China Economy in 1993

China's Fix for Runaway Economy Is Falling

Short
By PATRICK E. TYLER,
Published: October 3, 1993

BEIJING, Oct. 2 Just a few weeks after China's economic czar, Zhu
Rongji, opened his 16-point austerity program this summer, Asian and
Western financiers were congratulating him on his early success in reining
in China's runaway economy.

He had reimposed some central authority over China's bounding expansion

by canceling scores of ill-conceived projects to pave over rice paddies with
casinos and office towers and by calling in loans that were feeding a
speculative frenzy in everything from condos to jetliners.

But more recently, the 65-year-old Mr. Zhu has admitted that the financial
state of the nation is still "relatively grim" and that his progress has not been
what he had hoped.

The United States Central Intelligence Agency, in a report to Congress that

appears to be contested by other Government economists, is warning that
economic growth and inflation in China are "threatening to spiral out of

control," raising fears that social disorder could follow. An Unpredictable

Mess

If there is any consensus about what is going on in China's economy today it

is that it is a mess, perhaps an enviable mess to other countries that would
like to see as many investors pouring into their airports as are pouring into
China, but an unpredictable mess nonetheless.

Partly as a result of the new austerity measures combined with the effects of
unabated inflation, some of China's state-owned factories are having trouble
meeting their payrolls, and others have been forced to cut production
drastically. A General Motors Corporation joint venture to build light trucks
in northeastern China saw its output wither by half in the first two months of
the austerity program as bank credits dried up.

Meanwhile, prices are still soaring. The cost of industrial raw materials is 40
percent higher than last year, as is the price of steel.

Inflation in big cities is at a four-year high of more than 20 percent, and

China's money supply, which no central authority seems to be able to control,
has been expanding at a rate of 30 percent a year since early 1992.

Still, with the steps that have been taken so far to stop wasteful investments,
real estate speculation and an explosion of credit, Government economists
like Fan Gang at the Chinese Academy of Social Sciences assert that "the
bubble" of speculation "has been stopped." But he acknowledged that
"inflation is still not under control."

A World Bank economist here, who said he might have agreed with the C.I.A.
analysis three months ago, added that "we were very concerned that if
measures were not taken," the Chinese economy would have revved up so
high that the country's transportation, energy and raw material bottlenecks
would have brought on a catastrophic gridlock and crash. 'Too Early to Tell'

But now, he added, "I would not say the Chinese economy is running out of
control." The evidence for this assertion, he said, is that "the tremendous
growth in investment has slowed down, but it is too early to tell whether that
will be sufficient."

Since early summer, when China's leaders became so alarmed that they
sacked the Central Bank chief and replaced him with Mr. Zhu, there has
been an expectation that the acerbic former Mayor of Shanghai could
somehow get the genie of money supply expansion and rampant speculation
back in the bottle and China back on a footing for more rational growth.

He sent investigators to the provinces to gather information and to bully

local officials who were circumventing Beijing's commands. He found some
provinces building so many bridges, highways, ports and skyscrapers on
concurrent schedules that they were driving material prices skyward and
overloading the system.

Worse, the provincial authorities were paying their bills with a "triangular"
pattern of debt passed among regional banks that was devaluing the national
currency and sapping revenues needed to buy summer crops from farmers,
meet factory payrolls and pay for high-priority transportation and energy
projects. Trying to Recover Loans

One of Mr. Zhu's biggest gambles was that he could suck back into the
banking system more than $38 billion that regional banks had lent to one
another to cover credits extended out the back door to factories, developers
and other investors trying to spend and get rich as fast as they could.

But in his report to the leadership on Aug. 30, Mr. Zhu admitted that he had
recovered only a third of those loans, and he has now extended the deadline
for regional bank officials to recover these funds to the end of the year.

Now that Mr. Zhu, by his own accounting, has failed to get inflation under
control, many of China's economic reformers fear that their rivals, those old
Communists who never met a free market they didn't want to bulldoze,
might once again emerge.

"I think there were a lot of naive expectations outside of China that because
Zhu Rongji is so competent, he would be able to engineer a soft landing for
the Chinese economy," said a Western economist based here. "But there is
no way for anyone to perform that kind of miracle." Mostly Flying Blind
The reason, many economists say, is that China's leaders, even when they
agree on how to run their economy, are flying blind most of the time. In
developed nations, central banks track money supply daily and impose
discipline on credit through regulation and interest rates. In China, statistics
are gathered monthly and controls are virtually nonexistent. Local officials
often deceive Beijing about their lending.
In China under Communism, the People's Bank has been little more than a
cash cow dispensing money to state-owned enterprises under a central plan.
Taking responsibility for bad loans, maintaining capital reserves to cover
loan losses and responding to money supply directives from a central
authority are concepts that are still embryonic in China.

In the West, tax systems increase government revenues as the economy

expands, but China's economic boomers, especially in the newly rich coastal
provinces, have hoarded their money and left the Government with fewer
funds to subsidize China's bottomless pit of state industries, which still soak
up more than 70 percent of Government revenues each year. Deng Spurred
Investment
In 1992, when China's senior leader, Deng Xiaoping, crusaded through the
country's southern provinces exhorting factory managers and local officials
to speed up their investment plans and thus China's economic miracle, he
only added gasoline to the fire, though at the time his motive was to defeat
hard-liners who were blocking progress toward a market economy.
"Right now the dangers of appearing to lose control of the economy are seen
to be paramount political dangers," said David M. Lampton, president of the
National Committee on U.S.-China Relations Inc., a nonprofit group that
promotes American-Chinese ties.
"All of China's modern leaders have personal experience with what economic
chaos brings in terms of mass suffering, not to mention its impact on
political careers," Mr. Lampton said.
Mr. Zhu appears to be no exception. While one part of the Government was
recently churning out anti-American propaganda over the search of the
suspect Chinese freighter Yinhe in the Persian Gulf, Mr. Zhu was busy

making soothing speeches to Western and Asian investors. Commitment to

Market
His message is that this summer's austerity program and its reliance on the
old levers of central Communist control have not dampened China's
enthusiasm for "deepening" reform and building a market economy by the
end of the decade. He pledged to press forward with plans to put state
industries on a sink-or-swim financial footing, to build a central bank and a
commercial banking system that will take responsibility for bad lending
decisions and to revamp China's tax system so the Government can finance
urgently needed projects.
"My guess is that he will use administrative measures that look serious to the
Chen Yun and Li Peng forces," Mr. Lampton said, referring to the leaders of
the conservative camp, "but I think Zhu can balance the factions and on the
other hand still be seen as a pro-reform force."
One Chinese official suggested that Mr. Zhu may already be running into
some resistance from the hard-liners and that his failure to control inflation
has weakened his position.
"The conservatives have been saying Zhu Rongji is in charge of the economy
and it is still going to the cows," the Chinese official said. "So the
conservatives are a little stronger, but so far they have no alternative
program." Price Freezes Ordered

This week, in a move that must have pleased the hard-liners, Mr. Zhu
stomped harder on the brakes when the Government ordered price freezes
on most commodities and services for the remainder of the year.
The C.I.A.'s warning aside, predictions for the outcome of the austerity
program are hard to nail down.
An economist at one Western embassy said he thought that growth would
decline to 6 or 7 percent next year and that China would take a one- or
two-year breather to absorb the stupendous expansion of the last 18 months.
But Professor Fan predicted that China's growth rate would stay at 10
percent or more next year with continued high inflation, "but not out of
control," because the leaders fear the social consequences of bringing down
the boom too hard.
"So my prediction," he concluded, "is for relatively stable chaos."
Photo: Zhu Rongji, China's economic czar, has recently admitted that the
financial state of the nation is still "relatively grim" and that he has not made
as much progress as he had hoped. (Bettmann)

Entrepreneurial Energy Sets Off a Chinese

Boom
By NICHOLAS D. KRISTOF,
Published: February 14, 1993

WENZHOU, China A few years ago, Wang Junjin was a traveling

salesman, a Chinese Willy Loman whose second home was a ponderous,
creaking sardine can of a train carrying him 38 hours each way to the
factories in Hunan Province that bought his badges and insignias.
Mr. Wang found a better way. He and his brother started an airline.

Today Mr. Wang, a short, boy-faced tycoon who looks much younger than
his 23 years, has far more need for his cellular telephone than for a razor.
His Sky Dragon Charter Airline Company offers seven regularly scheduled
flights a week and reported revenue last year of $2 million -- some of which
went into his $420 double-breasted suit and his $600 24-karat gold
bracelet.

"If the Government lets us do it," Mr. Wang said, "we'll do it." Profound
Consequences

His boldness captures the entrepreneurial spirit in China today, and the
entire Chinese economy seems to be taking off with as much energy as Mr.
Wang's chartered Boeing 737's and other aircraft. Perhaps the takeoff will

still be aborted, but there is a growing view that the incomes of China's
nearly 1.2 billion people could soar for decades with almost incalculable
consequences here and abroad.

China's economic revolution of the last 14 years is already in many ways

more profound than Mao's revolution of 1949, for Chinese history is littered
with peasant rebellions and new dynasties. But never before in recorded
history have so many people -- or perhaps even such a large proportion of
humanity -- risen from poverty so rapidly.

Based on comparisons of purchasing power, China may now have the second
largest economy in the world, ranking behind only the United States. Such
statistics, while open to conflicting interpretation, suggest that China could
overtake the United States as the biggest economy in another decade or so.
Will China Surpass U.S.?

"It may well be that when the history of the late 20th century is written 100
years from now, the most significant event will be the revolutionary changes
in China, which will soon be Communist only in a rhetorical sense,"
Lawrence H. Summers, the former World Bank chief economist, wrote last
year.

"For more than a century, the United States has been the world's largest
economy," Mr. Summers added. "The only nation with a chance of
surpassing it in the next generation in absolute scale is China."

What would China look like if it sustains its course? If it reaches Taiwan's
per-capita income levels, China will have an economy larger than all
industrialized countries in the world combined. It would be a bit like the rise
of Japan, except that China has nuclear weapons and nearly 10 times the
population.

"It's mind-boggling," said a Western diplomat who studies the Chinese

economy. "The amount of change is truly incredible."

"I really feel that it's sustainable, because of all the unfulfilled potential," the
diplomat added. "They haven't come close to meeting the level of
productivity that they could, in both industry and agriculture."

Assuming that China continues to flourish, there is still a crucial uncertainty

about what this means.

Will economic growth lead to an easing of the repression in China and the
emergence of a more democratic society? Or will it prop up the hard-liners
and subsidize the guns and spies that help keep the Communists in power?

There is evidence for both propositions, but the East Asian experience
suggests that prosperity and economic pluralism may eventually lead to
political pluralism as well.

In the short term, the authorities seem to have demonstrated that they can
combine brutal political repression with an economic miracle. No one
doubts that China's economy is one of the most vibrant in the world.

Dwight H. Perkins, the director of Harvard University's Institute for

International Development, published a book in 1986 entitled, "China: Asia's
Next Economic Giant?" If he were redoing it today, he said, he would leave
off the question mark -- or at least print it in smaller type.

"I don't see what's going to stop it, unless you can tell me a story of civil war
or real chaos amounting to civil war," he said.

Not everyone agrees, and many Chinese are much more pessimistic. They
worry about the risk of chaos or even civil war after the death of Deng
Xiaoping, the nation's de-facto emperor, who is 88. They point to immense
potential problems, ranging from corruption to the gap between economic
dynamism and political stagnation.

No present or former Communist country has completed the transformation

from central planning to a booming market economy. The East bloc
countries -- like Yugoslavia and Hungary -- also prospered when they first
introduced elements of capitalism, but they no longer seem so inspiring.

Attitudes abroad about China's prospects have fluctuated sharply over the
last two decades, mirroring the boom-bust pattern in China's economy.
Skeptics say this is simply another peak in a love-hate cycle that will lead to
new disappointment in a year or two.

In the early- and mid-1980's, there was a wave of enthusiasm about China.
That disappeared after troops fired on Tiananmen Square protesters in June
1989. The rise of the hard-liners coincided with a cyclical economic
slowdown, and all bets were off.
The economy suffered less damage from sanctions and ebbing investor
confidence than most expected, however. Last year, China's gross national
product grew by a stunning 12 percent, to an official level of about $370 per
person -- or perhaps to $2,000 or even $4,000, according to other
estimates.
As the variety of figures suggest, Chinese statistics are maddeningly
unreliable. On the one hand, they exaggerate growth rates because they do

not sufficiently take inflation into account. On the other hand, they do not
reflect the huge and growing underground economy -- encompassing
everything from sidewalk restaurants to professional scribes who write
letters for illiterate peasants. It is unclear which factor is more important,
and for all anyone knows the two distortions may cancel each other out.
Even a Slowdown May Not Stop Boom
Almost everyone acknowledges that the growth rate of 12 percent in 1992 -even if the figure is accurate -- was a fluke. The economy appears to be
overheating, running up shortages of raw materials and driving up inflation,
and the Government is trying to slow growth rates a bit, something that may
cool foreign enthusiasm for what is happening in China.
Yet even if a slowdown is in store later in 1993, some economists believe that
an annual growth rate of 6 to 9 percent may be sustainable, on average, for
another decade or more.Since 1980, China's economy has grown by an
average of 9.5 percent a year, roughly the same level that Japan and then
Taiwan and South Korea experienced at their postwar peaks.
At a 9 percent growth rate, economic output quintuples in just 19 years. In
contrast, the United States economy has expanded at an average annual rate
of about 3 percent over the last 12 years.
The industrial revolution in China is most evident in cities along the eastern
coast, like Wenzhou, 250 miles south of Shanghai. The atmosphere along the

cluttered shop-lined streets is very much like that of Taiwan two decades ago,
with frenetic activity, multitudes of small businesses and a good deal of what
Marx would have called exploitation.
"We start at 7 or 8 in the morning and go on until about 11:30 at night," said
Zhou Sailu, 37, a peasant who left her village three months ago to work at a
shoe factory in Wenzhou.
Many of the workers maintain that routine seven days a week, month after
month. They sleep in cubbyholes above the factory floor and take a break
only for Chinese New Year and in the slack season around June.
Ms. Zhou left her husband in the village but brought her daughter, 19, who
works beside her stitching shoes. They each earn a bit more than $100 a
month. When a visitor asked if her husband objected to her leaving home to
work all day in a grimy factory, Ms. Zhou smiled patronizingly at the
stupidity of the question.
"How could he possibly have any objections?" she asked. "Look how much
money I'm making!" Regulation Virtually Disappears
In any case, it is clear that it is no longer very useful to describe China's
economy as Communist, socialist or centrally planned. This year, for
instance, the Government says the central plan will account for just 6
percent of industrial production.

Economic sectors like agriculture and industry are already slipping out of
Government hands, so overall the state-owned sector accounts for less than
one-third of total economic output.
In industry, the output of state-owned companies still makes up half of
production, but the share is dropping steadily. By the Government's own
predictions, the state share will drop to 27 percent of industrial output in the
year 2000, with collective enterprises accounting for 48 percent and private
companies making up 25 percent.
These days, the problem occasionally seems to be not enough Government
regulation rather than too much. In the last few years, for instance, dozens
of factories have turned out useless contraptions that are supposed to make
people taller or to expand women's breasts. A company in Shandong
Province has learned enough about marketing that it is exporting what it
labels in bold English letters "gourmet powder." Apparently this is intended
to evoke the cooking secrets of the exotic Orient.
In Chinese characters, the product is labeled more clearly: MSG. Similarities
To Other 'Miracles'
Some economists are optimistic about China's prospects in part because of
similarities they see with the "miracle economies" of Japan, South Korea,
Taiwan, Singapore and Hong Kong. Though the link is unproven, some
people note that all these areas were traditionally influenced by

Confucianism. They say Confucianism may have left a useful legacy of

respect for education and for thrift and savings.
Perhaps as a result of the emphasis on education, China's labor force -much more than Africa's, India's or Bolivia's -- is literate enough to power an
industrial revolution. And the 38 percent savings rate, one of the world's
highest, helps finance new investment to maintain the economy's
momentum.
Like Japan, Taiwan and South Korea, China went through a process of land
redistribution, soon after the 1949 revolution, that evened out the worst
inequities in wealth. China's peasants in effect have their own land, giving
them more of a stake in the system than many peasants have in Latin
America. And in China they have a sufficient base of nutrition, health and
education to work productively in the factories sprouting across the country.
China has also adopted -- in contrast to many other developing countries -the same export-oriented growth strategy as its successful neighbors. It
maintains a realistic exchange rate instead of a hugely overvalued currency
like that of the old Soviet Union or of many developing countries.
A crucial economic advantage that China has over other developing
countries is that it has brought its population growth under control. While
China's 14-year-old family planning policies are harsh and coercive,
sometimes involving forced sterilization, they give the country an economic

edge over nations like Laos or Kenya, where the economy must expand by 3
percent annually just to keep up with the population.
What the statistical comparisons obscure is the powerful yearning to do
business that is infecting cities and villages across China. It is often said that
70 years of Communism stunted the entrepreneurial feelings of Russians,
but in China tens of millions of people are racing to start new restaurants or
factories. Some say that in the current economic boom, China may be the
easiest place in the world to make a fortune.
"My nephew is in California, looking after my business interests there," said
Zhou Jiangning, the owner of a factory in Wenzhou that produces jade
carvings. "But he says that it's easier to make money in China. Expenses are
too high in America."
Mr. Zhou earned a profit of $750,000 last year on sales of about $1 million,
and he says that profits and revenue are rising by about 35 percent a year.
He is an apt representative of China's new gilded age: in the first 15 minutes
of conversation, he mentions that his diamond-studded gold Rolex watch
cost $16,000 and asks if it is true that middle-class Americans earn less than
$100,000 a year.
"Oh," he said soberly, shaking his head sympathetically, "that's not very
much."

To be sure, many Chinese find people like Mr. Zhou less inspiring than
infuriating. The economic boom is bypassing some inland rural areas, where
tens of millions live in caves or rudimentary huts, where meat is a great
luxury, where parents cannot afford to send their children to school.
Life has never been fair, but to some Chinese peasants, it has rarely been so
unfair. One of Communist China's great achievements was a relatively
egalitarian distribution of wealth in a nation that historically had huge
disparities; now those traditional disparities are returning with remarkable
rapidity. After Deng, The Deluge?
The one ingredient in the East Asian recipe for an economic boom that
appears absolutely essential is stability, so investors are willing to risk their
money long enough to get a return. That may be the weak link in China's
strategy, for no one knows what will happen after the death of Mr. Deng.
"The best analogy with the economy today is with the way things were in the
early 1980's," said a senior Chinese official who is on the pessimistic side.
"Then the Government divided up the communes and freed agriculture.
Today it has freed the cities in the same way, and there's a burst of
entrepreneurship and initiative. But big problems will come up, just as they
did with agriculture in the mid-1980's.

"Who knows what will happen after old Deng dies?" he added. "Maybe China
will collapse into chaos. There's no chance that the hard-liners can take over
again in the long run -- that's not the risk. The risk is chaos."
That view seems to be widely shared. Many believe that if hard-liners ever
had a chance of tugging China back to the Maoist era, it was in the aftermath
of the Tiananmen crackdown. If they could not succeed then, many Chinese
say, they never will. On the other hand, chaos -- or luan, a four-letter word in
Chinese -- pops up cyclically in Chinese history, and many economists and
officials fear major upheavals that could derail all progress.
"There's a huge potential for conflicts," a Chinese journalist said. "There's
the problem of regionalism, and then inflation will come back again. And as
the economy develops, people will demand more of a political voice, and the
Government won't want to give anything up. We'll see a lot more of these
conflicts."
Regionalism is seen by many Chinese as a primary threat because the
provinces are clearly gaining power at the expense of the central
Government. Localities regularly ignore national laws and policies they
dislike, and they establish illegal barriers to goods from other provinces.
This reminds Chinese of the rise of regional warlords early in this century,
and some fear an eventual carving up of China into states that would
resemble divisions in Europe. Some Threats To the Miracle

Other challenges that could threaten China's economic development over the
next decade are these:
*Power struggles will almost certainly follow the death of Mr. Deng, and
could lead to turmoil and a coup d'etat. A coup by the armed forces might
not be an overwhelming problem for the economy, but some experts do not
rule out the possibility of fighting among military commanders and even of
civil war.
*Taiwan is suffering from an identity crisis, and there is a possibility that it
will eventually declare itself an independent country. China has promised to
intervene militarily if that happens, and the result could be an international
uproar and sanctions against China. Economic activity might be disrupted
for many years.
*Corruption is growing steadily, and at some point it may begin to sap
economic growth. Public outrage over Government officials' demands for
bribes -- along with anger over decontrolled prices and layoffs from state
factories -- could lead to renewed street demonstrations that threaten the
Government. If the Government again ordered army commanders to fire on
protesters, China would once more be thrown into a crisis.
*A less cataclysmic challenge is simply the mammoth problems that China
faces in developing infrastructure and training its workers. Investment in
railroads, ports and energy production has lagged, and may not be able to

support continued growth at current rates. Education spending is not

keeping pace with the economy, so China may not have enough skilled
workers to lift itself to a higher technological level of manufacturing.
The Chinese offer other scenarios in which the economy collapses, civil war
breaks out and the state disintegrates into regional fiefdoms. Perhaps the
important point is simply that there is a persistent cloud of uncertainty
about where China is going.
Another cautionary point is that predictions about which developing
countries will "take off" are often proven wrong. In the 1950's, the two East
Asian economies regarded as the most promising were the Philippines and
Burma. Compared with economies of other countries in the region, they
have been going downhill ever since. Will Prosperity Foster Democracy?
Even if China maintains its economic momentum, there are mixed views
about whether this will encourage democratic change any time soon. Mr.
Deng, as shrewd an analyst of China as anyone, clearly is betting that
economic growth will sustain Communist Party rule rather than undermine
it.
Yet the East Asian experience suggests that in the long run, economic growth
fosters a more open and democratic society. The middle class has eventually
sought a measure of political participation, occasionally even toppling
leaders who brought them huge increases in standards of living.

The best examples are Taiwan and South Korea, where local leaders were
forced by popular pressure in the late 1980's to start accommodating
demonstrators instead of shooting them. The middle class was a steadying
presence in each country, seeking evolutionary change rather than violent
revolution.
A middle class is emerging in China numbering in the tens of millions at
least, still a small proportion of the population, which increasingly supply
the ranks of senior officials.
Telephones, photocopiers, fax machines, computer modems and printing
presses are proliferating, and more Chinese are traveling abroad. While the
Government can crack down on protests, it seems virtually powerless to stop
the flow of information and ideas.
In Wenzhou and other prosperous cities in the economic vanguard, which
may offer a glimpse into the future, there has been almost no overt challenge
to the Communist Party. The 1989 pro-democracy protests took place on a
much smaller scale in the bustling south than in northern cities like Beijing.
Yet in these cities economic development has undermined the Communist
Party in more subtle ways, costing it its relevance and prestige.
"Girls don't want a boyfriend who's a cadre," said Xiang Zhengmeng, a
19-year-old waitress in Wenzhou. "We'd like a businessman. That way, we
can get more money and live a better life."

NEXT: Empire of "Avon ladies."

Photos: China's flourishing economic revolution is in many ways more
profound than Mao's revolution of 1949. It is led by entrepreneurs like Wang
Junjin, a 23-year-old who founded an airline with his brother. (Nicholas D.
Kristof/The New York Times) (pg. 1); As a result of a strong emphasis on
education, China has developed a labor force that is literate enough to power
an industrial revolution. At an experimental middle school in Guangdong,
students worked at banks of computer terminals; The owner of a shop in
Guangzhou offers European-made shoes for up to $200 a pair. A majority of
her customers are wealthy local entrepreneurs. (Photographs by Ron
McMillon/Gamma Liaison) (pg. 12) Graph: "Startling Growth," tracks
percent change in gross domestic product, 1978-1992, for U.S. and China
(U.S. GDP for 1992 not available) (Source: China State Statistical Bureau,
Datastream) (pg. 12)

China Sells Off Public Land to the Well

Connected
By SHERYL WuDUNN,
Published: May 8, 1993

HAIKOU, China Four decades after Communist leaders declared a "land

reform" that ultimately left almost all rice paddies and city apartments in the
hands of the state, an equally revolutionary "land reform" is under way.

