Hard-line Leaders Prefer Stability to Economic Reform

A POPULAR quip in Beijing reflects the mood of gloom tinged with hope surrounding China's downtrodden economic reforms: ``These days people are saying that Eastern Europe's past is China's present,'' notes a Chinese journalist. ``And Eastern Europe's present is China's future.''

Over the last decade, China has been hailed among socialist countries for its pioneering experiments in many areas of economic reform. But today, as several East bloc countries stride boldly toward market systems, China is lagging far behind.

China's hard-line leadership has slammed the breaks on market-oriented economic reforms, at least for the next two years. Preoccupied with economic and political stability, it has ruled out freeing prices, privatizing China's mammoth state sector, and other key initiatives backed by former Communist Party chief Zhao Ziyang. Hard-liners purged Mr. Zhao, a staunch reformer, and his allies last June during the crackdown on student-led democracy protests.

``China's leaders don't want to pay the cost of reform as Eastern Europe and the Soviet Union have,'' said the journalist, requesting anonymity.

Chinese and foreign economists predict China's reforms will continue in the long run, perhaps under a new regime. Economic stagnation, pressures from population growth, and falling living standards will eventually force China to restructure its economy, much as Eastern European countries are today, they say.

``Someday the sort of change taking place in Eastern Europe will influence China,'' said Steven Cheung, professor of economics at Hong Kong University.

China's stunning turnabout from a leader in market reforms to a holdout for central planning began in 1988.

That summer, record, double-digit inflation fueled by loose monetary policies stymied a drive by China's reformers, led by Zhao, to win the backing of party conservatives for a thorough reform of China's irrational pricing system.

Instead, central planning advocates represented by Premier Li Peng ruled out freeing prices and in the fall of 1988 launched a nationwide austerity program aimed at curbing inflation.

``All Zhao's policies have been totally negated,'' said a Chinese financial source on condition of anonymity.

Today, China's central planners are re-imposing state controls over virtually every aspect of the economy. Recently, for example, the government announced that for the next two years it will expand the portion of production under mandatory planning, shrinking the scope of the free market. The state will strengthen its ``direct management'' of major firms and power to authorize investment decisions.

Beijing is also retracting economic powers delegated over the past decade to factory managers and provincial officials. Communist Party cadres and officials of the party-run trade union are gaining influence within factories. Provinces, meanwhile, are losing financial autonomy from the central government.

The government is tightening its grip over China's small but dynamic private sector, cracking down on tax evasion and shutting down thousands of household- and village-run rural enterprises.

Meanwhile, Beijing has rejected a plan by reformers to free prices to fluctuate with supply and demand. Instead, the government is re-imposing a single, fixed state price for many commodities.

The leadership has also ruled out the privatization of Chinese enterprises, a logical next step following experiments in factory leasing, contracting, and shareholding that began in China in the mid-1980s.

As a consequence, Chinese factory managers, private entrepreneurs, farmers, and investors have lost confidence in the continuity of China's reforms and economic growth. Consumers are saving their money out of fear that ``great difficulties will surface in the next two years,'' Chinese economist Yang Peixin wrote in a recently published article.

Party conservatives argue that tougher controls are necessary as part of a 17-month-old austerity drive aimed at reducing inflation and ``rectifying the economic order.'' The heavy-handed policies have cooled inflation. But unemployment is soaring as many factories shut down. Industrial growth in recent months has been negative for the first time in 10 years.

``Reform means risk-taking. But the leadership is preoccupied with maintaining a stable economy to prevent social unrest. That is behind the recentralization,'' said a Western diplomat.

As power gravitates back into the hands of central planning bureaucrats, China's economic policy is increasingly characterized by stop-gap measures that fail to treat underlying problems. ``Current economic decision-making lacks any vision. (China's leaders) are fixated on hitting targets without considering their broader implications,'' the diplomat said.

Without essential price and ownership reforms that could bring market forces into full play, China's bureaucratic economy is likely to stagnate as waste, inefficiency, corruption, and unemployment mount, while living standards decline, experts say.

``China's economy is in deep trouble. It's a mess right now,'' says Prof. Cheung.