China discovers inflation

AS China attempts to adjust to free-market prices, it is experiencing a very capitalistic-sounding problem: double-digit inflation. No wonder no other communist country has attempted to do what China is doing. The idea is that after the prices of almost all goods and services have been allowed to rise to their market level, competition will eventually bring them back down so that supply meets demand.

But as the Chinese are learning, eventually can be a long time off. Right now, many people are spending much if not most of their income on food. Even well-paid officials are having a tough time making ends meet.

This so-called price reform is considered critical to economic modernization, but it's not clear that the government will be able to continue the policy. Price reform was allowed to sneak up on the people, so to speak: It was introduced this spring, and not really officially announced until it was well under way over the summer. As a result of public outcry, a price freeze has been announced - which is not to say, been made to stick.

Factors other than price reform figure into the inflationary surge: extra currency issued to cover government budget deficits, as well as excessive loans by banks to businesses.

The huge price increases are hitting city-dwellers worst of all; a saving grace for the country as a whole is that 80 percent of the Chinese are country-dwellers, less involved in the cash economy.

On the other hand, the relative unsophistication of the economic and financial system has led to other problems. But there are still enough Chinese who hoard money in mattresses that the central bank has less than optimum control over the money supply.

Moreover, inflation has caused bank runs as consumers have panicked at the thought that their money would just evaporate if it were on deposit to earn interest at rates below inflation. The interest on savings has recently been raised - but banks are still stuck with lots of outstanding loans at low rates.

China faces other economic problems as well: The tax collection system is so ineffective that the government misses most of the revenue due. And official corruption is getting out of hand.

All this said, China is at least getting some results for all its trouble. In the Soviet Union the people are having to face free-market evils like inflation before they see benefits from perestroika. In China, change is apparent.

Not surprisingly, this all may have some political repercussions. Premier Li Peng and others have been arguing for slowing the pace of change and sticking with some form of planning. Former Premier Zhao Ziyang, an economic policymaker who sees inflation as the inevitable side effects to rapid, progressive change, has been toning down his free-market rhetoric.

In the months ahead, the world will be watching to see whether China continues to brave the swells and swift currents of the free market - or retreats to the calmer, if not stagnant, waters of state control and central planning.