In effect, real estate is being privatized on a huge scale, and it has become
one of China's hottest, craziest new businesses.

A few years ago, for instance, a economics official from Beijing came down to
this southern city and used his connections, or guanxi, to go into the real
estate business. He did not have any capital or experience, but he did O.K.
anyway: now he runs a company worth more than $50 million.

This is possible because the Communist Party has quietly but frenetically
been parceling out public lands to well-connected businesses at cut-rate
prices. So far, more than 6,000 square miles of land throughout the country
has been set aside for "sale to the public" for urban development, and the
number of areas zoned for real estate sales exploded from fewer than 120 in
1991 to about 8,700 by the end of last year, according to Government
statistics.

Economists praise the more pragmatic approach as a crucial step toward a

market economy. The problem is that the transition from an irrationally

priced centrally planned economy to a market economy offers enormous

potential for manipulation. Connections Are Crucial

Communist governments are sometimes accused of expropriating private

property without adequate compensation. But here the concern is the
opposite: Individuals seem to be expropriating the state's property at
bargain prices. Thus, today's real estate boom raises troubling questions
about land that is allocated not by prices but by guanxi. The deals sometimes
say less about market economics than about simple corruption.

"China is not yet capitalist, and it's not socialist either," said the Chinese
businessman who struck it rich, acknowledging that his connections had
been essential. "If you have guanxi, it's the time to make some big money."

All across the country, local governments, from the district level to the
county and on down to the village, have been trying to get in on the action,
declaring the lands within their boundaries up for sale. The phenomenon
has rattled the central authorities in Beijing, and they are threatening to
crack down on the boom.

Zhu Rongji, a Deputy Prime Minister, recently warned against excessive

property development, and the central Government has already started a

plan to curb real estate sales at the local level. It is also hoping to regularize
the industry by curbing speculation from foreign companies, which often
team up with local partners.

If a foreign company wants to invest in real estate, it will have to improve the
property significantly before it can officially obtain control of the land. Land
Itself Not for Sale

Of course, there is another minor obstacle: A real estate market technically

does not exist in China. Most land is supposed to belong to "all the people,"
and cannot be bought or sold.

Instead, the authorities now allow Chinese to sell the right to use the land,
for decades at a time or sometimes in perpetuity. And that is just as useful as
the land itself, so a result, in effect, is a property market.

"Selling land isn't a particularly capitalist thing," said Gu Yuanyang, an

official at the Hainan Provincial Economic Cooperation Department. "It's
like eating rice. Everyone needs to eat."

"Making money off real estate?" he added. "It's a good phenomenon."

Since no one really knows what the land is worth, however, the tendency is
for the Government to distribute land not by public auction but to those with
guanxi. Own Money Not Required

The son of one central Government leader, for instance, said he had been
able to earn $350,000 in a property deal without putting out a cent of his
own money. He had never bought or sold real estate before, but he used his
name and influence to convince a powerful middle-level official to approve a
contract to obtain the land. Then, once again through connections, he lined
up financing and turned around and resold the land.

"What was my real contribution in the deal?" the son asked. "The
connections."

Another Chinese intellectual explained how he had helped a friend to gain

approval for a block of prime land in Shandong Province. Government
officials were saying there were no more lots available for sale, but the
intellectual flew to Shandong and spent a week visiting officials at every
level.

His family had close ties to the provincial leaders, which is why his help had
been sought in the first place.

"I first talked with them about my father and then came around to the topic
of the land," said the Chinese intellectual, who also has no experience in real
estate. "I did this over and over again, and by the end, they admitted that it
would be possible to get the approval." Huge Sums Involved

Stories like this are becoming more common, and in Hainan, a

sun-drenched southern province of 6.7 million people, the amounts of
money in real estate deals are sometimes tremendous. The Hainan Pearl
River Enterprises Company, Ltd., for instance, recently earned $12.1 million
by merely buying and reselling 16 acres of land in the province.
Thirty special land development zones and 800 real estate companies have
blossomed here in Hainan, which was given special economic privileges
when it was carved off from Guangdong Province in 1988 to become a
province on its own.
Last year Chinese poured $14 billion into real estate across the country,
more than double the amount in 1991. The speculation and the corruption
tied to it, however, are stirring public indignation at a much swifter pace.
Graft is already a major source of public discontent, and there are signs that
the real estate industry is simply creating new opportunities for corruption.
Gifts and Commissions Given

Investors in real estate often hand out expensive gifts or hefty commissions
-- sometimes worth hundreds of thousands of dollars -- to Government
employees who can help arrange the sale of property. Many ordinary people
bristle when they hear stories of real estate tycoons dropping sums in an
hour or two that ordinary people never see in a lifetime. At a new
department store in Beijing, one Chinese property magnate recently spent
$5,400 on a single gold pen.
The extent of the corruption is slowly leaking out. The Government
announced about two months ago that it had caught four Hainan officials
who had illegally obtained $3.5 million worth of real estate and embezzled
$6.6 million from banks.
Some officials justify their graft by saying they have been poor too long and
deserve a chance to take part in the economic boom.
"Imagine, a bureaucrat spends his whole life in the Government, can't even
save much money and certainly doesn't consider himself rich," said a
Government official in Haikou. "He has to support a family, raise a kid. He's
got a lot of power, and there are so many people who are plying him. He's
definitely got to give in to bribes sooner or later." Alternative Called Worse
A result is that domestic speculation is likely to continue. Economic officials
say the side effects of moving to a market system are still better than the
alternative of remaining a centrally planned socialist economy.

"We are still in the process of developing," said Chi Fulin, a senior official at
the Hainan Reform Development Institute. "Of course there are problems,
and everyone thinks this place is chaos. But actually it's all very good for our
growth."
The most aggressive sellers in the current real estate craze are often
Communist Party branches, which often occupy prime locations at no cost
and can sell land-use rights for enormous sums of money that they can use
to invest in other projects or to buy fancy cars and apartments for officials.
Last year in the coastal city of Qingdao, the Communist Party Committee
sold its headquarters, a large, stately European-style compound, and moved
to cheaper space. Selling Off Famous Retreat
In the remote hills of the mid-eastern province of Jiangxi, a cash-starved
local government sold the land-use rights to Lushan, a beautiful
mountainous retreat by the Yangtze River.
Lushan, one of China's most famous sites, was a resort for the Nationalists,
who ruled China before the Communist revolution in 1949. Lushan then
became the site of crucial Central Committee meetings in 1959, when Mao
purged his Defense Minister and threatened to start a new revolution unless
the party went along with him.

The authorities recently sold 50-year land-use rights to 21 villas at Lushan to

a Hong Kong investor group for $17.5 million. One of the villas had belonged
to Chiang Kai-shek, the Chinese leader who was defeated by the Communists
in 1949. Now, the Hong Kong group hopes to refurbish and sell the villas to
rich overseas Chinese for about $2 million each.
"Chinese will want to buy these villas to show off," said Bi Fei, a
quick-talking businessman who is helping manage the deal. He added,
referring to the Communist Party leadership compound in Beijing, "Next,
we'll be selling off Zhongnanhai."
Photo: Land reform is a noble goal but economists fear the market
consequences when the impetus behind the change is simple corruption. In
Haikou, China, the privatization of real estate has been a boom to the
fortunate few who happen to have guanxi, or connections. On the street, life
has not changed. (Sheryl WuDunn/The New York Times)

China, Barreling Along the Capitalist Road, Now

Posts Strict Speed Limits
By NICHOLAS D. KRISTOF,

Published: July 23, 1993

BEIJING, July 22 China's new economic program may or may not succeed in

bringing down inflation, but it is already having one far-reaching effect: it is

making many ordinary workers spitting mad.
When millions of Chinese collected their June salaries, they found most or
all of their pay docked. The money went to purchase Government bonds,
which nearly all urban citizens have been forced to buy.
"We asked the boss how we can live for the next month if we don't get paid,
and he said we can use our savings," a 40-year-old factory employee
complained. "But a lot of people don't have savings. They depend on their
salaries to live from month to month, and now all of a sudden they have
nothing." Prices Have Jumped
The widespread grumbling reflects a general apprehension about the
Government's efforts to cool down the economy by taking money out of
circulation. In the first six months of this year, China's gross domestic
product was 13.9 percent higher than a year earlier, and industrial output
jumped 25.1 percent.
Prices in 35 large cities rose 21.6 percent at the end of June from a year
earlier. Measuring the price increase in June alone and annualizing it,
inflation would be much higher, fueled by high consumer demand and what
economists consider to be a surplus in the money supply.

There have already been a few scattered protests over the Government's
economic crackdown, and some officials fear that strikes or peasant riots
could become more frequent as austerity measures take hold.
Some provincial government offices and companies are already running out
of cash, forcing them to pay employees with i.o.u.'s. Any tightening of the
money supply may also mean that rural offices will run out of cash to pay for
the grain they buy from farmers. Optimism for the Long Term
In strictly economic terms, China's difficulties are short-term and reflect the
boom-bust cycle that has marked China's growth for the last dozen years.
Many foreign and domestic economists are still enormously optimistic about
the country's long-term prospects -- but they now sound just a bit more
defensive than they did a few months ago.
In the last few weeks, the Communist Party leadership has taken tougher
steps to rein in the economic growth. Deputy Prime Minister Zhu Rongji has
been put in charge of the clampdown, and the leadership is circulating a
secret memo, Central Committee Document No. 6, with a 16-point plan to
cool the economic pace to a more sustainable level.
Three years ago a similar clampdown also caused widespread resentment,
but then workers kept mum, remembering all too well the firing of machine
guns at protesters in the 1989 Tiananmen democracy movement. These days,
people are far less afraid of the Government, and rising anger and
diminishing fear could be a volatile combination.

In the Government's nightmare scenario, the clampdown would take hold in

the coming months and stir growing unrest -- and just at that moment Deng
Xiaoping, the frail senior leader, who turns 89 next month, would die. It's
the kind of possibility that sends tremors down the spines of party officials.
Docked $20 to $100
As economic problems go, China's are not so bad: the worry is not that
growth has stalled but that it is careering out of control. In economies as in
cars, most people prefer one with a sticky accelerator to one that will not
start. But the resulting drive can be pretty hair-raising.
The forced purchases of the bonds was one of the first of the 16 points to be
carried out and -- from the point of view of ordinary Chinese -- one of the
most infuriating. Most workers were docked the equivalent of $20 to $100
for June, representing up to a month's wages, and some private vendors
were forced to buy almost $400 worth of bonds or face harassment and loss
of their commercial licenses.
This technique for bond distribution, a marriage of capitalist instruments
and Communist methods, reflects China's difficulties in making the
transition to a market economy.
Two years ago, the Government announced that it would stop requiring
people to buy bonds and that it would henceforth adjust interest rates and
rely on voluntary purchases, as other countries do.

That worked fine as long as inflation was low and interest rates were high.
But this year, the three-year bonds pay only 13.96 percent annually, so
voluntary purchasers bought only 13 percent of the bonds by the original
May 1 deadline for sale of the securities. Force Pays Off
The process went much more rapidly once the Government decided to use
compulsion. A few days ago, the authorities cheerfully announced that they
had met the target of selling $5.2 billion worth of bonds.
"Nobody wants the bonds," complained a manual laborer in his late 20's. "In
the last couple of years, they paid a high interest rate, and so the leaders
bought all the bonds for themselves. But now they hardly pay anything, and
the leaders don't want them. So we have to buy them."
Another crucial element of the 16-point plan is a 20 percent cut in
Government spending, which no one seems to think is likely to be achieved.
On Tuesday Finance Minister Liu Zhongli announced that in the first half of
the year, Government revenues rose 3.5 percent from the similar period in
1992, while expenditures rose 12.5 percent.
Mr. Liu acknowledged that the Government had much less money available
at the end of June than in June 1992. That could be an indication of cash
shortages in the coming months. Ban on New I.O.U.'s

One of the 16 points is a ban on issuing more Government i.o.u.'s to the

peasants. But the plan does not explain how the Government is to avoid

giving out i.o.u.'s, and its proposals to raise revenue by cracking down on tax
evasion sound dubious.
The plan emphasized that banks must call in unauthorized loans, and work
teams have been sent to the provinces to audit financial institutions to
insure that they obey. The plan also tries to curb real estate speculation by
weeding out development zones and taxing capital gains on real estate.
The plan calls for scaling back capital investment and public-works projects
and for a virtual ban on automobile imports in the second half of the year.
To slow inflation, the liberalization of most prices will be suspended for the
rest of the year.
Some of these measures -- like the ban on auto imports and reductions in
Government purchases -- could aggravate trade tensions with the United
States, whose trade deficit with China is already larger than that with any
country except Japan. Big Political Risks
Mr. Zhu, the new economic czar, faces enormous opportunities and risks as
he takes charge. If he manages a "soft landing," he may be rewarded with the
job of Prime Minister. That post is now held by Li Peng, who had a heart
attack in April and has since been mostly out of sight.
On the other hand, if Mr. Zhu is less than entirely successful in cooling the
economy, he could make a convenient scapegoat for other leaders. Mr. Zhu,
sometimes known as "China's Gorbachev" because of his openness to
political and economic liberalization, has plenty of enemies -- hard-liners

distrust him as a closet capitalist, and many high officials hate him because
of his tendency to humiliate those who spend more time drinking tea than
solving problems.
"Zhu Rongji is in a very dangerous position now," said a senior economic
official who is rooting for Mr. Zhu to succeed. "He's like a man trying to stop
a horse cart that is running out of control down a hill. He could just get run
over."
The challenge for Mr. Zhu is twofold.
On the one hand, he must discipline local leaders and curb inflation. Some
officials warn that if the Government cannot cool the economy soon, China
could face inflation of 100 percent or more. Cash Shortages May Come
On the other hand, if the Government tightens monetary growth and
investment too much, unemployment will rise and cash may be short.
Already, a few factories and government offices are running out of cash to
meet payrolls. In Hubei province, in central China, the employees at a
county-run guest house complain that they have not been paid for several
months. They get free food and lodging, but their salaries are in i.o.u.'s.
Considering how well China's economy is doing by international standards,
it is striking how disgruntled many Chinese are about economic issues. In
private, workers often complain bitterly about rising prices, rent decontrol,
restrictions on health-care reimbursements, layoffs and the forced bond
purchases.

"The market is ruthless and it believes in no tears," The People's Daily

warned this month, apparently in an attempt to caution the public that the
slowdown may mean more pain ahead. The newspaper said some
state-owned factories would be forced into bankruptcy because there was
simply not enough money to go around.
"Even if funds could come from the heaven like the water of the Yellow
River," the newspaper declared, "there would hardly be enough funds to fill
all of these bottomless pits."
Chart: "Taming a Dragon" highlights a 16-point plan to cool down the
overheating economy.

China Unifying Its Currency In Step Toward GATT Role

Published: December 30, 1993
BEIJING, Dec. 29 China said today that it would unify its two-tier
exchange-rate system and let the value of its currency, the yuan, float at
market rates starting Saturday.
The step brings China closer to making its currency convertible, which will
help foreign investors and improve its chances of some day entering the
world trading organization, the General Agreement on Tariffs and Trade.
"It's a gesture of good faith toward GATT," a diplomat said. "It's a sign of a
real seriousness of purpose of the Government."

The action allows businesses to freely exchange yuan for foreign currencies,
easing the flow of imports and exports and aiding China's slow shift toward a
market economy.
Zhou Zhengqing, vice governor of the central bank, said on state radio and
television that the plan "lays a foundation" for the yuan to become "a
convertible currency in the future."
He did not say when true convertibility -- allowing the yuan to be exchanged
for foreign currencies at any bank -- might occur. Pain Before Gain Expected
Today's action suggests a devaluation of the yuan. At official exchange rates
now, a dollar is traded for 5.7855 to 5.8145 yuan. But at the semiofficial,
market-driven swap centers, the dollar buys 8.7 yuan.
Despite the loosening of restrictions, the central bank made clear that
Beijing was not giving up total control of the currency.
"This unitary and controlled floating-exchange-rate system based on market
demand and supply will replace the current dual-track system," said a bank
spokesman, quoted by the official New China News Agency.
An announcement said that the bank would intervene in the market and use
monetary and interest-rate policy to keep rates stable -- just as many
capitalist countries do.
"The word 'controlled' is key," said a Western diplomat who specializes in
the Chinese economy, quoting the Government's description of the new

system. "This isn't convertibility, but it's quite a big step" because the gap
between the official and market rates is so great.
The two-track system has served as a subsidy for state-owned companies,
which were allowed to buy hard currency at the lower official rate. Pledge on
Convertibility
But China has promised GATT that it will make its currency fully convertible
within five years, establishing a foundation for worldwide trade.
Earlier this year, it began weaning state industries away from the official
exchange rate, cutting back on the amount of hard currency available at the
cheaper price.
Officials have said that 80 percent of trade-related exchanges already take
place at swap-market rates.
China also announced the demise of Foreign Exchange Certificates, the
special money for foreigners that has circulated along with the reminbi, or
"people's yuan," for 13 years. The certificates will be gradually withdrawn
from circulation, now that the artificial, two-track exchange system that
created them is to be ended.
Tourists and most other foreigners will cash in their certificates at a rate of
5.8 to the dollar. Hotels and tourist centers have demanded certificates from
foreigners while allowing Chinese to pay in yuan.
The black market for the Foreign Exchange Certificates collapsed today as
reports of the changes swept through Beijing.

Photo: China announced that it would unify its two-tier exchange-rate

system and let the value of the yuan float at market rates. Foreign Exchange
Certificates, the special currency for foreigners, will be phased out.
(Associated Press)

China Sees 'Market-Leninism' as Way to Future

By NICHOLAS D. KRISTOF;
Published: September 6, 1993

Ever since the Opium War erupted 150 years ago, China has been groping
for a way to regain the edge over the West that it enjoyed for most of
recorded history.

Now, in the 1990's, China's leaders seem to think that they have found the
Way.

The plan is to jettison Communism -- but not Communist Party rule -- and
move China's nearly 1.2 billion people into the East Asian tradition of
free-market authoritarianism. Pioneered in the 1960's and 1970's by South
Korea and Taiwan, this East Asian model combines harsh single-party rule
with competition in the marketplace.

In short, dissidents are zapped with cattle prods and the economy is prodded
with market incentives.

After Deng Xiaoping, China's current paramount leader, was purged in 1976,
the People's Daily quoted Mao Zedong as saying that Mr. Deng "knows
nothing of Marxism-Leninism." Mao may have been half-right, for the
89-year-old Mr. Deng has even advised visitors from developing countries
not to bother with Marxism.

At the same time, Mr. Deng and other Chinese leaders retain a fondness for
Leninism, in the sense of highly disciplined one-party rule with centralized
decision-making. Their aim, in other words, is Market-Leninism.

In some ways, China already resembles Brezhnev's Soviet Union or

Honecker's East Germany less than it does modern Indonesia: a nepotistic
and corrupt dictatorship that presides over a booming market economy with
both state and private sectors. Mao once talked of China's becoming another
Soviet Union; Mr. Deng reserves his highest praise not for a socialist country
but for that bastion of capitalism, Singapore. Paramount Leader's Paradise

The attraction of Singapore is that it has achieved Western living standards

without being infected by Western political standards. Singapore is a

paramount leader's paradise, for it is populated by clean-cut, law-abiding

citizens who obligingly use their ballots to keep their rulers in power.

"China's dream is to become another Singapore," a Western diplomat noted

the other day. A few feet away, a foreign ambassador responded without a
pause, "It'll never happen."

Whether China will succeed in transforming itself into another Singapore -or even Indonesia -- is one of the fundamental international questions for
the next decade or two.

If China can make that metamorphosis, a new superpower could emerge in

the 21st century. If it fails to transform itself economically and politically,
perhaps collapsing under popular resentments and ethnic and geographical
divisions, then many Chinese officials believe that civil war and massive
chaos are possible. In that case, more than one-fifth of humanity could be
caught in the upheavals, new states with nuclear weapons could pop up in
the center of Asia, and a tidal wave of tens of millions of boat people could
engulf distant shores. Police Sell Cattle Prods

But whatever the future holds, it is already pretty clear that China is no
longer a Communist country in any meaningful sense.

No Communist country, at least, has ever so fully embraced stock markets,

satellite television, private colleges, Avon ladies, music video and radio talk
shows. The Communist Party is still in command, but its branches no longer
devote much energy to controlling ideology. Instead, in the 1990's the
business of the party is business.

The State Security Ministry runs a bakery, the Police Ministry sells electric
cattle prods, and -- until it was caught -- the party's official women's
organization ran a brothel. Misleading Froth The Underside Of a Boom

The party's avarice and materialism tend to impress foreign visitors, who are
dizzied by aggressive quasi-capitalism: the glitzy discos that keep everyone
bopping until the wee hours, the 30 Rolls Royces sold so far this year in
China, the luxury restaurants that sprinkle bits of 24-karat gold into their
dishes because rich patrons think it is good for longevity.

Yet all this is froth, and misleading froth at that. When foreigners rave at the
sight of all the gleaming new high-rises under construction in Beijing, local
people sometimes respond with a cynical old folk saying: On the outside,
even donkey droppings are shiny.

Visitors who travel only to major cities learn about as much about China as a
foreigner would learn about the United States from a few days spent next to
the pool of an elegant hotel in Beverly Hills. In the countryside, where
three-quarters of the population lives, the peasants are far more likely to
inhabit caves than discos, and for every Chinese who eats gold there are
millions who cannot afford meat.

Just as important, this scramble to get rich may be undermining China's

value system. Many Chinese worry that the social contract is collapsing, for
the old glue that held society together -- Communism -- has lost its adhesive
qualities. The Chinese have a saying: "yi fang, jiu luan" -- as soon as control
eases, there is chaos.

"All the time in Chinese history, when you don't have strong rule, you get
chaos and warlords," said a military official in an extremely sensitive post.
"If we try to get too much democracy, it'll all fall apart again. China will
disintegrate, and it'll be worse than in the Soviet Union." Selling Military
Secrets
The official complained that social order is disintegrating because of an
almost universal desire to make money, and he seemed to know something
about that. His purpose in arranging the meeting was to try to sell a reporter
top-secret information about Chinese missile sales to Pakistan.

His forehead glistening with sweat as he contemplated the executioner's

bullet that would rip apart his skull if he were caught, he provided evidence
of his role in the missile program. He said that China was continuing to sell
M-11 ballistic missiles to Pakistan, and he offered to provide the dates of
shipments, quantities and other specific data in exchange for cash.
The United States formally concluded late last month that China was selling
M-11 missile technology to Pakistan, in violation of international agreements,
and imposed economic sanctions as a punishment. But the United States has
not formally determined whether China has sold the complete missiles
themselves to Pakistan.
Told that reporters do not pay for information, the military official asked for
an introduction to an American diplomat who would pay. When that request
was turned down as well, he declined to provide detailed information about
M-11 shipments.
In the course of two lengthy meetings, in which a reporter tried to persuade
him to give the information for free, and he continued to press for an
introduction to a diplomat, the military official explained how he decided
after months of agonizing to betray his country.
"If my neighbor's kid gets a toy, then my kid wants it too," he reflected
during a tense meeting under a lamppost late one night. "Life's a

competition now. Everybody's trying to make money. Everyone! Hey, I'm

just trying to cash in on what I have."
The no-holds-barred capitalism shows in all kinds of ways. Children
regularly die, for example, after drinking fake medicines that fly-by-night
entrepreneurs churn out without regard to effectiveness or safety.
Restaurant owners in at least half a dozen provinces have been caught lacing
their dishes with opium pods in an effort to make their food literally
addictive. The Ministry of Public Security became so alarmed that it recently
ordered a crackdown on the use of opium as a spice.
In the village of Haotou, in southern China's Guangdong Province, the
peasants figured out an easy way to join the market economy. They began
kidnapping girls and young women from other areas, hauling them back to
the village and forcing them into prostitution. Many of the peasants turned
their homes into brothels employing more than 100 sex slaves.
Corruption has grown to such huge proportions that President Jiang Zemin
warned last month that it threatened to ruin the Communist Party itself. A
few years ago, the problem was petty bribery of a few dollars; now officials
steal millions or billions.
In June, the Agricultural Bank of China disclosed that officers of one of its
branches had issued fraudulent letters of credit for $10 billion. The fraud

was revealed only because the bank wanted to make clear that it would not
honor the documents.
Minor graft has turned into Mafia-style organized crime. Particularly in
coastal areas of southern China, local party and army officials have joined
forces with criminal gangs in Hong Kong and in Chinatowns abroad to
engage in massive smuggling and other rackets.
More than 90 percent of the videocassette recorders sold in China have been
smuggled in, often with the help of the police, the army or border guards. In
the first four months of this year, South Korea exported 26,000 cars to
China, but only 166 were reported to Chinese customs officials so that duties
could be paid.
Police officials in Beijing run a prostitution racket out of an army-owned
hotel. Doctors routinely demand bribes of hundreds of dollars before
performing major surgery, and journalists demand payoffs for attending
corporate news conferences. Failed Experiment A Crisis Of Legitimacy
"Corruption is much worse now than it ever was under the Nationalists,"
said an octogenarian former senior official, in a reference to the Government
that the Communists overthrew in 1949. It is a bold statement, for
corruption was so rampant under the Nationalists that the Government had
virtually rotted away by the time the Communists overthrew it.

