China's Floods Strain 'Boom-Bust' Economy

TWO months ago, the spindles and looms of the Xitang Village textile mill stood rusting under four feet of flood water. Soggy bags full of wool piled high against crumbling factory walls.Drenched by the heaviest rains in 100 years, the factory was one of 4,000 rural enterprises forced to halt production when floods all but shut down Wuxi, a major industrial city in Jiangsu province. But today, the mill hums and whirs as peasant women in white bonnets tend machines in full throttle. A shiny plaque recording the watermark on a newly built factory wall is one of the few visible signs of the disaster. "We are recovering fast," boasts Tang Jianrong, an official in charge of the mill in the suburbs of Wuxi. "This factory is run by peasants, so our enthusiasm is much greater than at state enterprises. We work day and night!" says the ruddy ex-farmer. China's recovery from the most destructive floods in decades is progressing more quickly than predicted, as peasants in disaster-striken areas toil to replant crops and revive thousands of tiny rural factories. But as the underlying shock of more than $13 billion in direct damage from flooding reverberates through the system, government statistics show that this summer's deluge is seriously disrupting the economy. By spurring double-digit inflation and helping to swell the 1991 state budget deficit by an estimated 60 percent, the disaster has pushed China's economy closer to a dangerous overheating, Chinese officials and Western economists say. "[The latest statistics] are very worrying. They would suggest another boom-bust cycle," said a Western economist in Beijing. Since 1980, China's economy has failed to break out of a lurching, stop-go pattern caused mainly by the continuing dominance of the state-owned sector and heavy-handed government planning. "If there is no shift in policy, this winter will be very difficult," he added. "They will surely overshoot."

Devastating the heartland The floods that swept central and eastern China in late June inundated heartland provinces popularly known as the nation's "granaries"and "treasuries" for their high agricultural output and tax payments to Beijing. One-fifth of China's total farmland was affected by flooding, causing an estimated loss of 25 million metric tons of grain in six central provinces alone, official figures show. The waters ruined summer crops and delayed sowing for the autumn harvest. Tens of thousands of factories were forced to shut down or produce below capacity. Especially hard-hit were rural enterprises, China's most dynamic economic sector, which account for 30 percent of industrial output and a growing share of exports. In Jiangsu province, the country's top industrial producer, rural enterprises make up more than half the value of manufactured goods. The province suffered some of the greatest damage during the floods, with 42,000 factories waterlogged. Today, as the waters recede, Beijing is beginning to assess the prospects for recovery. Conditions vary sharply, with poor, agricultural provinces like Anhui lagging behind wealthy, industrial ones like Jiangsu. But the overall pace is faster than anticipated. In agriculture, the summer grain yield dropped by as much as 9 percent compared with last year's, official figures show. But owing to increases in investment and acreage planted nationwide, authorities are still hoping for a "relatively good" autumn harvest. Moderate increases in grain imports are expected, Western diplomats say. After slowing in July, industrial growth revived to reach 14.6 percent in August over the same period last year. The rise in average daily output value hit the second-highest level since 1979. Rural industries led the rebound with a 27 percent increase last month. Yet Beijing's praise for the "revival of production" is mixed with new concern over inflation, especially following a more than 20 percent expansion in money supply this year. "The economy is clearly picking up at a faster speed.... We cannot ignore the latent pressure of inflation," warned the Communist Party newspaper People's Daily in an article Sept. 18.

Shortages spur inflation Western economists predict inflation could hit 14 percent this year, compared with 2.1 percent in 1990. The cost-of-living index for 35 major Chinese cities rose 10.7 percent in August compared with the same period last year, according to official figures released last week. The inflation was buoyed by sharp price rises caused by food shortages in flood-striken areas. In July, the cost of living rose 22.2 percent in Anhui's capital Hefei, and 18.3 percent in Nanjing, capital of Jiangsu. Vegetable prices more than doubled in Wuxi and other disaster zones, residents say. At Wuxi's ancient rice market, one of four national trading points for grain, prices of soy and mung beans were up some 10 percent. Yet state limits on price hikes prevented bigger fluctuations, vendors say. "If prices are too high, the government will punish me and confiscate my earnings," says one vendor, as men heaved bags of corn from his stall onto a barge in the Grand Canal. Another potential source of inflation is the ballooning state budget deficit. Flood costs combined with state enterprise losses may push this year's deficit to a record $4.1 billion - 60 percent over the earlier estimate of $2.5 billion, Chinese officials say. "It will be very difficult for us to strike a balance in our financial situation," said Yuan Mu, spokesman for the State Council, China's cabinet, Aug. 27. Hard-hit provinces like Jiangsu, which normally hands over billions in profits and taxes to the state each year, have asked Beijing to cut their contributions to central coffers. The State Council agreed in August to exempt Jiangsu, Anhui, Hubei, Guizhou, and Henan from agricultural taxes for one year. In return, Beijing has asked all provinces to curb investment to help ease the budget squeeze. It is also pressing China's wealthier, unaffected provinces like Guangdong and Fujian for more revenue, Western diplomats say. "Some belt-tightening will have to take place in the provinces," said one Western envoy. Aware of the budget crunch, some ambitious localities like Wuxi are using the floods to lobby Beijing not for tax-breaks, but for greater powers to expand free-market reforms and attract foreign investment. "Wuxi has a very strong ability to recover, but we need some special policies from the central government to overcome the objective damages," says Qian Zhixin, Commissioner of the Wuxi Economic Commission.

Second in a two-part series. The first appeared Sept. 19.