and provinces alike to engage in a veritable spree of capital construction -- investment in new plant and equipment.

The inevitable result was a huge deficit of 17 billion yuan ($11.32 billion) in the central government finances in 1979 and another deficit which probably exceeded 10 billion yuan ($6.67 billion) in 1980.

For this year, 1981, the deficit was originally expected to be five billion yuan ($3.32 billion). Some sources say it may turn out to be the biggest ever -- 20 billion yuan ($13.34 billion) unless the government drastically reduces the scale of capital construction.

Thus the leadership's second task is to cut back severely on new plant and equipment in heavy industry, in factories and equipment that may be desirable in the long run, but that require years to complete or that may duplicate existing plant and equipment.

Third, the leaders must make existing plant and equipment more efficient. This may mean closing some plants, stopping production of some items, changing production to other items, or merging plants. Even in light industry, they will have to lower the boom on local governments rushing into textile or cigarette factories expecting to make quick profits without considering wasteful duplication and inefficiency.

Fourth, they must face up to the consequences of declining oil production (which has reached a plateau of 106 million tons per year). To cover at least partly the foreign-exchange receipts earned until now mostly from oil, the nation will need a rapid increase in coal production (which requires expensive infrastructure) and a step-up in exports, of light industry and agricultural products.

Fifth, they must continue to find employment for a population that grows by more than 10 million per year, and a working age population increasing by an even larger number because of the higher birth rate of the 1960s. One well-informed Chinese source estimates that there are 14 million unemployed today. Another five to six million will be at least temporarily displaced by the restructuring of industry required by item three.

Sixth, however strained government finances may be, China's leaders cannot afford to do away with the subsidies on staple foods, on housing, and on welfare that have brought a measure of prosperity to the countryside and that cushion price increases in other areas. They must vigorously continue the building of housing, neglected in the years of ultraleftism.

The more thoroughly the first four tasks are carried out, the more difficult become the fifth and sixth, particularly this year and next.

Mr. Chen, is charge of the economy, may have to tell Messrs. Deng and the other leaders that they face uncomfortable choices. After all, it was trying to get rid of the food subsidies that precipitated the Polish crisis last year.

"Our wages are only about 60 yuan [$40] per worker," a city dweller says. "I can't afford to buy eggs on the free market, and in state stores I am rationed to a pound of eggs per month."

And there is a seventh task not many people talk about --national defense. The Chinese-Soviet quarrel remains acute, and the Chinese are as concerned about growing Soviet might and Moscow's willingness to use it as are Washington and the Western allies. But the defense budget has been kept firmly under control. In 1980, 19.33 billion yuan ($12.89 billion) was budgeted for defense -- nearly 3 billion yuan ($2 billion) less than in 1979.

In 1981, defense expenditures will be allowed to rise 4.35 percent, to 20.17 billion yuan. Leaders of the armed forces have accepted the logic that only after China's economy has grown consistently for several more years can the military share of the pie increase -- that to demand more at this stage would dislocate the economy and delay its healthy growth.

But there have been signs of restiveness within the armed forces, and there are always unforeseen events which can jack up the military budget, such as the "defensive counter-attack" China launched against Vietnam in February 1979.

This brings up in turn the question of political stability, Mr. Deng is China's strongest leader, but he has had his problems with Hua Guofeng and others. It is essential for his proteges now at the helm of party and government -- Hu Yaobang as general secretary and Zhao Ziyang as premier --that Mr. Deng remain active long enough for the structure he has gradually remolded over a three-year period in his own image to be solidified.

Sometime during the spring the 12th congress of the Chinese Communist Party will be held. This congress will elect the new Central Committee, of some 220 full members and 130 alternates, that will show how firmly the Dengist approach to the solution of China's problems has taken root.

Meanwhile, however, leaders worry that the sense of crisis that pervades the central government these days has not percolated through to all provinces and municipalities. They are uncertain how to transmit their own sense of urgency to the people at large in such a way as to spur them to sacrifice and hard work instead of frightening them into passivity.

"In the early 1960s, after the failure of the "Great Leap Forward,' the collapse of the economy was evident to all people," said one source in touch with the thinking of top leaders. "Today, it is the Central Committee [of the party] that is aware of the seriousness of the situation. The regions do not feel it as yet.

"In the early 1960s, people did not have enough to eat. But today, fortunately, the agricultural situation is good. [Last year China had the second-best harvest in its history -- over 315 million tons of grain.] This is another reason people do not see the hidden danger of the situation.

"In the 1960s, the central government was in full control of the entire economy, which was rigidly centralized.

"We sent as many as 20 million urban youths into the countryside -- some temporarily, some eventually to return. Today social conditions do not permit us to take any such drastic measures. Yet, in the cities, we have 14 million unemployed, and if our readjustment policy is to be effective, we must take measures that will at least temporarily add to that unemployment."

(Unemployment is a taboo word in China, and the word actually used by my source was "waiting for employment.")

China's economy today is much bigger than it was in the 1960s, my source continued. Because decisionmaking has been at least partly decentralized, the central government does not have total control over its own policies. Chen Yun in the 1960s had a simpler task than he has today.

Far more than at any previous period since taking power in 1949, China's communist government must exhort and persuade. It cannot simply order.

Messrs. Deng, Chen, and the others do not want to return to the old, monolithic system of government consciously taken from the Stalinist model at the very start of the People's Republic. They know it would not work. They are not about to abandon communism as an ideology or as a political doctrine, but they seem to be feeling their way toward a genuinely collective leadership, open and responsive to expressions of popular feeling. Until now, their economic policies have been popular because they have gone in the direction that the rice roots have long demanded.

But readjustment is a different story. Before people have really had a chance to begin to enjoy the fruits of their incentive earnings, they are being told that hard work and sacrifice are once again required.

"Comrade Mao Tse-tung once said, "Man must have some spirit,'" said a long New Year's Day editorial in the People's Daily after discussing the severe problems the national economy faces. "We must carry forward the revolutionary and death-defying spirit, the spirit of observing discipline and self-sacrifice, the spirit of subordinating the individual to the organization, the part to the whole."

This is language the people have heard over and over again during the past 30 years. Obviously it will be insufficient to energize the masses.

Then what will? That is the dilemma with which China's leaders wrestle as they face their most critical testing time since the fall of the gang of four.

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