The old man was eating dinner in the spacious apartment that the
Communist Government gave him as a reward for many decades of faithful
service to the party. He has enjoyed all the perquisites of power in China and
has even played bridge with Mr. Deng. But, largely because of the corruption,
the party's esteem for him is not reciprocated.
"I'll tell you, in 1949, I hated the Nationalists," the old man said. "I went to
welcome the Communists when they entered Beijing and I cheered for them.
When a Communist soldier was shot, I went to get help for him. At a
meeting in my office to discuss what to do, I was the first to speak out. I said
we should support the Communist Party."
"Now, I would welcome the Nationalists back," he added bitterly. "In fact, I
would go out and lead them into Beijing."
That sentiment is not unusual, particularly among intellectuals. Even many
Communist leaders are said to acknowledge privately that the grand
experiment to which they have devoted their lives has in many respects been
a failure.
In the United States, many college radicals of the 1960's have changed their
views and become bankers. The thinking of many Chinese leaders appears to
have undergone a parallel evolution, but it is always easier for members of a
congregation to slip out than for the high priests to stand at the altar and
admit to atheism.

"None of them really believe in Communism any more," said the child of one
Politburo member. The widow of a top leader says: "He stopped believing all
that long ago, but what could he do? The only person he could admit it to
was me."
Some Chinese -- including the old man who would welcome back the
Nationalists -- believe that the Communist Party is a collapsing dynasty, just
like all the other dynasties that have disintegrated in the past. They point to
the irrelevance of its ideology, just like that of Confucianism at the end of the
Qing Dynasty a century ago.
Confronted with a crisis of legitimacy during a period of widespread
alienation and corruption, the Qing rulers responded with the same
combination of repression and reform that the Communist Party has
repeatedly tried. The New Revolution Economic Forces Remold a Nation
There is a huge difference, however, between China at the end of the Qing
Dynasty and China today: In the 1990's, China has the fastest growing
economy in the world. Instead of disintegrating into floods and famines, the
former sick man of Asia is enjoying the fruits of the world's latest economic
miracle.
Prof. Thomas B. Gold, a sociologist at the University of California at Berkeley,
agrees that China resembles a disintegrating dynasty, but he argues that the

economic boom makes a crucial difference. It may have the momentum to

keep the country going, he says.
"In many ways, what is happening in China today is more revolutionary than
what the Communists did," Professor Gold said. He notes that change used
to come from the top in China, dictated by political campaigns. But now it is
the nation's economic forces that are remolding the nation.
The emerging China, Professor Gold and other scholars suggest, will look
increasingly like Taiwan and South Korea. On other continents, the parallels
may be Spain under Franco in the 1960's or Chile under Gen. Augusto
Pinochet in the 1970's.
Among the crucial changes in Taiwan, and in the other East Asian countries,
were a rise in educational and income levels, greater interaction with the
outside world and the emergence of a technocratic elite in the bureaucracy.
The economic boom nurtured a growing urban middle class that was able,
after the passing of the old guard, to demand what might be called stable
change: far-reaching political and economic liberalization achieved without
spilling too much blood.
The same processes are under way in China. It is an open question whether
the Communists would allow them to work if it meant the party would be
presiding over its own demise. Moreover, it is far more complicated to
choreograph the transformation of a nation of 1.2 billion people -- including

minorities like Tibetans -- than it is to transform a city-state like Singapore

or an island like Taiwan.
The uncertainty about China's prospects reflects a long debate about
whether a market for goods can flourish for long if there is no companion
market for ideas. Particularly in the West, many people assume that China
will be unable to liberalize its economy successfully if it does not liberalize its
political system.
Yet in Asia, many people draw the opposite conclusion. They see
democracies like the Philippines where economic growth is anemic and
conclude that industry grows best in tightly controlled political greenhouses
like China. The Soviet Union under Mikhail S. Gorbachev emphasized
"glasnost" more than "perestroika" -- openness more than economic
restructuring -- while China has churned up some impressive statistics by
trying perestroika more than glasnost.
If China continues to thrive, it will offer a lesson to the third world that the
West may find profoundly unsettling: Political repression is the grease that
can lubricate an economic boom.
For students of the Soviet Union, one of the longest arguments was between
those who foresaw the state's collapse and those who predicted convergence
with the non-Communist world. In the case of the Soviet Union, those who
took the bleakest view were proved right.

Now the same argument is raging about China. One of the most talked-about
books in China in recent years was a prediction of the collapse of the
Communist world, written by Zbigniew Brzezinski in the 1980's and
published in Chinese in a limited edition for senior officials.
Some young Chinese intellectuals worry that the Communist Party will
survive the collapse of Communism, and that what the leadership is really
trying to build is fascism. Mao himself was the first to warn of this risk.
"We are afraid that we will stop being a revolutionary country and will
become a revisionist one," the Chairman said in 1963. "When that happens
in a socialist country, it becomes worse than a capitalist country. A
Communist Party can turn into a fascist party."
And so, some argue, it has. There are parallels, for example, with Italy under
Mussolini and especially with Spain under Franco, in the sense that China is
an authoritarian, militarized and disciplined society in which
state-controlled corporations compete in market conditions. A Huge
Improvement
Even if what is emerging in China is fascism, however, in practice it
represents a huge improvement for most Chinese. The Government still
smashes those who challenge it -- the authorities sentenced a Chinese
journalist to life in prison on Aug. 30 for leaking an official document -- but
it no longer tries to regulate every aspect of daily life.

When China had a redder tint, its people could not wear lipstick, listen to
rock music, have foreign friends, dress in colorful clothes, or use "bourgeois"
expressions like "Miss." Now Chinese have reclaimed their private lives from
the Communist Party; once again, they can display personalities.
In short, China seems to be in an immensely important transition from
totalitarianism to authoritarianism. Dissidents are still brutalized, but life
for the average peasant or worker -- who knows that politics, like explosives,
are to be avoided -- is relatively free.
It may be no more than the freedom of a bird cage. But most birds probably
would prefer to be able to fly around in a cage than be skewered on a
rotisserie, which is what life in China used to be like.
NEXT: The "real" China, bullying or benevolent?
Photos: Alongside images of the past, modernity and wealth abound in
Shanghai, above, and other Chinese cities. (Dan Habib/Impact Visuals);
Despite steps at modernization in China, in the countryside, where
three-quarters of the population lives, the peasants are far more likely to
inhabit caves than discos, and for every Chinese who sprinkles gold on food,
there are millions who cannot afford meat. (Associated Press); The path
China seems to be taking combines economic freedom with political
authoritarianism, as evidenced by a billboard in Guangzhou urging people to

"get rid of poison and evil in order to create a prosperous society." (Agence
France-Presse)(pg. 5) Map of China showing location of Beijing. (pg. 5)

BEIJING RESTRICTS LAND SPECULATION

By NICHOLAS D. KRISTOF,
Published: August 15, 1993

BEIJING, Aug. 14 Pressing ahead with its clampdown on runaway

economic growth, the Chinese Government has banned new golf courses and
announced that work on some luxury hotels and villas will be halted even
though they are already partly built.

A seven-point directive issued by the central Government reflects its efforts

to regain control over the real estate industry from local developers.
Thousands of small property companies have been making huge profits by
"chao di," or "stir-frying property" -- buying and reselling in a speculative
frenzy.

The document said the Government would impose strict limits on the
amount of land that can be leased for development and particularly crack
down on the rush to build luxury villas, hotels, office buildings and country

clubs. Some of those now being built are supposed to be converted into
standard apartments, to ease the housing shortage, and into regular
commercial buildings.

The new measures also threaten to shut down real estate companies that
"stir-fry property" without actually developing it. Fear of Inflation

"The Government will sternly punish those who engage in speculative

activities with the aim of making quick money rather than a long-term
investment," the New China News Agency said Saturday night in
announcing the crackdown.

The new measures are part of a broad program that the nation's leadership
has introduced to cool the economy. While Western governments may view
economic overheating as preferable to the recession many of them now face,
Chinese leaders are concerned that their boom is unsustainable and will
result in spiraling inflation.

The People's Daily announced on Thursday that the Government has closed
1,000 of the nation's 1,200 economic development zones. These zones were
set up by local authorities to attract foreign and domestic investment, and

they often offered tax breaks and special incentives that violated national
policy.

A few days ago, the Government also announced plans to transform

one-third of state-owned companies into limited-liability corporations
responsible for their own profits and losses. That would mean that if the
companies suffered persistent losses, the Government would not bail them
out and they could go bankrupt. New Social Umbrella

In another sign that bankruptcies and layoffs may be permitted in China on

a far broader scale, the official China Daily said today that all urban workers
would be brought under a social insurance umbrella within two years. That
way, they will get unemployment benefits if they are dismissed.

The result is that it will be politically more palatable for the Government to
permit large-scale layoffs. In the past, the Government has worried that
workers who are laid off might organize protests, and so it has tended to
subsidize even loss-making enterprises that have little hope of ever turning a
profit.

It has been evident since the end of last year that China's economic activity
was accelerating to a dangerous degree, and the Government began to urge

restraint in speculative investment and property development. But in

January, Deng Xiaoping, the 88-year-old senior leader, declared that the
economy was not overheated. With the emperor, in effect, having spoken,
the nation's entire leadership and bureaucracy switched positions and urged
that growth could be accelerated.

Mutual Funds; The China Factor in Asia Funds

By Carole Gould
Published: June 13, 1993

SPURRED on by China's movement farther and farther from a controlled

economy, "China funds" have been popping up fast -- so fast that only one
among four new China-flavored mutual funds and three new closed-end
China funds has celebrated its first birthday.

Their timing seems auspicious. Late last month, the International Monetary
Fund reported that, at $1.7 trillion, China's economy is four times larger
than previously believed and the third-largest in the world, behind the
United States and Japan.

But investors who want to tap into China's fast-growing economy should
remember that "10 to 12 percent economic growth rates won't translate into
big investment returns overnight," said Colin Mathews, a closed-end fund
analyst with Morningstar Inc., fund researchers in Chicago. And, like all
investments in emerging markets, these funds carry plenty of risks.

From the time they came to market last summer, the three closed-end funds
-- the China Fund, the Greater China Fund and the Jardine-Fleming China
Region Fund -- have been volatile. They trade, like common stock, on the
New York Stock Exchange, and began selling at premiums of roughly 8
percent over the net asset value of the securities they own. But by October,
all three had fallen to discounts approaching 20 percent.

Why? Because the funds are so similar, supply exceeded demand, explained
Thomas J. Herzfeld, in Miami, a specialist in closed-end funds. Then there
was a buyers' riot on China's stock exchange, followed by a threat in the
United States to revoke China's most-favored-nation trade status.

But the funds quickly rallied when China agreed to reduce barriers to
imports from the United States, averting a costly trade war. Then in April
the Securities and Exchange Commission ruled that the funds were allowed

to buy "B" shares -- Chinese company shares created for foreign investors -clearing the way for direct investment in Chinese issues.

Until the S.E.C. ruling, Chinese investments were nearly impossible. So

funds labeled "China" haven't necessarily invested there, or at least not
heavily, and that's still true. Direct Chinese investments account for only 16
percent of the Greater China Growth Fund's portfolio, for instance, and just
3 percent of the China Fund's.

Mutual fund investors likewise can only get a taste of China through regional
funds. The two granddaddies here are Newport Tiger, started in 1989, and T.
Rowe Price's New Asia, the only no-load in the group, set up in 1990. Two
more began investing last year: the Merrill Lynch Dragon Fund and the
Eaton Vance Greater China Growth Fund, in Boston, the first mutual fund to
make China, rather than the Pacific Rim, its investment focus. In April, Van
Eck, in New York, set up the Asia Dynasty Fund and Fidelity introduced its
Southeast Asia Fund.

None of the China mutual funds, however, are loading up on direct

investments in China. Instead, all try to capitalize on China's growth mainly
by buying shares in Hong Kong, Korean or other Pacific Rim companies with
large sales revenues from China or manufacturing facilities there.

Typical is Eaton Vance, which invests just 4 percent in China -- in Shanghai

Refrigeration Compressor, Dazhong Taxi and Shenzhen China Bicycle,
among others. Some 45 percent is in Hong Kong, whose exchange is better
established and better capitalized, 13 percent in Singapore, roughly 10
percent each in Malaysia and Korea, and the rest in the Philippines,
Thailand and Taiwan.

Newport Tiger, with no direct investment in China, has 48 percent of its

portfolio in Hong Kong and the rest throughout Asia. "The China story is
compelling, but it's going to be some time before the securities markets are
settled enough to invest there," said Tim Tuttle, managing director of the
fund's sponsor, Newport Pacific Management.

George Murnaghan, vice president of Rowe Price Fleming International,

sponsor of the New Asia Fund, said, "We looked at 'B' shares, but there are
cheaper ways to get China exposure." New Asia has 31 percent of its portfolio
in Hong Kong and the rest in Malaysia, Singapore, Thailand, Australia and
New Zealand.

Most of the funds plan to continue investing outside China despite the
S.E.C.'s blessing to plunge in. Valuations are high on the Chinese exchanges,

managers say, partly because so few new issues are floated on the exchanges,
which are not very liquid anyway.

Managers are enthusiastic about China's prospects, but concede that interim
performance will probably be erratic, despite flashy gains this year of 30 to
35 percent (closed-end) and 19 percent and up (mutual) funds.

Mr. Mathews suggests that investors hang onto shares in Pacific Rim funds
for at least 10 years to capture the long-term value built into China's
economic prospects, and limit their exposure to only a small part of the
high-risk portion of their portfolios. As shown by the lukewarm performance
of funds that sprang up after Eastern Europe opened for investment, new
and uncharted territory isn't easy to till profitably.

As for the closed-end funds, today they again sport hefty premiums and Mr.
Herzfeld advises waiting to buy until the funds return to discounts -- which,
because the funds react so sharply to political news, he noted, could be any
time.

Review/Television; To Let a Thousand Bull

Markets Bloom
By LOUIS UCHITELLE
Published: November 11, 1993

After watching Adam Smith's two-part series on the Chinese economy, the
first impulse is to invest, to get in on the ground floor of China's booming,
astonishing economy.

That is not an unreasonable impulse. On Channel 13 tonight and on Nov. 18,

Mr. Smith offers a vivid glimpse of China's emerging middle class, now 200
million people and climbing rapidly. Supplying them makes China a golden
market, not only for American companies with products to sell but also for
Americans with money to invest in the Shanghai and Hong Kong stock
markets.

Mr. Smith calls it the "China play," and he brings on a Western investment
banker in Hong Kong who says, "I foresee a 50-year bull market
developing."

We have heard this sort of message, of course. The Chinese economic

miracle is a favorite and important media theme; Mr. Smith breaks no new

ground. But in his simple, explanatory style, he makes the Chinese

marketplace understandable to Americans only casually acquainted with
China.

The two half-hour programs are a quick, viewer-friendly course in Chinese

economics. They reflect Mr. Smith's surprise, on his first trip to China since
1976, at the buying power and size of the consumer population. He mentions
in passing that for all its vigor, China's economy could founder, given that
nation's various political and civil-rights problems, and even the possibility
of regional conflicts.

He notes that the 200 million middle-class consumers represent less than
20 percent of China's population, clustered mostly in urban coastal areas,
while 1 billion Chinese inland still suffer from poverty and hardship. Will
this mix erupt in some unforeseen way after the death of Deng Xiaoping,
China's 89-year-old leader?

While other journalists raise these downside problems in detail, the message
of Mr. Smith's program is that the worst-case scenarios won't happen: China
will stay on the high road, regaining the glory it enjoyed through most of
history as a rich and powerful nation. So get aboard, America. Or, as J.

Stapleton Roy, the American Ambassador, puts it, China is a market that
cannot be ignored.

Mr. Roy makes several appearances, becoming a sort of assistant narrator,

reinforcing Mr. Smith's message and providing some startling statistics. The
Chinese economy, he says, is growing faster than any other nation's, and at
the current pace will be the wealthiest economy in the world in 30 years. For
every 100 urban households, there are 101 television sets, 77 cameras, more
than 55 VCR's -- and good products, not cheap merchandise.

In the rich Guangdong Province near Hong Kong, wages and incomes are
rising by 20 percent a year, on average, and bank deposits by 40 percent, Mr.
Roy reports. And other experts tell us that by the end of the century, China
could have more billionaires than the United States, while already 80 million
people in the rising middle class make $10,000 a year.

This rich marketplace has already paid dividends for American companies,
Mr. Roy explains, giving Mr. Smith's documentary just the suggestion of a
sales pitch for foreign investment. A visit to the A.T. &T. operation, trying to
supply China's huge demand for telephones, demonstrates the payoff now
and to come for one big investor. And then Mr. Smith and his camera crew
move quickly to the next scenes and interviews, never bogging down as they

portray, in broad strokes, China's new wealth, its modern cities and rising,
Westernized middle class.

Mr. Smith's great skill is in the insights that explain in some simple,
memorable way how economics works. His visit to a Beijing family -parents and young daughter -- does this towards the end of tonight's
program. The parents, two of China's new consumers, earn $141 a month, he
as a property manager and she as a bookkeeper. But they spend only half
this income on necessities in a nation where the state still subsidizes rents,
utilities and three daily school meals for their daughter.

That leaves half the income for consumption, a neat explanation of how
China can be both a great source of low-wage labor and also middle-class
consumption. Can the subsidies and the good times last? No one knows, Mr.
Roy says, but Mr. Smith bets that the good times will. Adam Smith Made in
China PBS, tonight thursday at 8 (Channel 13 in the New York area) First of
a two-part series produced by Alvin H. Perlmutter, Inc. and WNET/New
York. Peter Foges, producer; Douglas P. Sinsel, coordinating producer; Ellen
Egeth, associate producer; Laura Blodgett, researcher; Nancy E. Pelz-Paget,
program administrator; Terence Williams, creative consultant; Alvin H.
Perlmutter, executive producer; Adam Smith, host and editor-in chief.

THE WORLD; As China Leaps Ahead, The Poor

Slip Behind
By SHERYL WuDUNN

Published: May 23, 1993

GUIYANG, China A NEW way of measuring the world's economies has

vaulted China from the ranks of third-world nations to those of the economic
powerhouses. Under calculations being introduced by the International
Monetary Fund this week, relying on the buying power of each nation's
currency rather than its dollar value, China's economy comes out four times
bigger than most previous estimates. That makes it the world's third-largest,
after the United States and Japan.

But the confirmation of China's enormous economic power helps to obscure

the unevenness of the nation's economic development. China may be the
world's fastest-growing economy on its way to becoming the world's largest
market, but that represents primarily the activity along the country's coastal
rim, from the northeastern tip of Manchuria all the way down past Hong
Kong.

In fact, what has emerged in the past few years is a two-tier economy that is
broadening the gap between rich and poor. This is worrisome to China's
leaders because the same sort of gap prompted Communist guerrillas like
Mao Zedong and Deng Xiaoping to fight to overthrow the old order in the
1930's and '40's.

In its more Communist days, China was relatively egalitarian as countries go,
for no one had much of anything. Indeed, the economic restructuring begun
in 1978 by Mr. Deng, the nation's senior leader, initially created a more
equal society. By stimulating growth in the countryside, it raised living
standards closer to those of the cities.

But last week, Deputy Prime Minister Zhu Rongji warned that over the past
six months disparities between China's different regions had "widened to
some extent." That seems an understatement. All indications are that
income disparities have been growing since the mid-1980's, and that the
pace is now accelerating.

"That could provoke a great deal of disenchantment and impatience among

those whose lives are lacking," said Carl A. Riskin, a specialist on the
Chinese economy at Queens College in New York.

In Guizhou, a landlocked southern province, the poverty is striking. In the

mountainous countryside surrounding the city, a handful of children, their
small bellies slightly distended, run around half-naked because their parents
can't afford to buy them clothes. Huts are made of tree trunks, branches and
straw. The typical resident's income was $123 last year, about one-sixth the
average income in Shanghai.

China's 30 provinces were never all that much alike in the first place, but in
their earlier years the Communists diligently played Robin Hood. They
milked rich places like Shanghai to give to poorer regions. But the policy has
shifted dramatically over the years, and now the contrast is sharp. The coast
is vibrant, with executives striking thousands of deals every day with the
outside world. The interior is crawling -- admittedly, faster than before -- yet
even Chinese refer to this four-fifths of the nation as "China's third world."
Rich Get Richer

Guizhou belongs to this other world. For the past dozen years, while
provinces like Guangdong and Jiangsu were given economic privileges to
develop, Guizhou was asked to supply its coal, timber and other raw
materials at fixed state prices. The logic was that economic activity would
"trickle in" to remote areas, as land, labor and transport costs rose in more
developed regions.

The problem is that such a process is likely to take decades. Meanwhile,

poorer areas are still subsidizing richer coastal areas with cheap raw
materials. Officials tacitly acknowledge this phenomenon, but they defend it
as imperative for progress.

"Development must be stable and orderly," said Zhao Jiaxing, vice director
of Guizhou Economic Commission. "Actually, China can't develop evenly.
But after the coastal areas get rich, their people will come here."

By some accounts, the nation has four or five million millionaires as

calculated in local currency. (A million yuan is equivalent to about $175,000
at the official rate of exchange.) Some Chinese believe that such estimates,
reported in the Chinese press, are exaggerations, but they have aroused
some resentment.

"A certain level of gap encourages people to work," said Zhu Qingfang, who
researches income differences at the Chinese Academy of Social Sciences.
"But if the gap is too big, it makes people feel uneasy."

In any case, the disparities are creating strains. Conspicuous consumption is

growing in the cities, leading official newspapers to denounce "money
worship." Huge migrations are creating headaches, as millions of peasants

flock to cities in search of work. In the past, China restricted labor

movements, but it has relaxed those rules, partly to allow urban economies
along the coast to soak up surplus labor in the countryside.

One result is a talent drain from the poorer inland regions in China's
northwest. The "floating population" has also made it tricky for the
Government to control the birth rate. The Government's overriding fear is
that the new inequities will provoke unrest. But some Chinese argue that
even the poor are better off and therefore will not challenge the system.

"We know from TV that life in Guangdong may be better than here, but
Guiyang is better than before," said Zhang Jinghui, a peasant who recently
got a job as a vendor in this city in Guizhou. "And anyway, you can't believe
everything you see on television."

New Tally of World's Economies Catapults

China Into Third Place
By STEVEN GREENHOUSE,

Published: May 20, 1993

WASHINGTON, May 19 Saying that traditional measures

underestimate the economies in developing countries, the International
Monetary Fund has concluded that China's economy is more than four times
as large as previously measured. That makes it the third largest, behind the
United States and Japan.

The new study, to be released next week, also greatly increases estimates of
the economies of India, Indonesia, Mexico, Brazil and other developing
countries.

Until now, most studies have measured each country's output by valuing its
goods and services in dollars, using international exchange rates. Thus, if
China's currency weakened, its economy appeared to shrink.

But in the new method, national output is calculated by what goods and
services a country's currency will buy, compared with the purchasing power
of other countries' currencies.

By this method, the I.M.F. found, China produced about $1.7 trillion in
goods and services last year, far greater than most previous estimates of
about $400 billion. An Influence on Foreign Aid

The recalculation means that China's economy, one of the fastest growing in
the world, is just slightly smaller than Japan's -- and not No. 10, as
previously calculated. It is less than half the size of the United States
economy.

Many economists say the new calculation is long overdue and gives a much
more accurate picture of the developing world's economy. The study could
have far-reaching repercussions in international aid programs, where
per-capital income is crucial in determining assistance.

If China's prodigious growth continues, the World Bank said, the combined
economies of China, Hong Kong and Taiwan will be larger than the United
States economy in less than a decade.

"The main importance of this is geopolitical," said Paul Krugman, an

economist at the Massachusetts Institute of Technology. "It's a reminder
that China is a great power already, which is something many people haven't
quite grasped yet."

The new estimates, many economists say, will push policymakers to stop
thinking of the world economy as having just three poles -- the United States,
Europe and Japan -- and encourage them to add a fourth: China.

"You have over a billion people there, and even with per-capita income that's
pretty modest, you have a pretty big overall economy and a growing market
for imports," said C. Fred Bergsten, director of the Institute for International
Economics.

With China playing a larger role on the economic stage, some economists are
wondering whether it should be invited to join the Group of Seven industrial
democracies.

"China will have a very different viewpoint from the Group of Seven," said
Mr. Bergsten. "It's a developing country; its per-capita income is just an
eighth or so of that of the G-7 nations. Besides, China is neither industrial
nor a democracy." All That Non-Money Can Buy

In its new study, the I.M.F. does not measure an economy's size in the
traditional way, by translating the local-currency value of output into dollars.
Instead, the fund uses purchasing-power parity, which compares currencies
according to what they buy at home.

The measure looks at prices of a bundle of goods and services, including

food, clothing, housing and transportation, using that yardstick to compare
the total value of output in different countries.

Many economists favor this measure, noting that if a country's exchange rate
drops 10 percent against the dollar, this should not automatically reduce the
size of that nation's economy by 10 percent.

"It's a great triumph that the I.M.F. has made this change, because it gives a
more accurate reflection of the world economy," said Robert Summers, an
economics professor at the University of Pennsylvania, a leading authority
on this measuring method. "Purchasing-power parity has long been the
accepted method in the academic community. This measure helps change
people's perception of the world, although we should remember that all the
distended bellies are still there." Car Is Not a Car Is Not a Car

Some economists say they will still measure economies using current
exchange rates because they they do not fully trust purchasing-power parity.
They say it is hard to compare the value of goods in different countries, for
instance, to weigh the value of a Chinese car with that of an American car, or
of a one-bedroom apartment in Manhattan with one in Beijing or Tokyo.

I.M.F. officials said they would now rely mostly on purchasing-power parity
in measuring economies, but added that they would not abandon use of
exchange-rate measures.

Using the fund's new measure, per-capita income in China was about $1,600
last year, compared with $370 using estimates based on exchange rates.
Based on purchasing-power parity, per-capita income in the United States
was $22,204 in 1991, the last year for which a range of comparable figures is
available.

Using the new measure, India's economy soared in 1991 to $996 billion, the
sixth largest, from $285 billion using exchange rates. India's per-capita
income in 1991 was $1,150, rather than the $330 calculated using exchange
rates.

World Bank economists apply the purchasing-power parity somewhat

differently, and their estimate of China's total output is even higher than
reckoned by I.M.F. The bank puts the figure at $2.2 trillion in 1990. If one
allows for China's brisk growth over the last two years, its output reached
$2.35 trillion in 1991 and the $2.6 trillion in 1992, pushing it past Japan to
No. 2 position.

Using the new measure, the share of the developing world in global output
almost doubled in 1991, to 34 percent, from 18 percent under the older
reckoning.

Officials from some developing countries object to using purchasing-power

parity because World Bank rules state that countries with annual per-capita
income of more than $765 cannot qualify for loans under the most favorable
terms, usually 35 years with no interest.

But the World Bank continues to measure economies by exchange rates, and
officials said that if they adopted purchasing-power parity, they might have
to raise the per-capita ceiling for cheap loans.

The new measure is contained in an annex to the I.M.F.'s World Economic

Outlook, which was released in April. The annex, which is to be published
next week, puts China's economy at more than 6 percent of worldwide
output in 1990, the last year for which global figures are available, up from
slightly under 3 percent in 1970. In comparison, the United States
represented 22.5 percent of world output, Japan 7.6 percent and Germany
4.3 percent.

The former Soviet Union accounted for 8.3 percent of world output in 1990,
but the annex gave no separate figures for Russia's economy.

After several years of internal debate, I.M.F. officials have begun using
purchasing-power parity because they are convinced that traditional

measures produced invalid results. For example, measuring output by

exchange rates indicated that China's economy had shrunk to slightly less
than 2 percent of global output, from slightly more than 2 percent two
decades ago, even though its economy had grown twice as fast as the world
economy.

China Starts Effort to Slow Overheated

Economy
By NICHOLAS D. KRISTOF,
Published: July 15, 1993

BEIJING, July 14 Alarmed that inflation is spinning out of control, the

Chinese leadership has begun a far-reaching effort to try to rein in the
nation's badly overheated economy.

The Communist Party is circulating a secret order, Central Committee

Document No. 6, providing for a 16-point plan to bring down economic
growth to a more reasonable level that can be sustained. "Work teams" are

fanning out through the provinces to try to insure that Beijing's edicts are
obeyed.

To be sure, as economic troubles go, China's are enviable ones. The present
difficulty is not an economy that has stalled, but one that is stuck in
overdrive.

Still, the overheating has caused prices to soar, with consumers rushing to
buy gold to preserve their savings. The Chinese yuan has taken a
roller-coaster ride on the currency markets, and real estate prices have
soared on speculative buying, with the prices of some poorly situated
apartments in Beijing exceeding $500,000.

Above all, there has been a feeling of disorder and chaos. "People in the
hinterland began to panic," Ta Kung Pao, a Chinese-backed newspaper in
Hong Kong, observed, and everyone remembers that inflation was one of the
factors that provoked the Tiananmen democracy movement in 1989.

Zhu Rongji, a 65-year-old Deputy Prime Minister, this month was named
head of the central bank, after the previous central banker was dismissed for
allowing the chaos to develop. Mr. Zhu, who is sometimes dubbed "China's

Gorbachev" because of his sympathy for far-reaching political and economic

change, has essentially become China's economic czar.

Many senior officials believe that Mr. Zhu is acting like a czar as well, for he
has a withering style that has top bankers and economic cadres quaking at
their desks throughout the country.

Just a few days ago, Mr. Zhu summoned provincial bankers to a meeting and
berated them for exceeding lending limits. He asked one banker from
Manchuria the size of his loan portfolio and then, after hearing the answer,
lashed into him.

"Tell me the truth!" Mr. Zhu raged, according to a senior economic official.
"Don't try to trick me. I know you're not telling the right number. I already
found out how much it is from the central bank."

As Mr. Zhu's comments suggest, one of the central Government's problems

in trying to slow down the economy is that local Governments do not listen.

"If anyone can cool down the economy, it's Zhu Rongji," said the senior
economic official. "But I'm not sure that anyone can do it properly, because
the localities are all blindly investing and lying to the center about it."

If Mr. Zhu can succeed in taming the economy, he may well replace Prime
Minister Li Peng, who had a heart attack in April and whose political health
is as uncertain as his physical condition. On the other hand, if Mr. Zhu does
not manage a "soft landing" for the economy, he may be one of the new
jobless.

It was obvious by the end of last year that the economy was overheating, and
Mr. Zhu and Mr. Li both warned about it. But Deng Xiaoping, the
88-year-old senior leader, said in January that the economy was doing fine,
and no one dared disagree with him.

Gross national product, the overall measure of goods and services produced,
soared 14 percent in the 12-month period ending in May.

The problem with a 14-percent growth rate is that it cannot last. At such a
clip, the economy runs out of raw materials and inflation runs out of control.

Prices in the nation's major cities were officially reported to be 17 percent

higher in April than a year earlier, but the annualized inflation rates for each
month -- which the Government does not release -- are widely believed to be
much higher.

Economists say that the risks now are more political than economic, for even
a "hard landing" would mean a slowdown consisting of still-enviable growth
by international standards. Indeed, many economists still are enormously
optimistic about China's medium- and long-term prospects.

China Economy in 1994

China to Act on Factories
Published: October 20, 1994

BEIJING, Oct. 19 China said today that it would soon declare bankrupt
an unspecified number of state-owned factories that have been soaking up
state subsidies with no hope of reversing their losses.

The State Council, or cabinet, will identify the companies in a decree that
will also specify how their debts and workers will be managed, the
newspaper China Daily said.

Wang Zhongyun, minister of the State Economic and Trade Commission,

said state-owned enterprises would be left to fend for themselves in the
fledgling "socialist market economy."

"The state will no longer assume liability for the ailing enterprises," Mr.
Wang was quoted as saying.

He said 45.3 percent of state enterprises were operating at a loss in the first
eight months of 1994 because of poor efficiency, outdated technology or
shortage of funds.

Bond Buyers Bet $1 Billion on China

By JOSHUA MILLS
Published: February 4, 1994

The Chinese Government and Merrill Lynch & Company patted themselves on
the back yesterday after successfully completing a $1 billion offering of
10-year bonds. But a number of money managers who sat out the offering
questioned whether investors might be at substantial risk because they
became caught up in the excitement of the Communist giant's inching toward
a market economy.
"Many people are eager to be involved with the Chinese," said James Calmas,
a vice president of Massachusetts Financial Services in Boston, which did
not buy the bonds. "And there's clearly plenty of economic growth to be had,
but I don't know if you're being paid to take the political risk. What if China
falls apart? What if we have another Tiananmen Square?"

Indeed, the sale came just a day after the Clinton Administration reiterated
its criticisms of China's human rights policies and said Beijing had a long
way to go to earn a renewal of its special trading privileges with the United
States. The loss of these trade concessions would be a serious blow to the
Chinese economy. 12% Annual Growth

The bonds, offered at 6.5 percent, were priced Tuesday at $99.406, to yield
6.582, 85 basis points more than a 10-year Treasury note. At the heart of the
prospectus prepared for the offerings, and clearly on the minds of many

investors, is the fast-growing Chinese economy, which has expanded at a

rate of 12 percent annually in the last two years.

Mr. Calmas noted that South Korea's debt had a higher credit rating than
China's and its economic fundamentals are sounder, yet South Korean debt
trades at 100 basis points, or hundredths of a percentage point, above
United States Treasury securities.

Thomas G. Wolfe, director of fixed-income research at Neuberger & Berman,

was another skeptic who passed on the deal. "Our feeling is that the political
risk in China is difficult to quantify, and the bonds just don't provide value at
that level," he said.

In his firm's view, he continued: "You can't just look at the financial
numbers; you've got to look at the political risk. How do they work through a
financial revolution without changing the political system at all, with a small
dictatorship running the country?"

And Robert Citrone, portfolio manager of Fidelity Investments' New

Markets Income Fund, said: "We think the fundamental levels are improving
in China, but we're much more interested in buying Mexico, at about 160

basis points. And on the higher-quality side, we can buy Thailand and
Malaysia for 70, 75 points. We feel that's better value than China at plus 85."

Yet a billion dollars' worth of investors clearly did not agree. Winthrop H.
Smith Jr., the chairman of Merrill Lynch International, said at a news
conference at Merrill Lynch's headquarters in lower Manhattan that there
was "considerable interest on the part of retail investors." He said that he did
not have final figures from the syndicate that joined in underwriting China's
offering but that Merrill Lynch's share was placed 60 percent with American
investors, 20 percent with Europeans and 20 percent with Asians.

"I'm very pleased this issue has been a great success," Jin Renqing, China's
Vice Minister of Finance, said at the news conference.

Both men said the global offering, which was preceded by a financial review
that led to higher ratings for Chinese debt from two agencies, would pave the
way for additional bond and equity offerings. Mr. Jin declined to provide any
details, saying they awaited Government decisions in March.

Mr. Jin said the $1 billion raised this week would be used to improve China's
energy, transportation and communications systems. Asked if the rapidly
expanding economy, and the infusion of cash, raised a specter of inflation,

he said, no, the bond offering "will help keep the momentum in the
economy."

Mr. Smith of Merrill Lynch noted that energy supplies, railways and roads
and telecommunications were all "bottlenecks in the Chinese economy."
Easing the problems, he said, would help combat inflation by lowering the
cost of goods produced.

Mr. Jin said China currently carried about $70 billion in debt.

Graph: "Rising Interest in China" shows direct external public debt and
foreign direct investment in China, from '88-'92. (Sources: China Securities
Regulatory Commission; Ministry of Finance; State Administration of
Exchange Control; Ministry of Foreign Economic Relations and Trade)

Between Marxism and the Market, A Chinese

Manager Finds Corruption
By PATRICK E. TYLER,
Published: May 25, 1994

WUHAN, China The No. 1 Cotton Mill is probably the best-run textile
factory in town, but its labyrinthine production line is in danger of being

shut down because, its manager says, corrupt officials are manipulating
national supplies of cotton.

It was an extraordinary allegation to make in the middle of a recent

interview, but Zhang Baoxin, the 58-year-old director of this state-owned
factory, said he was frustrated and fed up with the corruption threatening
his plant and its 9,000 workers and retired employees on pensions.

"The corruption is caused by the two-tier pricing system," he said, tempting

officials to sell raw materials to the lucrative private sector. 'So Many
Loopholes'

China has largely decontrolled cotton prices, but maintains the subsidized
quota system in part to protect the huge state textile industry.

"The core of the problem lies in the two-track pricing system and that is a
policy problem," Mr. Zhang said. "There are so many loopholes."

Such pricing encourages state cotton barons, most of them Communist Party
bureaucrats, to underreport the tonnage of cotton purchased from farmers,
creating an off-the-books surplus that can be sold on the market at world
prices. The proceeds are pocketed.

The price difference is substantial. A metric ton of cotton -- about 2,200

pounds -- at the state's fixed price recently cost $920, while the market price
is now nearly double that, a little more than $1,800.

"This is the problem that you have in the transition from a planned to a
market economy," Mr. Zhang said.

His factory, which uses 25 tons of raw cotton a day, was down to an
eight-day supply recently because of the diversion. Last August, a supply
shortage caused a two-week shutdown. This time, Mr. Zhang said, he
petitioned the municipal government in this industrial city in central China
to open its strategic reserves of cotton to keep his mill running.

"We have to beg constantly," he said. "You should have seen me just this
morning on the telephone."

The trials of the No. 1 Cotton Mill are the trials of China's state industries,
the largest drain on the national budget but which contribute less than half
of economic output.

State factories, on the cusp between a Marxist command economy and a

market economy where most of the rules have yet to be written, are seeing

their raw-material supply lines undermined and their machinery and

finished goods sold out the back door.

China has been in the midst of a campaign against corruption since

September, but Mr. Zhang said it has failed to reach the party officials who
control major commodities like cotton and grain. He called the "overlords"
of the national cotton bureaucracy, those who control regional distribution
of state cotton supplies, "completely corrupt." Compounding the Sins

Mr. Zhang said he believes that much of the cheap cotton destined for his
mill is ending up in township enterprises, where second-hand looms are
being set up overnight to exploit the raw cotton with even cheaper labor, at
the same time avoiding taxes. Some of the cotton barons are investors in
these enterprises, he asserted.

The factory manager seemed fearless in publicly pressing his charges of

official corruption.

"Everybody knows," he said. "Even the Mayor knows. These people are so
powerful now that we have to beg them constantly for cotton. We give them
free gifts of cotton cloth, cigarettes, liquor; we even write checks to them."

A request for comment from Wuhan's Mayor, Zhao Baojiang, was not
answered.

Mr. Zhang said the factory should be allotted 500 tons of subsidized state
cotton a year, about one-third of the total tonnage the plant processes, but
the cotton officials, he said, had arbitrarily slashed his quota. The Scent of
Profit

The diversion of this subsidized supply has left him scrambling for raw
cotton on the open market. He sends buyers to Zhejiang province, several
hundred miles east, where, he said, he is developing his own cotton
connections.

"The state has a fixed price market that is always low and if we can get our
quota from the state, we can make a lot of profit," Mr. Zhang said.

China adopted a law last year making it a crime to misreport national

production data, but Mr. Zhang says there has been no enforcement. Of the
cotton barons, he added:

"These people are so powerful they don't have to listen to anyone, not even
the municipal leaders. Even if someone gives false and misleading figures,
who is going to punish them?"

Photo: The No. 1 Cotton Mill in Wuhan, where the director, Zhang Baoxin,
says he cannot get enough subsidized cotton because corrupt officials are
manipulating China's two-tier price system and pocketing the difference.
(Patrick E. Tyler/The New York Times) Map of China showing location of
Wuhan.

China Migrants: Economic Engine, Social

Burden
By PATRICK E. TYLER,
Published: June 29, 1994

BEIJING, June 28 With his possessions bundled in plastic and hung

from his shoulders, and his trousers rolled up to beat the heat, 30-year-old
Ren Jun drifted into Beijing this month, part of a migrant tide of 50 million
peasants that is threatening to swamp China's urban landscape.

To the Communist Party leadership, they are the engine of China, an

inexhaustible supply of cheap labor, a floating population helping to build
the country. They are one reason that 5,000 factories can be simultaneously
under construction in China's coastal provinces.

But they also are becoming a huge and at times unstable and exploited force
rampant on the fringes of China's overcrowded and polluted urban centers,
where crime, corruption and unemployment threaten stability.

The migrants are easy to spot. Most large cities along China's coast have a
million or two living in shanty towns, dormitories or public spaces. At
Beijing's main railway station, a thousand migrants an hour pass through
the green metal gates. And vast numbers of laborers like Mr. Ren appear
each morning here at an impromptu labor market, hoping local coal-mine
supervisors will pick them to work. 'A Positive Development'

"So far, I think it has been quite a positive development," said Fan Gang, a
leading economist at the Chinese Academy of Social Sciences. "It has helped
to transfer wealth from rich to poor areas of the country."

Richard Baum, a political science professor at the University of California at

Los Angeles, called the mobile population "a shock absorber" that can flow
from one sector of the fast-changing economy to another "to cushion the
transformation of the Chinese economy."

At the same time, today's migration could be the harbinger of an even

greater one to come, Chinese and Western specialists say. With 130 million

surplus workers in China's farm belt and a surge in population growth that
will push that number to 200 million by 2000, China's migrants are an X
factor in China's future.

"In five years, this could become a very big problem," Professor Fan said.
Estimate of 70 Million

In March, Agriculture Minister Liu Jiang estimated that 50 million peasants

had left their farms in 1993 to seek employment in the cities, more than
double the 24 million who set off for the cities in 1992.

Some estimates put the "floating population" at 70 million to 100 million,

said Dorothy Solinger, a China scholar at the University of California at
Irvine. She also argued that the migrant problem "may not be as bleak as it is
made out to sound."

"First, they are not all going to the big cities," she said. Many migrants
simply move off farms into township enterprises nearby, or even far away,
but not necessarily to large cities.

Second, she argued, where migrants do cluster, crime is the largest potential
worry, not political rebellion. She pointed out that the Mayor of Zhuhai, the

special economic zone adjoining Macao, recently said 75 percent of the crime
in his city could be attributed to migrants.

But much is simply unknown, she said. The growth of the migrant
phenomenon came from nowhere in a country that enforced rigid residency
rules just a decade ago, making it impossible for peasants or city dwellers to
stray from their work units.

What seems undisputed is that Pearl River delta in Guangdong Province has
the largest concentration of migrants, an estimated 10 million. At least
500,000 are child laborers, Chinese surveys have shown; many work in
sweatshop conditions. Dangers of a Downturn

In Jiangxi Province, the outflow of farmers leaped from 200,000 in 1991 to

more than 3 million last year. Shanghai's 13 million residents are now
supporting 2.5 million rural workers attracted from all over the Yangtze
valley to construction work on the city's vast redevelopment.

As long as China's economic growth gallops along at more than 10 percent a

year, this floating population is likely to remain relatively well employed,
prosperous and stable. But an economic downturn or recession could easily
leave the migrants stranded and aggrieved.

"This is the labor of an exploited class," said a longtime Western diplomat

here. "There are no wage laws to protect them, and they can be fired on a
whim."

Professor Baum added: "It is a double-edged sword to be sure. They may be

an efficient buffer helping to transform the economy, but they are also a
large pool of marginal people subject to the vagaries and insecurity of having
no rice bowl they can count on. They are dying in grotesque industrial
accidents, they are locked in the dormitories at night, and they create a
pocket of potential human misery wherever they cluster." Building Subways
and Hotels

Farmers from Sichuan Province are building Beijing's new subway, just as
peasants from Zhejiang Province are building new freeways, hotels, office
buildings and ministries. Many leave their villages because $1.25 a day on a
sweltering construction site is more than they can earn working the land.

Others are "environmental refugees" from northern and western China

where the land has just given out from degraded soil, dried up water
resources or the relentless advance of the Central Asian deserts.

Many go home with money in their pockets, but many also go home
nurturing grievances.
On a recent afternoon, six unkempt men lying on bedrolls in Beijing's main
railway station explained why they were returning to Jiangsu Province after
less than a month at work here. Their spokesman was a 24-year-old farmer
named Liu with a face lined by weather and worry.
"We just don't want to work here any more," he said. "We left our
construction team yesterday without notifying the boss. It serves him right."
The construction boss had come to Mr. Liu's hometown and promised to pay
the villagers $1.72 a day to lay bricks and pour concrete. He said he would
also pay for their train tickets. But when they got to the site, near Beijing's
international airport, the boss cut their wages to 57 cents a day and told
them they would have to pay for their own train tickets. The Uses of Money
Their tempers simmered for a month before they decided to head back to the
farm, where their wives were looking after the rice crop.
Speaking in a tone that reflected their intimidation in the big city, Mr. Liu
said: "We dare not walk in Beijing alone. We are new here. Some people
might find faults with us, or fine us."
Remittances from peasants who do find work are dramatically redistributing
the new wealth.

Professor Fan said that in one county in Sichuan Province, migrants

remitted $138 million last year, more than the total economic output of the
county, which was $115 million. A recent study of China's rural economy said
migrant farmers from Anhui Province sent home $862 million, which
exceeded the provincial government's annual revenue by $230 million.
What is most remarkable, however, is the sheer mass of migration.
During Lunar New Year celebrations, when all 1.2 billion Chinese are drawn
home to their families, train stations became encampments for hundreds of
thousands of travelers a day, Woodstock-sized crowds of peasants waiting
for trains in dozens of rail hubs. 52 Trampled to Death
At the New Year in February, China's overburdened rail system pressed
special freight trains into service, each one bulging with human cargo
packed so tightly that some passengers became hysterical with
claustrophobia. In one accident, 52 people were trampled to death when
10,000 migrants were herded onto a freight train in Hunan Province.
Mr. Ren arrived recently in Beijing hoping to land a job in the local coal
mines. He made his way to the labor market, becoming one face in a sea of
laborers for hire.
Alarmed at the rapid growth of Beijing, the municipal authorities have
posted signs saying the market has been closed. This has not stopped the

peasants from coming, nor has it stopped gangs of criminals from prowling
the market, looking for women and children to abduct and sell into China's
booming trade in prostitutes and wives for sale. From One City to Next
Policemen on foot patrols often scatter the workers like so many chickens.
One laborer who kept well away from the police was Wang Xinmin, 24, who
has migrated from one city to another since he left Henan Province at 17.
Too much work on not enough land put him on the road, he said.
He has worked in the far south, at a garment factory in the special economic
zone of Shenzhen, adjacent to Hong Kong, but it did not last.
"The local people there bullied us because we were from the countryside," he
said. And the factory boss, who had promised high wages, delivered only half
of that on payday.
"The working conditions were really unsafe and chaotic," he said, "and
though we were supposed to work eight hours a day, actually we had to work
much longer."
Having lost his most recent job, as a busboy, Mr. Wang said he would try for
two more weeks to land another job in Beijing before heading home.
Farming 'Not Worth It'
Mr. Wang sat cross-legged under a pine tree near the labor market, and
when he finished telling his story, he listened to one from Mr. Ren, who

comes from a line of farmers in the hardscrabble hills of Hebei, 120 miles
northwest of Beijing.
"People like me don't want to work on the land anymore," Mr. Ren said. "It's
backbreaking work. I've tried it. The land is not fertile, and it is far from any
water. It's just not worth it."
If he stayed home and worked the land, Mr. Ren said, he might earn $345 a
year if rain were plentiful. But working in a Beijing coal mines, he might take
home nearly $700.
In either case, it is not enough to get a wife these days. "I would like to have
a wife," he said. "But the dowry demands of girls are very high," higher even
than the wages of a migrant coal miner.
Photos: China's migrant labor force, an estimated 50 million strong, greases
the wheels of the country's surging economy. But experts warn that it could
be a destabilizing force if the jobs run out. A major gathering point for
migrant workers is the central train station in Beijing. (Agence
France-Presse); "People like me don't want to work on the land anymore,"
said Ren Jun, who came to Beijing from Hebei Province. (Patrick E.
Tyler/The New York Times) Map of China shows the location of Beijing and
of Shanghai.

THE WORLD; The Dynamic New China Still

Races Against Time
By PATRICK E. TYLER
Published: January 2, 1994

BEIJING THERE is not an adjective that soars high enough or detonates

with enough force to describe China's economic explosion or the promise of
its future. One-fifth of humanity, for decades locked in the dungeon of Mao
Zedong's proletarian revolution, where they were whipped and exhausted by
meaningless mass movements, are now fully unleashed in an epic pursuit of
material wealth.

Coming off two years of 13 percent economic growth, China's is the

fastest-growing economy in the world. And in the last 12 months, capitalists
from more than 40 countries have signed contracts worth $100 billion to
build new industries and open new markets .

The Chinese are buying, building and consuming as if there were no

tomorrow. Their cheap labor is the magnet of their profit-making capacity
and the income from this dynamic laboring class and its entrepreneurial
leaders is creating a mammoth market for the world's industrial powers.

Textile and shoe manufacturing, consumer electronics and toy factories -- all
are coming here because, as one industrialist said recently, the cost of labor
in China, compared to other costs of production, is effectively zero on an
industrial balance sheet.

The ignition of this great economic engine has conferred upon China new
importance as the regional superpower, a potential ally or adversary to
Japan, to a united Korea or to the rim countries of Southeast Asia. But how
steady is China's historic rise and how long can its economic engine roar?
That is the question some of China's leading scientists and economists are
beginning to utter in public.

China at the end of the century is in a race against time, a race against the
rapid depletion of the country's natural resources and the demands of its
own population explosion. As Professor Zhou Guangzhao, the head of the
Chinese Academy of Sciences, said in a recent interview, "China as a whole is
weak in ecological stability and society has not realized the seriousness of
this problem."

Add to this the pent-up political frustration of China's growing

entrepreneurial class, whose wealth has yet to buy participation in

decision-making by the Communist Party leadership, and the outline of

China's challenge begins to take shape.

Whether in politics or economics, China's future could be far more turbulent

than the current get-rich investment climate suggests. Last fall, after his
third visit to China, the American economist Milton Friedman confessed to
"very mixed feelings" about China's prospects. "Never in the history of the
world has a totalitarian state successfully converted itself into a free market
economy," he said during a talk with Hong Kong business leaders after
leaving the mainland.

He wasn't dismissing China's chances for success; he was only pointing out
that China remains hobbled by bureaucracy and bankrupt state-owned
industries that dominate the economy. China's economic revolution, taking
place largely in its coastal provinces, is occurring in very controlled
circumstances. Foreign investors who enjoy favorable tax incentives are
exploiting China's labor market while contributing little in return.

In many cases, the foreigners have fouled critical water sources and rivers,
filled in rice paddies, paved over wheat fields or otherwise scarred the
landscape. "There really is no free lunch," Mr. Friedman said. "Somebody

has to pay for this." And, he added, "the true political revolution in China is
yet to come."

If 1994 is the year that China's 89-year-old economic tinkerer, Deng

Xiaoping, chooses to go to meet Marx, as he once referred to death, how long
after the funeral will China's pro-democracy generation wait before it
decides to challenge the Communist Party order? And if they do, will a
democratic republic emerge that is unified enough to cope with China's still
formidable problems? Or will it devolve into civil war, as Mr. Deng always
warned whenever anyone mentioned democracy to him. A Big 'If'

Whatever China's future, its sheer mass, its economic power, its status as
Asia's only declared nuclear weapons state and its permanent seat on the
United Nations Security Council insure that it will be a dominant force in the
region -- if, that is, it can manage its growth without a catastrophic
breakdown under the weight of its burdens.

Consider these daunting realities:

A population of 1.18 billion increases by the number of people in Texas every

year. China will add the equivalent of the population of Japan (about 120

million) by the end of the decade. Its economy must grow fast just to stay
even.

In 1993, China produced a bumper crop of wheat, rice and other grains,
about 440 million tons. But its soil is rapidly deteriorating in quality,
eroding or turning to desert. Chemical fertilizers have let its farmers defer
their problems while extracting higher yields. A leading scientist said
recently that China will have to double its grain output in 20 years and still
will not be able to feed each Chinese as well as he or she eats today.

Water supplies are drying up under the relentless demands of new industries,
population and agriculture. Of China's 500 cities, 300 are short of water and
100 are seriously short. More than 80 million people have to walk more than
a mile for drinking water.

By some estimates, millions of "environmental refugees" may already be

among a "floating" population that is migrating toward the cities and coastal
provinces.

No country in history has undertaken an economic and industrial revolution

on an ecological foundation in such a degraded state, scientists have
observed.

But the high level of stress on the environment will greatly intensify as
China's population swells to 1.5 or 1.6 billion in the second or third decade of
the next century. Thus China is approaching its limits. Instead of conserving
its resources, it is exhausting them with a vengeance. The dilemma for
China's leaders is how to exhort the masses "to get rich," as Deng Xiaoping
has often said, and still get them to consume less.

And it is not China's problem alone. Professor Zhou at the Academy of

Sciences pointed out the relentless mathematics. . If China fails to double its
food production, and instead continues to squander farmland and water
resources in the quest to catch up with consumption levels in the West, "then
China will have to import 400 million tons of grain from the world market
and I am afraid in that case that all of the grain output of the United States
could not meet China's needs." China's needs, in turn, are the world's worry.
Its weight in the world makes its success, or failure, everybody's business.

Photo: Chinese peasants harvesting wild rice in South China's Jiangxi

province. They earn 784 yuan, or $136 annually; Of four million shirts
produced annually at this factory in Beijing, 80 percent go to the United
States and Japan. (Photographs by Greg Baker/Associated Press)

Beijing Calls for an End To Misreported

Statistics
Published: August 18, 1994

BEIJING, Aug. 17 The Communist Party acknowledged today that false

reporting of economic statistics was widespread in China and, warning of
dire consequences, called for an end to the practice.

Western economists have long been aware of the problem, and Chinese
officials have privately admitted that their figures often do not reflect actual
conditions. In recent months, Chinese newspapers have also begun
reporting on the problem.

But today's front-page editorial in People's Daily, the voice of the

Communist Party, was the first official acknowledgment of the practice.
People's Daily editorials must be approved by the top leadership.

The editorial said misreporting of statistics by local governments and

enterprises was spreading steadily and had reached "very serious"
proportions in some places. International Repercussions

Although the practice has endured for decades, it has taken on international
repercussions with the opening of China's economy to the outside world.

The central bank, the People's Bank of China, issued a report last month that
said that accurate, detailed statistics were essential for inspiring confidence
in China's economic policies.

The People's Daily editorial today also suggested that false economic
statistics were hurting the Communist Party's image as it confronted such
problems as eroding control over local governments and the threat of
widespread labor unrest.

The editorial said the practice was usually motivated by hopes for
promotions or other honors, and said the mass media should uncover and
publicize cases of misreporting. Policy Errors Feared

The party newspaper warned that false reporting could result in serious
policy errors, saying that "we have already had a historical lesson in this that
left a lasting impression."

The reference was probably to ventures like the Great Leap Forward, a
disastrous 1958 attempt to create an industrial and agricultural revolution.
The campaign led to a famine in which at least 20 million people died.

Local leaders had given grossly exaggerated production and harvest figures,
leaving national leaders ignorant of their failures until it was too late to
prevent economic calamities.

Although the editorial did not give examples, previous reports have
recounted instances of exaggerated reporting. For example, a petrochemical
plant reported its 1992 output at $20 million, 50 percent higher than its
actual output of $13.4 million.

In other cases, poor regions underreport income to continue receiving

Government subsidies.

China's Hidden Army of Workers Strives to

Adapt
By PATRICK E. TYLER,
Published: December 11, 1994

MIANYANG, China Fearing nuclear attack from either the United

States or the Soviet Union, China in the mid-1960's undertook what was
perhaps the largest industrial relocation in history to protect its strategic
factories.

Now, more than 20 years after World War III failed to occur as Mao Zedong
had predicted, some of the country's top scientists and engineers are still
trickling down from production lines in remote mountains and caves to
gleaming cities like this one in south-central China.

They are designing television sets, fax machines, satellite receivers and,
perhaps, the battery system for the next electric car. Here, they are setting
up new factories and sending delegations to New York seeking investment
capital for high-technology ventures, They hope to find a market for the
talent and the skills they mortgaged for so long to Mao's apocalyptic vision
under a policy that relocated hundreds of important industries in the 1960's
and 1970's to remote canyons and caves in northwestern and southwestern
China.

"You know, there are many things in common with the manufacture of
bombs and in the manufacture of automobiles," said Zhu Senyuan, 48, a
computer automation specialist at a military institute now helping 600
factories across China convert armaments lines to commercial production.

But many of the strategic factories are old or redundant and, despite their
relocation to cities on the plains, they are far from potential markets at a
time when China is trying to reform its economy.

The cost of the top-secret program was staggering. Barry Naughton, an

economist at the University of California at San Diego, has estimated that
during the peak years China was spending 40 to 50 percent of its national
investment resources under the so-called Third Line policy, and that it had
sent hundreds of thousands of workers to the mountains where they
functioned as "human wave" construction brigades to chisel caverns, tunnel
for railroads, transport machinery and build assembly lines in remote and
forbidding landscapes.

"It very substantially slowed down China's economic growth and on some
levels contributed to the collapse of central planning," said Mr. Naughton, a
specialist on China's economy who has conducted one of the few studies on
the Third Line and its impact.

Beijing's central planners "got so tangled up in directing resources to these

remote sites that they never could complete these projects or make them
economically viable," he said during a recent visit to China.

By the time the Third Line was completed, Mao had died and it stood as
another monument to his willpower over the Chinese.

"The decision by Mao to build the Third Line was a big mistake," said Hua Di,
a rocket scientist who spent months living in Third Line bases testing
China's first strategic nuclear missiles and who now lives in California. "We
have wasted a lot of money by building this Third Line," which, he added,
gave China little additional security.

"If you have a rocket program and a bomb or missile falls on just one of the
many component factories, then you have no program," Mr. Hua said. "But
the leaders were ignorant of this aspect of modern technology."

In its heyday, planners of the Third Line ordered steel mills, nuclear
weapons plants and huge truck assembly lines, first built in coastal
provinces or near borders with the Soviet Union, disassembled and
transported over treacherous mountain roads or paths to what Mao thought
would be an impregnable "rear base," or "third line of defense" to sustain a
Chinese war effort. The "first" line was China's coastal defenses and the
"second" line was a fall-back position on the central China plain.

To build the Third Line, railways were ripped up in some populous provinces
to build new links through unpopulated hinterlands.

The consequences of the program are still radiating into the present because
the construction was so large in scale and took so long, 15 years in some
cases, leaving China with an uneconomical and inefficient industrial
architecture. Today, the plants are still being dismantled, abandoned or
turned to other uses.

"There is a major investment in this region," said Chen Zhixiang, deputy

director of the Mianyang economic and planning commission, "but the
problem is that the investment is spread out through canyons some distance
from the city. Our production and research bases are located in the
mountains and accessible only over very difficult roads."

Even Mianyang is difficult to reach. It can take four hours to travel the 60
miles of winding two-lane road from Chengdu, the provincial capital.

Somewhere amid the peaks and crags that are visible from these clean
streets is China's largest wind tunnel. It is too big to relocate, so
aerodynamic engineers from all over the country must come here with their
aircraft or rocket models to carry out large-scale tests.

One canyon holds a nuclear reactor for making plutonium for nuclear
weapons, another an electron accelerator for high-energy physics

experiments and yet another a large radar works. To the east is a rocket body
factory and the entire spectrum of electronics industries, many of which
have transferred part of their production here.
Today, much of the burden of finding employment for the Third Line work
force has fallen on the governments of inland provinces, whose economies
are not as strong as those in China's coastal belt. There have been some
successes, especially in the electronics industry, but these may not be
assured over the long term if China lowers its trade barriers as a member of
the World Trade Organization.
"They have moved hundreds of factories down to the nearest cities such as
Chongqing and Chengdu," Mr. Naughton said, "and they also gave to these
factories the privilege to move into new and lucrative product areas."
But as China's market has developed, Mr. Naughton said, most of these
privileged military enterprises are facing competition that in the long run
threatens to undermine them.
One example is the Long Rainbow radar factory, which first leaped into the
television business two decades ago. Its parent factory is still in the
mountains, making aviation radars for the Chinese Air Force.

"It can be said that the radar factory is also engaged in civilian production,"
said Li Yalian, whose title is chief of propaganda, "because they are making
the remote controls for the television sets."
Long Rainbow's 60 to 70 percent market share for domestic television sales
has begun to slip as Chinese consumers show a preference for foreign brands.
Wang Junmai, the assistant general manager of the Mianyang plant, said top
managers had been scouring Tokyo, New York and Los Angeles for investors
willing to finance a broader range of products with an updated production
line to keep the giant enterprise and its 6,000 employees viable. But so far
foreign investors have been reluctant to put their money into a military
enterprise.
"We want to expand into cellular phones, audiovisual and
telecommunications," Mr. Wang said, imploring a visitor to "please tell the
world about our potential and our advantages."
Governor Xiao Yang of Sichuan Province said that while the prospects for
the best of the Third Line factories were good, nothing seemed certain about
the bulk of the rest.
"The state of the Third Line industries is that one-third of them are doing
very well," he said in an interview, "but another third are just breaking even
and the last third are in very bad shape."

With two-thirds of these industries at break-even levels or worse, their

future very much depends on sustained high growth in China's economy.
Local governments throughout inland China will be saddled with Third Line
problems for many years to come, Mr. Xiao said. For the workers, it means
adapting without a system that provided job security and social programs
regardless of productivity.
"It's really hard," he said. "The workers have been living out of the so-called
iron rice bowl for so long."
Photo: Strategic factories set up in remote mountains and caves in the 1960's
when China feared a nuclear attack are struggling to find new roles. The
Jialing Motorcycle Factory in Chongqing, the biggest producer of
motorcycles in the country, began business as an ammunition manufacturer
for the military. (Mark Leong for The New York Times) Map shows the
Third-Line region of China.

China Economy in 1995

An Innocent on the Shanghai Exchange

By SETH FAISON
Published: April 23, 1995

SHANGHAI THERE'S a wisp of magic in the air.

Men in double-breasted, $1,000 Italian suits chatter on portable phones in

the back seats of limousines snaking through city streets; new buildings
shoot upward on nearly every block; new businesses are created every day.
This is Shanghai in the 1990's.

With money swirling around faster than anyone can count, it seems that
even an ordinary investor ought to be able to get a piece of this action. So
why not give the Shanghai stock market a shot?

The logic is irresistible: China's economy is steaming ahead like a locomotive.

In a nation famous for entrepreneurs, thousands of companies are
clamoring to sell stock, and the lucky ones already approved to do so are
making products like washing machines and refrigerators, wanted in every
Chinese household. Such businesses seem sure to grow for years to come.

Besides, the stock market in Shanghai, barely five years old, created
innumerable millionaires during a boom in 1992 and 1993. It drifted
downward throughout 1994 and is now near an all-time low.

How could it not go up?

With the curiosity of a new resident in a city reeking of opportunity and with
a lurking desire to make a killing, one novice investor set out to learn how to
buy some stocks. There are only 34 listed stocks available to the foreign
buyer, so how hard could it be to pick a few that will grow long term, riding
China's economic trajectory?

The first stop was at China Cathay Securities, known as Guotai in Chinese,
where, as at many of the 250 other young securities firms operating in
Shanghai, masses of investors jam the ground floor each day to watch share
prices on a big board and jostle each other to make a trade. Privileged
visitors are ushered upstairs to the private rooms, passing by trading desks
at which brokers finish one phone call after another with the salutation,
"Hope you get rich!"

"Call me Frank," said Frank Li, an earnest, short-haired broker who speaks
in a mixture of clipped, textbook English and slangy Mandarin Chinese.
With two years experience in the market, Frank is considered a seasoned
pro.

"The market will definitely go up," Frank said. Then, for good measure, he
added, "The question is when and by how much."

Sign me up -- the sensible reaction of any eager investor in such an

atmosphere of unbridled money-making.

Here's where the complications begin. How much will you invest? Frank
asked. A number was suggested: $1,000. He frowned. "Our normal
minimum is $10,000." Ten thousand! That's worth a moment's reflection.
Frank sensed the hesitation. "Since you're a friend, $5,000 would be O.K."

In the printed regulations for opening an account at Cathay, however, there

is no mention of any minimum investment.

"We wouldn't dare print that in the regulations," said Wang Hongwei,
Frank's colleague, So what is the rule about minimum investment? "There is
none," he said.

Not the most reassuring answer. But hey, no risk, no reward. Let's get down
to the business of picking some stocks.

"I think you should quickly accumulate stocks that are undervalued," said
Frank, slipping into market jargon. "Then you're sure to make a profit."

Narcissus Electric is Frank's first choice. As a maker of washing machines,

Narcissus is making a product that nearly everyone wants. Solid
management, Frank said, and at 25 cents a share, a good price.

What did Narcissus trade at the previous day? Frank shuffled through his
papers and frowned again. It didn't actually trade that day, he said. Not that
it was suspended or anything, there just isn't that much demand for
Narcissus. About one-third to one-half of the dollar-denominated stocks in
Shanghai do not trade on any given day, what you might call low liquidity.

Let's look at another stock, Frank said brightly. Lujiazui (loo-jah-SWAY): a

developer in the East Shanghai area that is being built as the city's new
financial district over the next five years, selling land-use rights in a real
estate market that is riding high. A sure thing, said Frank.

An alarm bell might go off in the mind of even an inexperienced investor

when he hears the words "sure thing." And one obvious question about this
stock is, what happens when the land is all sold? Frank insists that it will
take several years, and that his only concern is that the stock is expensive. At
73 cents a share, it is near its 52-week high of 74 cents.

For a second opinion, a visit to a second securities firm.

Patrick Chen brings potential investors into the modern office he shares with
four others at Shanghai International Securities. Shanghai International was
the most dynamic of Shanghai's securities firms until it was hit by scandal in
February; it suffered huge losses in the bond futures market and was
accused of trying to manipulate sales to avoid going out of business in a
single day.

On the computer at Mr. Chen's desk, the beginning of a company text was
visible: "A Brief Introduction to the Incident -- (1) Shanghai International
Securities did not lose nearly as much money as has been reported in the
foreign and other media. (2) Business is proceeding as normal ---- "
Not the most auspicious introduction. But Mr. Chen was quite open about
the market's drawbacks. "People know there is insider trading," he said.
"People known there is manipulation. These incidents happen every day."

A few Western analysts who follow the Shanghai market confirmed this
impression. Stocks rise and fall on rumors, they said, not on earnings
reports. Companies that promise to invest new capital in their operations
sometimes use the money to speculate in real estate instead. The rules,
where they exist, are openly flouted.

An American lawyer recently asked a trader to explain the difference

between a lottery and the Shanghai stock market, and was told, "In the
stock market, sometimes you can get information about the number before
it gets picked."

But then, the optimist must insist, what emerging market isn't prone to
some funny business? Even if the big players dominate the market, that
doesn't mean the individual can't ride the wave upward.

Some of the market's complications, while seemingly negative, have a

silver lining. Look at one basic condition of the Shanghai market, Mr. Chen
suggested: it is divided in two. Most shares are denominated in the local
currency, renminbi (RMB); a smaller number are available in United
States dollar amounts. According to the rules, Chinese citizens can only
buy RMB, or A shares; non-Chinese can only buy dollar, or B shares.

There is no intrinsic reason that the market should be divided; it was set
up this way in 1990 to accommodate local and foreign investors who have
limited access to each other's currencies. It is only a matter of time before
the authorities in Beijing decide they can be unified, Mr. Chen said, and

when they are, prices of the dollar shares are sure to rise because they are
now trading at well below that of their renminbi counterparts.

The Shanghai dollar stock index bottomed out at 51 in July 1993, and then
it shot up to 104 by December 1993 and has drifted downward since. It
closed last week at 54.82, up slightly from its 1995 low of 51.77 on Feb. 6.

The renminbi market has had an even wilder ride. After losing nearly half
its value -- from around 600 points to just over 300 -- in two months last
summer, it then rocketed to 1,000 in one more month, easing since then to
its close last week at 660.

So when will the markets be merged? Probably not this year, said Mr.
Chen. Maybe before the end of the year, said Frank.

But back to stock-picking. Mr. Chen likes the Post and Telecom Equipment
Company, a provider for the fast-expanding telecommunications business,
and Yaohua (pronounced YOW-hwah) Pilkington Glass, a Chinese-British
venture that makes glass for skyscrapers and windshields.

Although Post and Telecom can't match the quality of the equipment
produced by foreign companies, Mr. Chen said, many parts needed in
phone systems can be made locally. China will probably rely more and
more on domestic producers like Post and Telecom, which made a good
profit in 1994 and is trading at 58 cents a share.

Yaohua Pilkington is another steadily profitable company, and an

executive there, responding to a reporter's questions, was willing to
entertain a visit. The executive, Gui Xintian (pronounced
GWAY-shin-tee-yen), was happy to discuss the company inside the general
manager's office, but said a look at the production lines was not feasible.
"Privileged technology," he said.

But Mr. Gui said Yaohua is producing glass at capacity and does not expect
to lift its profits much past the $30 million it reported for 1994. Building a
third production line will not be easy because there is no more available
space at the factory. So much for upside potential.

Another broker, who asked not to be named, had a bright idea for an
investor who is also a reporter: write a positive article about a company,
then when its stock rises, sell for a nice profit.

"And tell me before the article is published," the broker added cheerfully.
He was disappointed to be told that newspapers prohibit reporters from
writing about companies they hold stock in.

But enough talk. Time to get down the business of buying.

In another visit to China Cathay Securities to fill out forms, there are a few
more surprises. There is a $24 fee just to open an account, and a $20
minimum commission on every trade. Then there are four more fees: a
stamp tax, a stock exchange fee, and two others that were difficult to
understand, either in Chinese or English.

As for the method of payment, no checks are allowed, not even one from a
Shanghai bank. They're too much trouble for us, said Frank's colleague, Mr.
Wang. It will have to be a bank transfer.

Would an individual investor in the United States be able to open an

account this way? No worries, said Frank. He could contact us directly, by
telephone or fax, or go through any large American brokerage house. A
handful of American firms can buy shares in the Shanghai market directly.

How do customers know how their portfolios are doing? Does Guotai send
a statement of any kind? "I'm afraid we don't offer that kind of service,"
said Frank.

One more thing, Frank said. Trade orders must be made in person. In
person? Unless you want to do it by phone, Frank said, but there's a $10
monthly charge for that. What if you don't make any trades in a particular
month? You are charged anyway.

How many individual foreign customers does Guotai have? "Several," said
Frank. Fewer than 10? "Several," he said again.

Actually, most foreigners interested in stocks from China buy shares that
have been listed in Hong Kong, where a generally better class of companies
trade. The luckiest companies, Frank said, are those that have been
allowed by the Chinese authorities to be listed in New York. But those
stocks, like Shandong Huaneng and Huaneng Power International, haven't
done particularly well. That's true, said Frank.

The market capitalization of the Shanghai dollar market is $1.2 billion, a

small percentage of the $30.8 billion Shanghai renminbi market, and tiny
compared with the $280 billion Hong Kong stock market.

As Frank showed the way out of Cathay's headquarters, a detour was taken
through a "big customer room," where individual investors with sizable
portfolios are allowed to sit in puffy chairs and monitor the market on
computer screens.

Who were all these Chinese investors watching the screens for dollar
stocks? "They're our customers," said Frank. Aren't they prohibited from
buying dollar shares directly? "Well, the market is very slow these days, so
we're accepting orders from anyone with U.S. dollars." Is that breaking the
rules? "I wouldn't put it that way," Frank said.

Frank offered a firm handshake in parting. The outlook for stocks in

Shanghai is strong, he said reassuringly. Inflation in China will probably
fall in the second half of the year, the Hong Kong stock market will
probably rise, and the attitude among stock exchange officials is "very
go-go."

"Yet doubts can dog any would-be investor. What about the health of the
90-year-old Chinese leader, Deng Xiaoping? The stigma against emerging
markets? The officials in Beijing who warn that the stock market is still "an
experiment?"

"No worries," said Frank. "Hope you get rich!"

Photos: Some 250 securities firms now operate in Shanghai. (Wang

Gangfeng for The New York Times) (pg. 1); Investors at Shanghai
International Securities. (Wang Gangfeng for The New York Times) (pg. 7)

INTERNATIONAL BUSINESS; Shanghai Stock

Market Cited for Scandal
By SETH FAISON
Published: September 22, 1995

SHANGHAI, Sept. 21 When Wei Wenyuan was replaced as head of the

Shanghai Securities Exchange last week, no official reason was given. Yet
securities executives widely suspected that Mr. Wei was taking responsibility
for the biggest scandal to roil the stock market since it opened in 1990: Last
February, the bond futures market spun out of control, ruining China's
leading securities firm and ushering in a period of reduced innovation and
greater regulation.

Today, the reason for Mr. Wei's departure was detailed in the first official
accounting of the scandal. In announcing the results of a seven-month
investigation, the authorities blamed the securities exchange for lax
supervision and accused two securities firms of manipulating the market,
trying to rig prices and violating exchange rules.

By timing their announcement with Mr. Wei's dismissal, securities

executives said, the authorities appeared to be trying to set a new tone -- less
risk and more supervision -- for Shanghai's fast-growing but unwieldy
securities markets. The departure of Mr. Wei, who was not named in the
report, had been expected for months.

"This is just the final word," said John Crossman of Jardine Fleming
Securities in Shanghai. "It says: Wei has stepped down. And here's why."

On Feb. 23, the report said, Shanghai International Securities and the
Liaoning Guofa Group tried to manipulate the market to save themselves
from huge losses incurred by betting the wrong way on bond futures
contracts in the midst of a wild market. The daily volume of futures
contracts traded jumped from $6 billion in January to $102 billion in
February.

Shanghai International blatantly ignored trading limits on bond futures, the

report said, and then flouted exchange rules by selling short in an effort to
drive prices down. Liaoning Guofa pursued a similar strategy, it said, but
then "began building massive positions to create a false impression."

Trading on the bond futures market was suspended at the time and partly
resumed the following week. The market was closed in May.

"The Shanghai Securities Exchange did not fully estimate the risk involved in
speculative markets," said the report, issued jointly by the China Securities
Regulatory Commission and the Ministry of Supervision. "Nor did it exercise
sufficient supervision."

Mr. Wei was replaced by Yang Xianghai as general manager of the Shanghai
Securities Exchange last Friday. Mr. Wei was unavailable for comment.

Shanghai International was ruined by the scandal, losing many of its

customers and most of its top executives. Its chief executive, Guan Jinsheng,
resigned in April, and an investigation into his activities led to his arrest in
July on charges of illegally using public funds and of embezzlement.

Although the report did not say how much Shanghai International lost in the
wild day of trading, executives at other firms estimated that the firm lost
more than $100 million on its trades, roughly the equivalent of its registered
capital.

With the ouster of Mr. Wei and the resignation and arrest of Mr. Guan,
Shanghai's stock exchange has lost two of its smartest and most aggressive
advocates. An article aboutShanghai's dynamic growth by a Hong Kong
magazine last year identified Mr. Wei and Mr. Guan as two of the five most
influential men in Shanghai.

Yet in a market trying to build an institutional base for China's fast-growing

economy, several executives said, it was inevitable that periods of increased
regulation would follow expansion.

"The Government has punished violators in order to preserve the normal

development of the securities markets," said Yan Yunlong, a senior executive
at China Guotai Securities. "It was a necessary step."

China's Anti-Graft Drive Grows; So Does

Graft
By SETH FAISON
Published: August 10, 1995

BEIJING, Aug. 9 On a rainy Sunday morning this week, 10 rusting

luxury cars were lined up in a parking lot outside Beijing's Municipal
Library and auctioned off. The presiding official, Yang Baojing, called it a
shining moment in China's fight against corruption.

The cars, Mr. Yang said, were confiscated from senior officials in a display
of the leadership's determination to rein in excesses in the upper ranks of
the Communist Party, which long ago lost its reputation for purity.

Yet the auction was probably more an ordinary money-making procedure

masquerading as government virtue than an indication of any zeal in
cracking down on corruption. Nearly all the cars, three of them
Mercedes-Benzes, had over 100,000 miles on their odometers, and each
had seen better days.

Despite what Mr. Yang said, they appeared to be cars that senior officials -complying with a new regulation that officials use domestically produced
cars -- would be eager to trade in for a new Chinese-made Audi, the
current favorite among the leadership.

If the anti-corruption campaign is netting bigger fish this year than ever
before, Chinese officials and Western businessmen say, it is more an
indication of corruption's growing pervasiveness than of any official
determination to alter the situation that allows graft to flourish.

"The network of gift-giving and favors involves the families of almost every
senior leader," a mid-level Chinese official said. "So anyone who tries to
move against them immediately runs into resistance."

Traditionally, those disciplined for corruption have been people who run
afoul of officialdom, while those who preserve connections with ranking
officials go unpunished no matter how bad their crime. Since investigators
and court officials take instructions from party officials, no prosecution
can proceed without approval from the senior authorities, either at a local
or central level.

With an economy growing at breakneck speed and officials involved in

many stages of business ventures, corruption has accelerated greatly in the
anything-goes economic atmosphere in recent years, the official said.

Small examples abound. A Chinese chief representative of an American

company in Beijing complained that she ran into corrupt practices every
week. Getting a telephone installed, having an operating license approved
and even registering her office all involve cash payoffs, the executive said.

"It's everywhere," the executive said. "I hate it. It's getting worse and
worse."

Last week the authorities announced that more than 47,000 officials had
been disciplined on corruption charges in the first half of this year, an

increase of 7.8 percent over the same period last year. Of those punished,
official news reports said, more than 1,801 were division chiefs or
magistrates or higher, a 44 percent increase.

Large cases are more common, too. In July, investigators publicized the
outline of the largest corruption scandal yet in 46 years of Communist
Party rule, a case involving central Government as well as provincial
officials.

A well-connected woman in Wuxi, 100 miles west of Shanghai, bilked

Government officials and private investors of more than $380 million over
five years in a pyramid scheme built on imaginary investments, an official
account said.

The woman, Deng Bin, 57, was accused of running an operation that
bribed officials in dozens of cities to invest in her company, Xinxing
Industrial Corporation, sometimes offering profits in advance. The
operation even reached into Beijing's Municipal State Security Bureau,
where a senior official lured high-ranking customers into the scheme,
before it collapsed last summer when the Wuxi authorities arrested Ms.
Deng. She now faces the death penalty.

An even more explosive corruption case came to light in April when the
Deputy Mayor of Beijing, Wang Baosen, was found dead in a ravine in
Huairou, 35 miles north of Beijing, apparently a suicide.

Mr. Wang was later accused of embezzling $37 million, but a second
Chinese official said investigators might find even more by the time they
finish looking into a series of Beijing construction projects under Mr.
Wang's control that apparently involved huge payoffs to staff at the Beijing
Municipal Communist Party Committee, headed by a Politburo member,
Chen Xitong.

"It's hard to separate corruption from politics in this case," the official said.
"No one doubts that Chen Xitong was dirty, but if only he and the people
around him are charged, it will look very political."

Mr. Chen has been a rival of the Communist Party chief, Jiang Zemin,
since the latter won his post in 1989, and is said to have complained in
meetings that he was better suited for China's top position than Mr. Jiang.

Mr. Chen's arrest, announced in early July, aroused speculation that Mr.
Jiang would open a far-reaching crackdown on corruption, both to clear

out political enemies and to earn respect from ordinary Chinese, who
almost uniformly express disgust with the level of graft that has spread
throughout Chinese society. Yet no more officials have been charged.

It is not clear why Mr. Wang chose to kill himself in Huairou, where the
nongovernmental forum of the United Nations Conference on Women is
being held next month. But a popular theory in Beijing is that he chose
Huairou because he had arranged several villas for senior Chinese leaders
there, and wanted to send a signal that if he was blamed for a huge
corruption scandal, his superiors had indirect complicity as well.

With Deng's Influence Waning, Privatizing of

China's State Industries Stalls
By PATRICK E. TYLER
Published: June 18, 1995

SHENYANG, China The last great task of Deng Xiaoping's era of

economic reform, the restructuring and privatizing of China's huge
state-owned industrial sector, is under assault at a time when he appears to
be too infirm to respond.

Since consolidating power in 1978, Mr. Deng, now 90, has supervised each
phase of economic liberalization, ending agricultural communes and
creating "special economic zones" as experiments in capitalism. In doing so,
he laid the foundation for the "socialist market economy" that became
national policy in October 1992 and has accounted for the tenfold increase in
China's gross national product from 1978 to 1994.

The greatest remaining challenge near the end of his life has been
transforming the state industrial sector.

Eighteen months ago the Communist Party mapped out a blueprint for
overhauling 14,000 of China's largest state-owned industrial enterprises by
the end of the century. Now, as Mr. Deng's health and influence as China's
paramount leader have slipped, almost no progress has been made while
conservative ideologues in the party leadership appear to be reversing the
strategy.

"The last big statement that gave us any hope was in November 1993," an
influential Western banker said, referring to the blueprint. The Nation's
Future Is Seen at Stake

Many Chinese and Western economists say the overall economic success or
failure of China in the coming years will turn on its ability to transform its
state-owned industrial sector from a debt-ridden burden into an engine of
growth. Failure to do this, many experts say, could undermine the ability of
China to pay its debts and feed and sustain its population of 1.2 billion.

Mr. Deng had endorsed the 1993 plan to put China's industrial leviathans on
the same footing as Western corporations, responsible only to shareholders
-- not the party -- and the demands of the market.

But allowing bankruptcies in money-losing large industries designated by

the provincial authorities early in 1994 has been postponed, and
"corporatization" has disappeared from the official vocabulary. The reason,
many Chinese and Western economists say, is that this last stage of reform
will take an enormous amount of political will to manage the social upheaval
caused by large-scale factory closings.

What's more, an assault on the state sector threatens the source of much of
the Communist Party's power. Party cadres dominate the management of
state industries. And tax revenues from state factories sustain the central
Government and the party in Beijing, providing 65 percent of national tax
revenues.

The party's political identity is at stake.

"What we are engaging in is socialism, and our final goal is to achieve

Communism," Song Ping huffed recently in a commentary in People's Daily,
the official Communist Party newspaper. A Clear Challenge To Deng's
Policies

Mr. Song, a 78-year-old conservative party elder, asserted that Mr. Deng's
reforms had led to "erosion by the corrupt thinking of capitalism." Just in
case readers missed the point, he added, "Our country has been carrying out
socialism for several decades and we don't have any reason not to talk about
Communism."

Chinese and Western experts say this prominent manifesto represents a

clear challenge to Mr. Deng's policies by party conservatives.

Some fear that a strong conservative backlash could stifle -- or even roll back
-- the trend toward more market-based decision making in the management
of state-owned factories, where ad hoc money-making strategies and
product innovations have demonstrated that a capitalist spirit has taken root
within the old system.

In a rare public admonishment made in a speech attended by senior Chinese

leaders, the United States Ambassador, J. Stapleton Roy, warned that "the
adverse consequences of delaying fundamental reform" in state industries
"and not making a stronger commitment to the market would be felt most
strongly in the first part of the next century and could jeopardize China's
hopes for sharing in the general rise in East Asia's prosperity in the first
decades of the next century." Workers Vent Fury On a Statue of Mao

Here in Shenyang and all along the industrial spine of northeastern China,
hundreds of thousands of workers have been sent home from state-owned
industries whose products are unwanted or uncompetitive. The euphemism
for these layoffs is "taking a long vacation" -- without pay.

"Some workers tried to set a statue of Mao Zedong on fire with gasoline,"
said Xu Ping, 30, an industrial engineer. "That's how angry they were.

People with families are seeing their livelihoods disappear and they are
asking, 'What kind of workers' state is this?' "

The answer seems to be that it is a state in transition -- "poised awkwardly,"

as Ambassador Roy put it recently, between a Marxist centrally planned
economy and the "socialist market economy" that Mr. Deng set as a national
goal.

Where Mr. Deng emphasized the need to take risks with the economy, his
designated successor, President Jiang Zemin, has adopted the language of
the Deng reforms but carries out the tactics of delay and deferral.
Mr. Jiang, a cautious consensus builder, now speaks mostly about the need
to maintain social stability and bring down the rate of inflation, which last
fall reached the highest level since the Communists took power in 1949 and,
though it has declined somewhat, remains alarmingly high.
Breaking up China's state sector carries with it great risks at a time when
China's social safety net is largely undeveloped. Most laid-off factory
workers can expect no better than $20 a month as a survival stipend.
China's leaders have looked at the "shock therapy" of economic reform in
Russia and pronounced it a dangerous failure, though many economists
argue that Beijing could afford to move aggressively against the state sector.

The reason is that the Chinese economy is booming, with annual growth
over 10 percent, on the strength of the performance by non-state companies
and foreign joint ventures. Role of Free Market Long in Contention
"China cannot afford to slacken the pace of reform," Harry G. Broadman, a
World Bank economist, said in a new study of China's state industries. Loss
of momentum, he said, could undermine China's "ability to maintain
growth."
Since the early days of Mao Zedong, China's Communist Party leaders have
struggled mightily over the role of the free market. Mr. Deng himself, as an
early pragmatist in economic affairs, was denounced and persecuted as an
unrepentant "capitalist roader." Now in failing health, Mr. Deng is unable to
defend his reforms as party conservatives blame them for turning loose
"volcanic forces" in society.
Mao's egalitarianism has been replaced by great disparities of income and
conspicuous consumption. Corruption and crime are increasing along with
the social dislocation of millions of Chinese leaving farmlands for the cities,
where they are part of a "floating population" of nearly 100 million Chinese
seeking higher wages. An Old Foe of Deng Stirs Up Resistance
Before he died in April, Chen Yun, Mr. Deng's longtime adversary on
economic matters, tried to convince several other influential party elders
that reforming the ownership of state industries -- the first step toward

privatization -- was "capitalistic and ought to be abandoned," one party

member said recently.
Mr. Chen and his allies, far from wanting China's moribund state sector to
wither away, spoke of reinvigorating state industries and making them
"pillars" of a new socialist society.
"Efforts must be made to improve the vitality of the state-owned enterprises
by way of deepening the reforms and building up their new superiority,"
President Jiang, echoing the conservative line, said while on an inspection
tour in southern China in May.
Mr. Jiang's new emphasis, and that of his economic advisers, is on
improving management. The party's strategy is now based on the tenuous
proposition that foreign investors would be interested in collaborating with
Communist Party bosses to bring modern technology and management
techniques to China's state industries.
"My view is that they should not invest another penny in the state sector,"
said Fan Gang, a leading economist at the Chinese Academy of Social
Sciences. But Professor Fan's group of economic reformers is on the
defensive these days.
As a sector, state enterprises comprise a sprawling network of more than
100,000 factories, 10 percent of them here in the northeast. They range in

size from shops with a handful of workers to giant auto works, refineries and
steel mills, like Anshan Iron and Steel here in Liaoning Province, which
supports 250,000 workers as well as 250,000 pensioners and dependents.
With more than 76 million state workers over all, these industries still
represent the core of China's economy, soaking up 70 percent of state
investment funds, yet they contribute less than half of the country's
economic output.
"You need labor market reform, housing reform and a social security system,
and these don't happen by accident," said a Western banker here. "Once you
begin to think through the implications of these reforms, you could pull your
hair out, because you don't know where to start."
A year ago, when China used a credit squeeze by state banks to get inflation
under control, state enterprises began a program of extensive layoffs in what
one banker called "a lifeboat strategy" to protect management and at least a
part of the work force.
At the time, Western economists did not really question China's decision to
pause in the reform program. With tens of thousands of idled workers in
China's major cities, it also became clear that without unemployment
insurance and social security reforms, the Chinese leadership would be
taking a significant risk in proceeding with large-scale restructuring in the
state sector.

"I don't blame them for pausing to sort of work up their courage," a Western
diplomat said.
"But then if they don't go ahead," he added, China has little hope of
sustaining the high level of growth needed for an expected population
increase of 400 million in the next three decades. The Private Sector To the
Rescue
Social security experiments are under way here and in several other
provinces, but there is little prospect that any such "safety net" system will
develop fast enough to guarantee a no-risk strategy for the hard-slogging
next steps of reform.
Luckily for many recently laid-off workers, the private sector is still booming
fast enough to employ many of those shed by state industries. The economy
is growing by more than 10 percent a year, despite the money-losing
performance of nearly half of the country's state-owned factories.
For many laid-off workers, bitterness has given way to entrepreneurial spirit,
even if that means selling watermelons, as Wang Shaojun, 34, a former lathe
operator sent home without pay last year, now does under a wind-tossed
plastic umbrella at a market here.
"I have no security in this job as we had in the factory," Mr. Wang said, "but
I am making some money, so I guess that's not bad."

Photo: A year and a half ago, China mapped out a blueprint for overhauling
14,000 of its largest state-owned industrial enterprises by the end of the
century, but almost no progress has been made. Conservatives want
reinvigorate state industries and make them "pillars" of a new socialist
society, like this iron and steel complex in the Sichuan Province that the
Government says is able to operate without extensive subsidies. (Associated
Press) Graph: "A CLOSER LOOK: Industry in Transition" Since 1978,
state-owned industries have accounted for a declining proportion of China's
gross industrial output. Deng Xiaoping's program to privatize the state
industrial sector is running into resistance. Graph show percentage
breakdowns of state-owned, collective, individual, and other industries
during 1978, 1985, and 1993. (Source: China State Statistical Bureau) Map
shows the location of Shenyang, China.

China's Plans to Make Family Car Are Receding,

Official Says
By SETH FAISON
Published: July 20, 1995

BEIJING, July 19 China's "family car" project, an idea that got Western
auto makers salivating when they were invited to submit prototypes last year,
is likely to be delayed until well into the next century, a senior Chinese
official said today.

In the first public comments on the family car by a senior member of China's
car bureaucracy since last fall, Huang Fuheng, general manager of the China
National Automotive Industry Sales Corporation, said that making family
cars salable would be a "very long and very complicated" process.

"It's going to be 10 or 15 years before a family car becomes feasible in

China," Mr. Huang said in an interview. "It's a complicated process, not
something that we can do in a day."

When Beijing held an exhibition for 20 leading foreign car makers last
September, some officials suggested China would choose a single model, and
could start producing them within five years.

Ford Motor Company recommended a model from its Fiesta line in Europe.
Mitsubishi of Japan offered a mini-van while General Motors pushed a
Corsa model from Adam Opel, its German subsidiary.

But Chinese auto officials fell silent after the exhibition, causing confusion
among car makers. Mr. Huang's comments, coming shortly after an internal
Government meeting on the family car project, indicated that car officials
are divided about how to proceed.

"There are some people in our planning departments who favor a single
model," Mr. Huang said. "My idea is that the family car should not be done
in one factory, or in one model. There are several different kinds of cars
needed in China."

He also conceded that it would be hard to meet the original demands set out
by Chinese car bureaucrats: that it will be modern, with air-conditioning and
anti-lock brakes, be fuel-efficient and cost less than $10,000.

"If you make a car that's too old a model, no one will want it; if you make it
fully modern, it will be too expensive," he said.

The vast majority of the 1.4 million vehicles made in China last year were
trucks; passenger cars totaled only 250,000, and most of those were
purchased by Government work units, which can afford a $30,000-$50,000
sedan for their senior officials.

Chinese officials said last year that they want to consolidate the domestic
market -- now composed of 120 or so small, inefficient plants making trucks
-- into a handful of large companies that can push total production to 3
million by 2000, with more than a million of them cars. By 2010, they said,
China should be producing 8 million vehicles, making it the world's
second-largest auto market, after the United States.

Their comments, and China's booming economy persuaded several foreign

auto makers that it was time to enter the Chinese market seriously. Yet the
market they are entering is plagued by a poor supply network, an
inexperienced labor force, and high tariffs that limit imports of autos and
parts.

Foreign auto executives said today that Mr. Huang's comments clarified a
situation they had already begun to sense: that priority is likely to be given to
building a car component industry, and that plans for several new passenger
car projects will be pared down.

"The family car is definitely way down the line," said Stephanie Hallford, a
Ford executive in China. "For him to say that is not really out of context from
what we've understood."

Chinese Leader Says 'Mistakes' By Government

Fueled Inflation
By PATRICK E. TYLER

Published: March 6, 1995

BEIJING, March 5 Prime Minister Li Peng acknowledged today that "mistakes" made "at all
levels" of his Government had allowed inflation to reach its highest point since Communist rule
began in 1949 and that this increase last year had "aroused great resentment among the masses."
The declaration, in Mr. Li's opening address to this year's National People's Congress, appeared
to lay the groundwork for an overall retrenchment of the economic reform program that was
begun by Deng Xiaoping in 1979.
It may have also set the stage for long-rumored personnel changes that would dilute the power of
Zhu Rongji, the Vice Prime Minister who has overseen economic policy since assuming control
of the central bank in 1993.
Speaking to 2,811 deputies gathered in the Great Hall of the People, Mr. Li reported that overall
inflation reached 21.7 percent in 1994, a rate that was double the level he pledged to maintain a
year ago.
Consumer price inflation, the main indicator of the effects of price increases on Chinese citizens,
was 24.1 percent. The prices of many basic foods and grains, however, increased by 60 percent.
The last peak in consumer prices was in 1988, when inflation reached 19 percent and contributed
to an outpouring of popular anger toward the Government during the democracy protests of the
following spring. Since then, consumer inflation had been a negligible factor in the economy,
reaching 3 percent in 1991 and 5 percent in 1992 until the rate rose to 13 percent in 1993.

"Practice has proven that in a Socialist market economy, the Government must carry out
necessary regulation and management in pricing for the major commodities, which have a great
bearing on the national economy and on the people's livelihood," Mr. Li said.
At the same time, he said, while economic reform will continue, it will come under greater
control.
The United States Ambassador, J. Stapleton Roy was among the foreign diplomats who attended
today's session and he said, "My instant analysis is that they are more focused on domestic issues
than they were last year."
In addition to inflation, the issues of crime, corruption and a decline in agricultural output
dominated the Prime Minister's address. Of all the concerns that have seized the generation of
leaders who will succeed Mr. Deng, inflation and corruption are pre-eminent. Mr. Li said
combatting corruption was a "matter of life and death for our nation."
But his exhortations to greater vigilance against corruption were focused on local party officials,
not the ranks of senior party officials and military officers where corruption is believed to be
endemic.
His emphasis on "mistakes" in economic management seemed aimed at Mr. Zhu, whose power
over the economy has vaulted him above Mr. Li in influence at times over the last two years.
Mr. Li's case was simple. He said price liberalization measures and a weak harvest had sent
prices of many commodities soaring, but that "the mistake we made was that we had
underestimated the repercussions of these measures."
"The Government took no emergency measures to stop these practices and launched no overall
austerity program," he said, because some officials were trying to "prevent a sharp decrease in
economic growth."
China's economy grew at 11.8 percent in 1994, compared with the 9 percent Mr. Li had sought.
His comments implied that a timely austerity program could have headed off inflation and
brought growth down to a manageable level.
Mr. Zhu, seated two rows behind Mr. Li during the speech, held his posture ramrod straight,
never glancing at the text of the speech before him, while other vice prime ministers scribbled
and underlined the document.
During his speech, Mr. Li said China would seek to slow its economic growth rate of 12 to 13
percent of the last three years to 8 to 9 percent.
The central Government plans to slow the pace of investment, and reduce the number of national
construction efforts so that financing can be made available for major projects that are already

under way, like the Three Gorges Dam on the Yangtze River, the largest hydroelectric project in
the world.
The annual session of the congress gives the 53 million members of the Communist Party the
opportunity to display its strength, with delegates from every province and from each of China's
55 minority groups. But the body itself lacks any real legislative powers and serves to ratify the
decisions made by the party's 170-member Central Committee, whose chairman is President
Jiang Zemin, the party's general secretary.
Five years ago, Qiao Shi, chairman of the National People's Congress and a member of the
Politburo, was considered a contender to succeed Mr. Deng as paramount leader but was edged
out by Mr. Jiang and has since lost other important party posts.
Mr. Li's power in the inner circle comes from his long association with the conservative wing of
the party, whose most hard-line members have begun to grumble that Mr. Deng's economic
reforms have created such destructive forces as unemployment, inflation and corruption.
At the same time, Mr. Li's health has declined. A heart attack in early 1993 removed him from
leadership responsibilities for four months, and Mr. Li has reportedly been working less to
conserve his energy.
Today, minutes after he began speaking, a page quietly brought a chair to the rear of the broad
wooden podium so Mr. Li could discreetly support himself during the speech.
Photo: Prime Minister Li Peng of China listened to the national anthem yesterday at the opening
of the National People's Congress. His opening speech to the 2,811 deputies appeared to lay the
groundwork for overall retrenchment on the economic reforms begun in 1979. (Agence
France-Presse)(pg. A9)
Correction: March 8, 1995, Wednesday An article on Monday about the opening of the
National People's Congress in Beijing referred incorrectly in some editions to recent rates of
Chinese inflation. Inflation, a major concern of the congress, last peaked in 1988, not 1989; the
rate then was 19 percent, not 17.5.

China's Central Bank Raises A Rate Linked

to Investing
AP
Published: January 2, 1995

BEIJING, Jan. 1 Confronting continued strong economic growth and

rising inflation, China's central bank today raised interest rates on loans to
financial institutions by an average 24-hundredths of 1 percent.

The move was aimed at controlling excess investment in fixed assets, the
official Xinhua News Agency reported. China had an inflation rate of 24.4
percent last year, more than double the Government's target.

On Friday, the State Statistical Bureau reported that China's economy

grew at a blazing 11.8 percent clip in 1994, the third consecutive year of
rapid growth.

The People's Bank of China said today that interest rates for personal and
enterprise deposits would remain unchanged, as would the rates on loans
for circulating capital.

The annual interest rate on loans for investment in fixed assets will rise by
an average of 72-hundredths of 1 percent, the bank said.

Interest rates for technical renovation loans will be raised from 10.98
percent, to 11.7 percent.

The new rates apply only to new loans and are not retroactive, the bank
said.

China's gross domestic product was 4.3 trillion yuan, or about $508 billion,
for the year, up 11.8 percent from 1993, a spokesman for the statistical
bureau, Ye Zhen, said. The G.D.P. growth rates were 13.4 percent in 1993
and 13.6 percent in 1992.

The bureau estimated the 1994 increase in China's consumer price index at
24.2 percent. The planned inflation target for 1994 was 10 percent.

Mr. Ye said the target was far outdistanced because the statistics bureau
underestimated the effects of lifting price controls and did not foresee
floods and droughts that damaged crops and increased grain prices.

He said prices were expected to continue rising rapidly early in 1995 but
then slow in response to control measures, resulting in a "big decrease" in
inflation. He declined to disclose an inflation target for 1995.

China's leaders have said controlling inflation, overhauls of state

enterprises and agricultural development will be priorities in 1995.

Only about a third of China's estimated 76,000 state-owned enterprises

are profitable, while the rest are losing money.

China Economy in 1996

16 Foreign Law Firms Cleared To Open Offices in
China
By SETH FAISON

Published: June 27, 1996

Correction Appended
BEIJING, June 26 China's Justice Ministry approved the opening of offices

by 16 international law firms today, reflecting a brighter climate in

Chinese-American business relations now that trade disputes have been
put aside.

With foreign companies pouring into China in recent years, the need for
business-related legal work has grown tremendously. Yet China has tightly
limited the number of law firms allowed to fully operate.

Today's new licenses were the first granted since early last year, bringing
the foreign law firms in China to 73. Many more are waiting for approval.
Of those approved today, five are from the United States and the others are
from Japan, Hong Kong, Britain, Italy and Jordan.

This round of license-granting was apparently delayed until a favorable

moment in China's relations with the United States. American officials
have been pushing hard for better market access for legal, insurance and
banking firms.

The moment came, several foreign lawyers said, after Chinese and
American trade negotiators reached agreement in Beijing last week on how

to fight piracy of intellectual property. One of China's threatened

retaliatory measures against prospective sanctions was to suspend the
allotting of new business licenses for American trade and service
companies.

Until today, only one American law firm, Davis Wright Tremaine of Seattle,
had been approved to operate an office in Shanghai. Today, two were
added: Altheimer & Grey of Chicago and O'Melveny & Myers of Los
Angeles, where Secretary of State Warren Christopher was a partner before
assuming his current post.

While several lawyers applauded the Chinese move as a step in the right
direction, some complained about the confusion and difficulties of working
in a semi-open market.

"Technically, we're not supposed to be here until we're legal," said an

American lawyer who insisted on anonymity. The firm he works for was
not approved today, though it operates an unofficial office in Beijing
anyway. "But we can't become legal unless we're here, wining and dining
Ministry of Justice folks, and showing how serious we are about the China
market," the lawyer said.

In practice, dozens of similar firms operate preparatory offices in Beijing,

Shanghai and other cities, where they act as consultants, keep low visibility,
and generally answer telephones by saying "Hello?" rather than
announcing the names of their firms.

Xiao Hongmin, an official at the Lawyers Affairs Division of the Justice

Ministry, said there was no set schedule for approving new foreign legal
firms, many of which applied as long as three years ago. More than 130 law
firms have applications pending, Mr. Xiao said.

"The whole process of approval has become ultra-selective," said Louis B.

Goldman, a partner at Altheimer & Grey, which will open an office in
Shanghai. "Over 50 major American firms were competing for these slots,
and 5 got in."

On the long list of things that Altheimer & Grey did to win favor with
Chinese officials, Mr. Goldman said, was running a preparatory office in
Beijing for two and a half years, inviting Justice Ministry staff members for
visits to the United States, where meetings were arranged with business
and political leaders, and advising Chinese officials on developing their
legal profession.

The Justice Ministry is expected to soon issue a set of regulations on how

the Chinese offices of foreign law firms will be supervised, the New China
News Agency said yesterday.

Dollar-Denominated Stocks an Elixir in China

By SETH FAISON
Published: December 11, 1996

SHANGHAI, Dec. 10 When China opened a stock exchange here six

years ago, two kinds of shares were created, one denominated in Chinese
currency, the other in dollars.

The idea was to keep Chinese investors separate from foreign ones. For a
while, it worked.

Not anymore. Local investors have started pouring their money into
dollar-denominated stocks, known here as B shares, and China's
long-moribund stock markets have suddenly come alive.

Since the beginning of November, Shanghai B shares have risen 80 percent.

In the southern city of Shenzhen, home of China's other stock market, B
shares are up 113 percent since Nov. 1.

''The major reason is that local investors are coming into the market,'' said
Brewer Stone, chief representative of Prudential Securities in Shanghai. In
the same period, both markets' A shares have risen less than 25 percent.

Regulations still clearly bar local Chinese from buying B shares.

But in China, more important is what regulations the Government chooses

to enforce. And it became clear by mid-November that brokerage firms
would not be penalized for allowing local buyers to trade in
dollar-denominated stocks, as long as they produced the simplest of
documents to point to some foreign connection, however flimsy.

Brokers at two leading firms in Shanghai said they could now accept a
photocopy of a passport, anyone's passport, even a Chinese passport, as
evidence that the buyer had an overseas connection, even if indirect.

''It's very routine now,'' said a broker at Huaxia Securities, of the procedure
for local Chinese to open a B-share account. ''We're trying to make it easier
for customers, not more difficult.''

As in many areas of China's half-state-controlled, half-market economy, the

old rules do not fit but no new rules are ready.

By watching in silence, the authorities are giving tacit approval to the local
buying, perhaps because they saw a need to breathe some life into markets
that had been almost dead for two years. The surge in local buying is also a
step toward an eventual merging of the market that is denominated in
renminbi, the Chinese currency, and the dollar-denominated market. But
that is unlikely to happen until China's currency becomes fully convertible,
at least three years away.

Until then, the stock markets will live with an odd division, whose growing
imbalance provided the kindling for the market's current surge.

When a company issues both A shares and B shares, the two kinds of stock
are equal: the same sliver of ownership, the same voting rights. Yet there are
so many more local investors buying and selling stocks than foreigners that a
company's A-share price may be three times the B-share price.

A renminbi-denominated share of China First Pencil, for example, sold

yesterday for the equivalent of $1.49, while the dollar-denominated share of
the same stock was 49 cents.

The A shares have been climbing all year, as interest rates have dropped and
many investors search for a place to soak up excess savings, making the
discrepancy between A shares and B shares ever larger. As it grew, local
investors apparently looked for signs that they would be allowed into the
''foreigner only'' market.

They found it first in Shenzhen, where a vice mayor named Wu Jiesi took a
public and aggressive position early this year that the southern city's market
must be revived. At the time, talk among brokers was that the stock market
in Shenzhen might be closed down, because it was small and barely alive,
with its B-share market down 31 percent in 1995.

Mr. Wu made efforts to try to speed up the cumbersome listing process and
to reduce the exchange's listing costs to issuing companies and commissions
charged to investors. Word soon spread that the B-share market was going
to be made more open.

When Shenzhen's B-share index leaped upward one week in June, the
authorities quickly came forward to remind brokers that B shares were
technically limited to foreign buyers only, and the market fell sharply. But in
November it became clear that the authorities would no longer block most
purchases of B shares.

The markets took off. On Tuesday, the Shanghai B-share index rose 12.2
percent, one of several days of double-digit increases over the last week, days
on which every single one of Shanghai's 40 listed B shares went up. The
market closed at 84.80, up 9.20 points. On Nov. 11, the index had dipped as
low as 44.50.

Even Shanghai Lianhua Fibre, a money-losing company widely seen as one

of the worst stocks in Shanghai's B-share market, has tripled in price in the
last six weeks.

''Yes, it's a bit of nonsense,'' said John Crossman, general manager of

Jardine Fleming's Shanghai office. ''But at least it's bringing some liquidity
into the market.''

Graph: ''A Boom in Shanghai'' shows relative performance of the Shanghai A

and B shares since Oct. 31, 1996 (Source: Bloomsberg Financial Markets) (pg.
D10)

Crime (and Punishment) Rages Anew in China

By PATRICK E. TYLER
Published: July 11, 1996

ZHONGSHAN, China The corpse of the taxi driver was still warm in the
back seat when Liao Yongxiong, age 29, pulled up in front of the Lian Yuan
Street branch of the Industrial and Commerce Bank here in the car he had
just hijacked.

He concealed his pistol under his jacket and went inside. The three women
tellers greeted him; he was a familiar face as one of the security guards who
delivered cash each week from the main office.

Perhaps he was smiling when he asked, "Could I use the restroom?" because
the women were all too willing to unbolt the door to the security area where
they were working.

He killed them swiftly, just as he had the taxi driver, with point-blank shots
to the head or chest. Only one of the tellers, right before she died on the
blood-spattered floor, was able to press the alarm button near her desk as
Mr. Liao was escaping with a bag full of cash and securities.

Scenes like this one, which occurred on April 16 on a leafy side street here in
this southern Chinese boom town, had been virtually unheard of in China
during most of the last five decades. Now, suddenly, gangsters are staging a
comeback in China and major crime seems out of control.

This has provoked the largest nationwide crackdown on crime in more than
a decade and a wave of executions that has alarmed human rights
organizations.

Serious crime and crimes involving firearms are rising at more than 20
percent a year, with more than a third of those cases involving gangs.

"We were used to seeing this kind of crime in the movies, but such things
have never happened here," said Su Leting, who had just opened a new

seafood restaurant and was concerned, as many members of the Zhongshan

business community are, that fear of crime would drive foreign investors
away. "Many foreigners have started to get nervous about social stability,"
said Hu Baishou, the editor of the Zhongshan Daily, whose front page
carried the police composite drawing that led to Mr. Liao's arrest 54 hours
after the robbery.

Before China opened to the outside world in the late 1970's, totalitarian
social controls had all but eliminated major crime, drug trafficking and
prostitution. But with the decentralization of authority, the disappearance of
Communist-organized neighborhood committees and the reappearance of
wealth, a criminal reawakening is under way.

Although the overall crime rate in China remains modest in comparison to

that of United States and other Western countries, its rapid rise and a
sudden surge in major crimes, including murder, armed robbery and drug
trafficking, have triggered a response from Communist Party authorities.

In December 1995 and February of this year, criminal gangs in Guangdong

province and in Beijing staged spectacular armored car robberies with
precision planning and sophisticated arms. Together they netted more than
$2 million in cash.

The holdups prompted the Ministry of Public Security to rewrite its budget
plan for the next five years to buy more armor, better alarms and
global-positioning devices that use satellite signals to pinpoint the location
of cash-carrying vehicles, many of which are not even armored in China.

The day before the Zhongshan bank robbery, the police in Guangdong
province stopped five jeeps and a truck trying to smuggle 1,200 pounds of
heroin into Hong Kong for shipment to the United States and Europe. It was
one of the largest single hauls of heroin in history.

In the country's rich coastal provinces, well-armed highway gangs have used
prostitutes to lure truck drivers into robbery and murder traps. Kidnappers
are preying on the families of China's new rich and the heroin trade has
spread to all of China's large cities.

But it may have been Mr. Liao's murderous bank heist in this city where Sun
Yat-sen, the father of modern China, was born that shocked the Communist
leadership in Beijing into ordering a nationwide crackdown on major crimes
and gangs.

The so-called "Strike Hard" crackdown has led in its first two months to tens
of thousands of arrests and at least a thousand executions, more than at any

time since the 1983 crackdown on crime when, diplomats say, 10,000 were
put to death within a few months.

One of those executed in the current campaign was Mr. Liao, who was shot
in the back of the head on April 30 by a police executioner, 15 days after the
crime. Before he died, he was paraded before 5,000 Zhongshan residents at
a sports stadium, where he was denounced as a "barbarian" by local
Communist Party officials.

"This was a big case, so the masses' reaction was very serious," said Mr. Hu,
the newspaper editor, who is also the deputy chief of propaganda for the
Communist Party committee in Zhongshan. "After Liao was arrested, the
people were very happy and they appealed to execute him right away."

Mr. Liao's last words to a state television interviewer were, "I do not fear
death," and his dramatic appeal to his older brother to care for his
3-year-old son was captured by a local photographer.

Around the country, so many city and provincial governments have been
staging execution rallies that human rights organizations are having trouble
keeping an accurate tally.

China Economy's Class Act: High Growth, Low

Inflation
By SETH FAISON
Published: November 14, 1996

SHANGHAI, Nov. 12 To those who wonder when China's

locomotive-paced economy will slow down, the chief of its central bank
replies: Not anytime soon.

With the nation's inflation rate dropping faster than expected, the chief
banker, Dai Xianglong, said in a published report on Tuesday that China's
Government had achieved what few economists thought it could, a favorable
balance of high growth and low inflation.

Private economists, though, said problems remained in China's economy

and the fall in inflation was cyclical and could pick up again with a poor
harvest.

Mr. Dai said that China's retail price index would grow by 6.6 percent or less
this year, well below the official target of 10 percent, and less than half of the
14.8 percent in 1995.

Meanwhile, the economy is growing by a healthy 9.8 percent, virtually the

same as last year. Since 1985, Mr. Dai pointed out, China's economy has
grown by an average of 10.3 percent each year, a stunning figure by any
measure.

''Looking at the present economic situation, I can say definitively that

China's restrained monetary policy has proven a success,'' Mr. Dai said, as
reported in a state-run newspaper called The Financial News.

Mr. Dai's comments came together with the news that October retail prices
grew by only 4.7 percent compared with a year earlier, the lowest monthly
increase since 1992. That brought speculation among economists that China
may again cut interest rates -- it has done so twice already this year -sometime in the next few months.

Mr. Dai credited China's three-year austerity program with achieving the
drop in inflation, which peaked in 1994 at 24 percent, a figure that Chinese
leaders worried might cause public unrest.

Economists almost uniformly predicted a tight money policy aimed at

controlling inflation would kill China's blockbuster growth rate, but the
authorities seem to have achieved the ''soft landing'' they sought, with
healthy growth and low inflation.

At the same time, China's foreign exchange reserves have grown to more
than $100 billion, Mr. Dai said, also far higher than anyone predicted.

Behind all these rosy numbers lurk deep uncertainties in China's economy.

In the midst of a wrenching transition from a planned to a market economic

system, China is saddled with an immense and inefficient state-owned sector,
chronic underemployment and common confusion about the future of the
state's official ideology, which despite all signs to the contrary is still socialist.
Virtually half of China's state-owned industrial enterprises lose money, with
much of the remainder breaking even and only a small minority actually
recording profits.

But Chinese officials and economists seem to take some pleasure in having
proved their skeptics wrong, at least in the short term.

''You have to recognize the overall success of the macroeconomic policy in

the last two years,'' said Xu Hongyuan, an economist at the State

Information Center in Beijing. ''The nation's 10 percent growth rate is steady,

and by international standards it's quite high.''

Mr. Xu said falling prices were caused mostly by an improving farm sector,
where the combination of a bumper harvest and expanded food imports had
eased domestic food prices, which make up half of the retail price index.

Joan Zheng, an economist at J. P. Morgan in Hong Kong, said that China's

agricultural performance had tended to be cyclical: any time there is a weak
harvest, as in 1994, the authorities go to some lengths to reverse it, offering
incentives to farmers to increase production and increasing imports of wheat,
corn and rice.

Ms. Zheng said she had detected a gradual easing of China's tight monetary
policy, but that increased Government spending had not affected the
inflation rate as much as low food prices.

A Shanghai-based economist, still puzzling over the latest growth and

inflation figures, said: ''These two numbers don't seem to fit. It really
surprised me how far the inflation rate has fallen. The general consensus had
been that inflation would be climbing again by the end of the year, but it's
still falling.''

Citing Security, China Will Curb Foreign

Financial News Agencies
By SETH FAISON
Published: January 17, 1996

SHANGHAI, Wednesday, Jan. 17 Citing national security, China's

Government announced on Tuesday night that it would further restrict the
flow of information into the nation by more closely regulating
international agencies that supply financial news to China.

International wire agencies selling economic information in China -namely Reuters and Dow Jones -- will now be "supervised" by the official
New China News Agency for the content of their reports as well as the
subscriptions they sell to Chinese customers.

While the full ramifications of the decision may not be clear for days or
weeks, it appears to have been prompted by concern among Chinese
leaders about growing access to information from abroad, both from
international news agencies and from the Internet, although the Internet is
not yet used widely in China. At the very least, the decision seems intended
to intimidate foreign news organizations.

"Foreign economic information providers will be punished in accordance

with the law if their released information to Chinese users contains
anything forbidden by Chinese laws and regulations, or slanders or
jeopardizes the national interests of China," said the announcement, as
reported by the news agency itself. It described the decision as having been
issued by China's Cabinet in the form of a circular.

In addition to the Government's desire to limit information it deems

unwelcome, however, a driving force in the decision was apparently the
New China News Agency's desire both for hands-on control over
information networks and, perhaps even more, the right to charge fees to
users and sellers of information.

An American news media executive in Beijing said the Chinese news

agency has been "trying to do this for months."

"I can't believe the Government finally went along with it," the executive
said. "It's this current climate of paranoia that allowed it to happen."

If the New China News Agency stands to gain, Chinese banks and
securities firms that trade currencies, commodities, stocks and bonds may
suffer badly, if their access to market information is blocked or slowed.

Although the announcement did not spell out how the New China News
Agency intends to vet all the market information, company news and
analysis that are available from news organizations each day, it implied
that adding a new layer of "supervision" may involve delays.

Of the many issues left fuzzy and uncertain by the announcement, perhaps
the largest is whether the news agency will actually try to vet all the market
news that Reuters and Dow Jones report each day. Although both news
services are oriented toward financial news, they also include political
coverage that reaches subscribers.

Access to international news in China has grown steadily in recent years as

the fax machine and international travel became common, but there
remain strict controls on what can be broadcast or printed within China.
Reuters quoted an unidentified Chinese official early today as saying that
the new restrictions would not mean a slowdown in up-to-the-minute
financial news, and would not constitute censorship.

On Tuesday, executives at Dow Jones and Reuters expressed great surprise

at the announcement, in part because it runs counter to a steady trend of
allowing more financial information to be available, and allowing agencies
to sell freely to Chinese institutions.

"The open flow of economic information is good for China," said James
McGregor, who is both chief representative for Dow Jones in Beijing and
president of the American Chamber of Commerce. "Abundant information
makes markets stable."

A Reuters executive in Hong Kong read from a prepared statement, saying:

"On the face of it, this has extremely serious implications for Reuters, as
well as for many other organizations active in China."

In recent years, Reuters and Dow Jones have each won thousands of
customers among China's banks and securities firms that use
up-to-the-minute market information to trade on international and
domestic capital markets. Neither company will say exactly how much it
earns in China, but one executive said it was in the tens of millions of
dollars each.

The financial information business boomed along with China's securities

markets in 1993 and 1994, but has fallen since then, in part because a
series of scandals led to tighter Government regulation. Bloomberg, a
supplier of financial information in much of the world, has just begun to
enter China.

"This certainly runs counter to the grand objective of making Shanghai an

international financial center," John Pinkel, chief representative of H. G.
Asia, a Hong Kong-based securities firm, said on Tuesday. He also
questioned whether the official news agency's monopoly on financial
information would allow its staff to use it to their advantage.

Other Western executives questioned whether members of China's Cabinet

fully understood how damaging their decision could be.

Nor does the decision bode well for Hong Kong, the vibrant financial and
trading center over which China will resume control on July 1, 1997.

"I am afraid this latest move will only send the signal that Chinese leaders
still do not understand how the freedom of information underpins
economic success," Martin C. M. Lee, leader of Hong Kong's Democratic
Party, told Reuters.

The announcement did not specify when supervision would begin, but said
that foreign wire services already in China would have to apply to the news
agency within three months for permission to continue.

Although the announcement was couched in political terms, saying the

overall aim was to "safeguard state sovereignty," much of it was concerned
with controlling the business side of news distribution. It specifies, for
example, that international wire services will no longer be able to sell
services directly to customers, and must determine subscription rates
together with the New China News Agency.

Part of the reason may be that the agency, which retains considerable
political clout, has watched its revenue fall in recent years because of its

heavy reliance on Government funding. In contrast, state-run television

stations and newspapers that sell their own advertising during a booming
economy are doing far better.

Yet another issue raised by the announcement is how badly it might affect
China's bid to enter the World Trade Organization. Although Chinese
leaders are determined to join, they have been blocked so far because
efforts to open their economy have only gone partway.

In the long run, even if China's leaders somehow succeed in limiting

information that is available from financial news organizations, it is hard
to imagine how they could prevent freer communication via the Internet.
Though the Internet craze has not hit China yet, when it does, it will be far
harder to control.

"It's a lot easier to control a commercial service, because they're trying to

keep track of you so they can charge you," Esther Dyson, chairman of the
Electronic Frontier Foundation, an independent group in New York, said
on Tuesday. "They can't control the Internet any more than they can
control what people say in their own homes."

Chinese leaders are still grappling with how to control information over
the Internet. Last week, one media executive said, all of China's Internet
providers were called to a meeting with Government officials, who lectured
them on the dangers of pornography on the Internet.

"They're well aware of the Internet, and they're scared," said Ms. Dyson.
"In the long run, there's nothing they can do about it."

As a Pampered Generation Grows Up, Chinese

Worry
By PATRICK E. TYLER
Published: June 25, 1996

BEIJING It was just another school day for Liu Huamin when the father
of one of her students burst through the classroom door and said his

teen-age son was threatening to commit suicide by jumping off the

fourth-floor balcony of the family's apartment building.

Why? asked Mrs. Liu, a chemistry teacher at Waluji Middle School here.

Because, the man replied, the boy's mother would not cook his favorite meat
dumplings for breakfast.

He did not jump, but the story of his breathtaking display of willfulness
incites a look of instant recognition across the faces of many Chinese
teachers today.

Indeed, it seems at times as if the willfulness of China's generation of "little

emperors" -- children growing up without siblings under China's one-child
population control policy -- knows no bounds.

In Guangdong Province a power failure prevented a housewife from cooking

dinner for her 14-year-old son, who flew into a rage and went out to watch
television with a friend. When the boy returned, there was still no dinner, so
he seized a meat cleaver and killed his mother with 10 blows to the head.
Then he hanged himself.

An extreme case, but the fact that China's Government-run news

organizations gave it prominent display last year also illustrates the concern
of many Chinese that its first generation of only children is rapidly maturing
into a generation of spoiled, self-absorbed tyrants.

After decades of famine and political turmoil in China, parents who grew up
in troubled and often violent times under Mao, suffering long periods of
deprivation in the countryside and interrupted schooling, are now rearing -in many cases doting on -- a generation of only children.

And these new parents are filled with anxiety about whether they are doing it
right.

"This is a fixation," said James L. Watson, an anthropologist at Harvard

University who has studied the Chinese family. "I would call it kind of a
compensation complex. The generation of parents that we are dealing with
now, many of them are Cultural Revolution veterans who themselves did not
have much of a childhood, and I think that many of them are trying hard to
make sure that their own children get all the benefits and more that they
missed out on."

But they are doing it with little cultural guidance. The current generation of
parents has been cut adrift from both the traditional Confucian values
emphasizing reverence for elders that were once the foundation of China's
extended families and from the Communist values imposed for three
decades under Mao.

Neither has much credibility in China today.

Specialists say it is too early to say whether China's "little emperors" are
growing up to be a generation of self-centered autocrats, whose politics may
be more aggressive than the generation that grew up under Mao, or whether
they are so overindulged at home that they will be ill prepared for the
competitive pressures and harsh realities of China's market economy.

Off to Bad Start, Teachers Say

"Seems like it could go either way," said David Y. H. Wu, an anthropologist

at Chinese University of Hong Kong. "You could either raise a generation of
rebels against the controls of the Communist Party or you could raise a
generation that would feel more nationalistic and assertive as Chinese.

"Talking about personality traits and trying to project to the whole nation is
very difficult, but I can see a whole generation perhaps more independent

and willing to challenge authority, or simply more authoritative because of

their intensified relationships with their parents, and the symbol of parents
is government."

Either way, if today's teachers are any judge, the "little emperor" generation
is off to an inauspicious start.

"As life and economic conditions get better and better, the moral principles
of students and their sense of responsibility to society and family get worse
and worse," said Mrs. Liu, the chemistry teacher, who has an 18-year-old son.
"We teachers often wonder how these students can take up their social
responsibility when they get older."

Teachers around the world have long complained about the quality of the
next generation. But in China, a generation of children is growing up in the
midst of a profound economic revolution, where social and political values
seem suspended in time as the country waits for the death of Deng Xiaoping,
the 91-year-old paramount leader, not knowing whether that event will
usher in a new era with a new value system.

"My most terrifying concern," said Zhang Xiaoyun, 33, who teaches
literature at the China Youth Political College in Beijing, a former

Communist Party school, "is that you must raise a child within some system
of beliefs, but our generation has no beliefs, so how can we educate our
children?"

The demographic shift from multi-child families under strong patriarchs to

small, nuclear families centered on only children "is going to have a
profound effect" on Chinese society, Professor Watson said.

Increased Spending On Toys and Books

One of the ways that Chinese are overcompensating in bringing up the

country's only children is by spending the greatest portion of family income
ever on toys, books, educational materials, personal computers and food.

The national obsession with children is fostering multibillion-dollar

opportunities for business.

Baby food, which barely existed in China a decade ago, is now a staple of
family life and a major item in family budgets.

China's "little emperors" are the single greatest force in determining

consumer decisions today, experts say.

"I met a woman who took her daughter to McDonald's in Beijing twice a
week to give her modern nutrition," said Yan Yunxiang, a Chinese-born
anthropologist at Johns Hopkins University, who frequently returns to
examine the culture he grew up in.
When he asked the woman why she was spending as much as half a normal
worker's income each month on McDonald's, she replied: "I want my
daughter to learn more about American culture. She is taking English typing
classes now, and next year I will buy her a computer."
Professor Watson said: "It turns out that most Chinese don't even like the
food, but what they are buying is culture. They are buying connectedness to
the world system.
"The idea is that if these kids can connect with McDonald's, they are going to
end up at Harvard Law School."
One of China's most popular amusement parks, Window on the World in
Shenzhen, has no rides and no arcades. Chinese come from all over the
country to pay, in some cases a week's wages, to show their children
miniatures of Manhattan Island, the Statue of Liberty, the Eiffel Tower and
the Taj Mahal. A Generation Driven by Rewards
"Most of our time and money are spent on this child," said Wen Geli, the
mother of a 2-year-old boy who seems less attentive to the park's attractions

than to gorging himself on ice cream. "We want to give him an introduction
to the world and expand his outlook."
"My generation grew up with hardship," said her husband, Zhang Xinwen, a
communications officer in the Chinese Army. "We were born in the 1960's,
and that was a period of bitter shortage, but this generation is growing up in
richer times and we want to take advantage of this better environment."
Not far away, a retired sports teacher, Cai Kunling, 59, was squiring his
5-year-old granddaughter, Fu Hua, past the wonders of the world. "She
should be in kindergarten today," he said, "but she wanted to take me to this
place," he added in a tone that reflected who was in charge.
The two of them sat for their photo in front of a miniature of Niagara Falls
and then strolled over to the little Manhattan.
To Mr. Cai, who lived through the Mao period, it was like a dream world.
"My generation made a lot of sacrifices and had a lot of devotion to the
country," he said. "But this generation needs a reward if you want them to do
something. If there is no compensation, they don't want to do it."
Sitting around a dinner of baked carp with three other teachers one evening,
Mrs. Liu and some of her colleagues vented their anxieties.
Free-for-All Future Worries the Parents

Li Shunmei, 31, a high school teacher with a 3-year-old daughter, said: "I
worry a lot about my daughter's future, because I have doubts about whether
she can survive under the harsher and harsher competition of Chinese
society.
"Nowadays, there are many children who commit suicide. I think it is
because parents obey their children's every demand, so they are not able to
endure any reversals or hard times."
This strain of anxiety is very prominent in Chinese families.
The old "iron rice bowl" society of cradle-to-grave social welfare protection is
giving way year by year to the new market economy, where life is beginning
to look like a terrifying free-for-all to many Chinese used to something more
secure.
"The home can be very sweet and gentle for these toddlers, but the world out
there is a cruel world," said Jing Jun, a Beijing native who now teaches
anthropology at City College in New York. "When we were growing up, the
state arranged everything for you, but now parents know the state is not
going to do anything for them and the job market is pretty grim."
Mr. Jing said he believed that China's "little emperors" would have to pass
through a tough period of adjustment. "They are under so much pressure,"

he said, "and their parents have such great expectations for them. Whether
they are psychologically prepared for that, I cannot say."
Professor Watson said, "A lot of people, including Chinese psychologists, are
concerned whether the next generation is going to be able to 'eat bitterness,'
whether they are going to be able to work hard or whether they will be
willing to sacrifice themselves as was true under socialism."
Some Chinese feel that the "little emperors" will adjust.
"I'm optimistic," said Wang Xujin, a teacher at Beijing Business College with
a 9-year-old son.
But, he confessed, "although the students each year are smarter and smarter,
I like them less and less."
Photo: Many Chinese are worried about pampering children withoutsiblings.
At an amusement park in Shenzhen featuring a miniature Manhattan, Cai
Kunling showed his granddaughter, Fu Hua, 5, the sights. "She should be in
kindergarten today," he said, "but she wanted to take me to this place."
(Patrick E. Tyler/The New York Times) (pg. A6)

CHINA: NEW YORK ... OR SINGAPORE?;The

21st Century Starts Here
By Ian Buruma
Published: February 18, 1996

It is better not to be in Shanghai during a heat wave. I was there during the
first week in September when a heat wave struck, the hottest September day
in 48 years: 87 degrees at night and as humid as a steam bath. Schools
closed, as did many museums, which lacked air-conditioning. In one small
museum, the former residence of Zhou Enlai, I was followed from room to
room by an attendant with an electric fan. At night, in the old neighborhoods
of Nantao, or what used to be the walled Chinese City, families slept in the
streets, stretched out half naked on bamboo chairs.

The houses in Nantao were like little brick furnaces, dark, unventilated, with
tiny windows. The streets were not much wider than a grown man lying
down. There was no electricity, and often no running water. The air was
filled with the stench of public toilets mixed with that of the Huangpu River
and piles of rotting food. Dust from nearby building sites left a sticky black
film on one's skin. Not everyone was able to sleep. Even after midnight,

people were up playing card games, eating snacks, sipping green tea from
jam jars, fanning their children.

Shanghai still has many such neighborhoods. In a few years, there will be
almost none. They will be demolished to make way for new high-rise
buildings, department stores, banks and elevated highways. Hundreds of
thousands of people are being shifted to suburbs, miles from the center of
town, into cheap public housing more likely to have running water, better
ventilation and electricity. The new Shanghai is to be a symbol of the new
China: rich, big, modern, flashy. But the methods being used to bring this
about are not all new. They are based on coercion, sloganeering and
exhortation. And the cynicism bred by years of Communist propaganda has
created a perfect climate for graft and corruption.

In what is perhaps the greatest urban transformation since Baron

Haussmann rebuilt Paris in the 19th century, Shanghai is being dismantled
and a new city built in its place. Yet most people don't leave their old
neighborhoods gladly. There have been public protests. One man defied the
Shanghai Housing Demolition Office by refusing to move. He held off
intruders for months, armed with a pellet gun. Suburban tower blocks were
no fun, I was told, not renau, "hot and noisy." Hot and noisy is the way
Shanghainese like it.

I first saw Shanghai in 1986, as a reporter following Queen Elizabeth on her

visit to China. Shanghai was still Shanghai then. That is to say, the city had
hardly changed outwardly since the revolution ("Liberation") in 1949.
Pre-Liberation Shanghai, now commonly known as Old Shanghai -- the city
of gangsters, taipans, sing-song girls, movie stars, beggars, tycoons, White
Russian taxi drivers, Jewish refugees, Japanese spies, Filipino swing bands,
Communists, Viennese cafes, fancy-dress balls and torture chambers -- had
disappeared completely. But the physical setting had survived, miraculously,
as a grand urban fossil; hardly a stone had been removed, or even renewed.
Shanghai had become a dilapidated repository of mock-Renaissance
apartment buildings, Art Deco skyscrapers, mock-Tudor villas, neo-Gothic
office blocks and old Chinese shops.

Shanghai had been arrested in time for a reason. To be sure, Maoism was
more conducive to destruction -- of the walls of Beijing, the monasteries in
Tibet and indeed almost every religious monument in China -- than
construction. But Shanghai, being a relatively new city, had few traditional
or religious monuments to smash. It was left to rot instead. Provincial
Chinese had always regarded the city with a mixture of awe and envious
disgust. The Communists saw Shanghai as the supreme symbol of urban vice
and wicked capitalism, a foreign parasite on the Chinese body politic.
Shanghai had to be re-educated, transformed from a cosmopolitan entrepot

to an inward-looking Chinese city. So Shanghai was systematically starved of

funds and cut off from the outside world upon whose trade its prosperity
depended. Without trade the city stagnated, like Calcutta with the buildings
of Chicago: an open-air museum with the rank air of a lifeless pool.

But of course, as the official line changed, so did Shanghai. Deng Xiaoping's
slogan "To get rich is glorious" could have been made for Shanghai. Once
again the city had to be transformed, this time to serve as the showcase of
China's economic revolution. Some people predict that in 10 years Shanghai
will have overtaken Hong Kong as the main commercial hub of China.
Others say it will be more like five. Shanghai has China's largest stock
exchange and three commodity exchanges. A new stock exchange building,
scheduled to open this year, will be twice as big as the one in Hong Kong and
three times the size of Tokyo's. Banners all over the city proclaim the new
version of Chinese nationalism: "We love our motherland! We work to make
our country great and rich!"

When I returned to Shanghai in 1994, great chunks of the city I had seen in
1986 had already gone. Out of the wreckage of modernization -- piles of
smashed window frames, shattered walls and half-built elevated highways
crossing broken neighborhoods -- a new city has emerged. It is hard to put a
name to its architectural style: high-rise blocks with chunky facades in fake

white marble or pink granite or golden chrome or brown-tinted glass,

bearing such prosperous-sounding names as Golden Palace, Lucky
Apartments or A Trillion Harvests. It is the predominant style of modern
East Asia. Calcutta with the buildings of Chicago is beginning to look more
like Singapore, Hong Kong or even, here and there, Tokyo.
Twenty-eight of the world's top multinational companies have set up offices
in Shanghai, where office space can cost up to $9 a square foot a month -- a
50 percent increase over last year. At least two dozen foreign brokerage
firms have arrived, as well as 14 financial institutions. Volkswagen is
producing 200,000 cars a year. Xerox, Pepsico and Coca-Cola have set up
plants in an industrial zone near the city. Mitsubishi and Sony are planning
to do so. And yet it can still take six months to get a telephone line installed.
Trying to find some respite from the muggy heat one night, I took a walk
along the harbor front. On my right was the old Shanghai, all lighted up in
fairy lights: the Bund with its famous row of former foreign banks, clubs and
corporations. Here was the neo-Grecian headquarters of the Hong Kong and
Shanghai Bank, there the British consulate, and there the old Cathay Hotel,
where Sir Noel Coward wrote "Private Lives" and Sir Victor Sassoon threw
fancy-dress balls. Farther along was the former Shanghai Club, a stuffy
British establishment closed to Chinese and women. (It is now a seedy hotel
with a KFC fast-food restaurant in the lobby.) I had started my walk from the

Public Gardens, which once bore that infamous sign barring Chinese and
dogs.
On my left, across the Huangpu River, was the new Shanghai, much of it
built since 1989: Pudong, a vast industrial zone with miles of factories,
warehouses, expressways, high-tech parks, workers' housing developments
and new corporate headquarters. In the old Shanghai, the Bund was often
compared with Manhattan. The same parallel is drawn with Pudong today
by eager official boosters. Out of this modern mess rises a great phallic
monster of truly monumental ugliness, a bit like an enormous asparagus
with a silver ball on top. It is the Oriental Pearl Television Tower, advertised
in every tourist brochure as "the highest edifice in Asia."
A young man sidles up to me as I am gazing at the concrete asparagus and
asks me how I like the view. Not wishing to fob him off with a rude reply, I
ask him which side of the river he prefers. He waves at the row of neo-Gothic,
neoclassical, neo-Renaissance buildings on the Bund. "Built by foreigners,"
he says. What about Pudong? "Well," he says, "some of that is foreign too."
But which does he prefer? His face creases in a proud smile: "The Television
Tower, the highest building in Asia."
This is just how people talk in Kuala Lumpur and Singapore: the pride of the
newly rich, the zest of the up-and-coming. Shanghai boosters think their city
will soon be as rich. The question is whether Chinese politics will change in

pace with the economy. It is commonly assumed in the West that economic
liberalization is followed inevitably by greater political liberties. In fact, the
comparison between China and Singapore does not displease the current
regime in Beijing, especially when Singaporean leaders proclaim that "Asian
values" do not include the Western notion of human rights, let alone
individual rights. Individual interests and rights, they say, must be sacrificed
to the collective good. The Singaporean example is congenial to an
authoritarian Government that wants to use capitalism to boost prosperity
without giving up political control. But is this possible? Will it be possible in
China?
Singapore is freer than China, to be sure. Singaporeans are free to travel, and
the chances of spending your life in jail for demanding more democracy are
smaller than in China. But the press is less than free, and although
Singaporeans can vote, the Government has made it impossible for an
effective opposition to develop. The state is involved in every aspect of social,
political and economic life. So even though Singapore -- even Singapore! -might be too liberal to serve as a model for hard-liners in China, reformists,
including Deng Xiaoping, see their ideal of China as a Singapore writ large.
The problem is precisely one of scale. Singapore is a small city-state. An
authoritarian government, manipulating a quasimarket economy, can run a
stable little ship in Singapore. In the expanse of China, such a government
might be as messy and volatile as the current regime in Beijing.

Other models for the new China might be Taiwan or South Korea. The riches
of both have been eyed enviously from Beijing, and both countries, after all,
liberalized their politics only recently. Like Chile, South Korea managed
perfectly well to combine economic growth with political oppression. But in
the long run, South Koreans did not stand for this vaunted combination. Not
only students but businessmen, too, wanted free elections and a free press -just what the people of Beijing demanded, and were denied, in 1989. Hong
Kong has had a free press and lately free elections, too. Beijing has promised
to crack down on both. Up to a million people might leave as a consequence.
For the fear is less that Shanghai will catch up with Hong Kong than that
Hong Kong will become more like Shanghai. The only examples of a free
press that I saw in Shanghai were the same ones I saw in Singapore: the
foreign newspapers at the international hotels. THE FIRST GRAND
WESTERN HOTEL IN Shanghai was the Astor House, a neo-Renaissance
pile built in 1911 opposite the Russian consulate. It used to belong to the
Sassoon family and was especially famous before the war for its fine
ballroom. It is now a dive for young budget travelers. Only the ballroom still
shows signs of life: it is the temporary home of the Shanghai Stock Exchange.
Financial services will make Shanghai great again, more than manufacturing,
for high rents and labor costs are driving industry elsewhere. The
impoverished stock exchange has 3,700 trading seats. Two-thirds of all
stocks in China are traded in Shanghai. The official brochure boasts that the

Shanghai Stock Exchange "will become the biggest marketplace for trading
in Asia." It still has some way to go.
While waiting in the lobby for Wang Huizhong, a young analyst at the stock
exchange, I examine the photographs on the wall. They show the elderly
party leaders, leaning on their canes and dressed in Mao suits, being shown
around the trading floor by young men in smart Western-style suits. The
leaders look shabby and bewildered, like peasants gawking at the big-city
lights.
Wang exudes the easy confidence of an American businessman. Dressed
smartly, smiling widely, talking fast, he tells me everything is just fine,
everyone is making money, Shanghai is going to get bigger and bigger,
business is great. "Our guys," he says, are experiencing all the benefits of
economic reform.
Wang studied international finance in Shanghai on a Fulbright scholarship.
He is the new face of China, just the sort of man who would pay attention to
economic and political liberties. I ask him if there are any problems in
Shanghai, any weeds in the garden of economic liberation. He gazes through
the glass window of the exchange, at the young men and women peering at
their monitors. They are dressed in jeans and red shirts with numbers on
their backs. Well, he says softly, as a matter of fact, things are a bit slow right
now. There have indeed been some problems: unscrupulous brokers had

cheated their clients; prices had got a bit out of hand; the Government had
decided to suspend trading in A and B shares. "Government control," he says,
with renewed vigor, "that's what's keeping us back. We want to be
international, but the central Government is afraid we'll grow too fast. They
want to tighten control."
It is an old story. Tension between the central Government and local
business has plagued Shanghai since the 19th century, when it ceased to be a
fishing village and became a center of trade. Many great cities (Beijing, for
example) rose around royal courts or military strongholds. Shanghai is
purely the product of trade, specifically Western trade that began after the
Opium Wars in the 1840's. Shanghai's rise was due to the defeat of China by
the British. After the Treaty of Nanjing, signed in 1842, Shanghai became a
"treaty port," where European powers enjoyed commercial, legal and
diplomatic privileges. Shanghai was divided into Chinese areas and foreign
concessions (or settlements), where the Europeans prospered outside
Chinese jurisdiction.
The revolution of 1949 was inspired as much by nationalism as by Marxism.
It was meant to be a national liberation. Naturally, then, generations of
Chinese schoolchildren were taught to deplore Shanghai's prewar period.
And indeed there was much to deplore: the racist attitudes among the
Europeans, especially the British; the number of prostitutes (1 person in

130); the racketeering; the opium addiction; the poverty among the coolies;
the exploitation of peasants in the factories and sweat shops, and so on. So
why should one expect any affection for buildings that represent such a
humiliating past? Yet that same past was also the height of Shanghai's glory.
It was the single most creative period in modern Chinese history. Herein lies
Shanghai's historical paradox.
I am staying at an Art Deco hotel that used to be an apartment building
named Broadway Mansions. It is located across from the Bund, next to the
steel-girded Garden Bridge, which thousands of terrified Chinese crossed in
1937 to escape from Japanese troops. The view from my window has hardly
changed since the 1930's. I am having tea with three men who started a new
tabloid in Shanghai called Entertainment Weekly. One of the publishers, Yen
Bufei, is a balding man in his late 40's, wearing a T-shirt and blue jeans.
There is something of the aging hippie about him. In fact, he had been a Red
Guard. He recalls attacking his teachers and vandalizing reactionary
households. I ask whether he had enjoyed himself. "Oh, yes," he says, "we
had a great time. We were out of control, free to do anything we liked."
So I am surprised to hear him suddenly say: "You know what we want to do?
We want to connect today's Shanghai with the Shanghai of the 20's and 30's
and cut out everything in between." I am surprised, because he would have
grown up despising the period he wished to connect with. But perhaps I

shouldn't be surprised. Yen sees himself as a real capitalist now. The only
purpose of publishing a paper, he says, is to "make money." In fact, he says,
the objective of most people since the 1989 debacle at Tiananmen Square
has been to make money. Money, they hope, will buy them freedom.
And so it will, up to a point. Money in Shanghai will buy you almost anything:
drink, fine clothes, German limousines, beautiful women. Some people in
Shanghai are making a great deal of money. Many more are not. You see
them on the building sites: tens of thousands of peasants, from the poorest
regions of China. They are the builders of the new Shanghai, the waidiren,
the "outside people," working day and night for very low wages.
The higher crime rate is blamed on the waidiren, as is the increase of
beggars and indeed most of the ills of high-speed modernization. These
people survive as long as the market is booming. If not . . . who knows.
Unprotected by unions or an effective legal system, they depend entirely on
the whims of bosses. Almost everyone in China depends on bosses -criminal, political and economic, or a combination of all three. The only way
to keep the bosses off your back is to buy them off. And that takes money. In
that sense, money does buy freedom, of a kind.
Where political authorities are unelected and unaccountable, where bosses
rule rather than laws and where people are constantly told that to get rich is

glorious, there corruption will flourish. Corruption is the only way to get
ahead. Corruption, once again, has become the currency of power in China.
This was one of the immediate causes of unrest in 1989. There was much
talk of democracy too, and foreign experts, as well as many Chinese, were
quick to point out the discrepancies between democratic slogans and the
demonstrators' often undemocratic behavior. Yet to ask whether democracy
was the main goal of the Tiananmen Square protesters, or whether the
Chinese people really want or understand democracy, is to ask the wrong
question. Even many intellectuals are ambivalent when you ask them about
democracy as an abstract idea.
He Ping, a co-publisher of Entertainment Weekly, shifts in his chair and tugs
at his trendy boots when I ask him about democracy. All the leaders of the
1989 protest movement in Shanghai are still in jail. "It is still too soon," he
says. "China is not yet ready for democracy. The thing we need is a civil
society." He Ping is sophisticated. He knows the jargon of Western discourse.
The difference between Chinese and Western societies, he says, is that China
lacks a public space for criticism. If China could develop an independent
middle class, like those in Taiwan and South Korea, then it would be easier
to press for more democracy.
After He Ping and his friends leave my hotel room, I am left behind with a
young student, Zheng Xi, who had helped me with translations. "Politics!"

she says. "I hate it." I ask her what she would do in the event of another
uprising. "I would run away fast," she says, and laughs. I ask what she thinks
of He Ping's views. "A typical Chinese intellectual," she snorts. "They just
want power for themselves. Civil society indeed! What rubbish. If people
want their rights, they must demand them."
She had put her finger on something that had puzzled me before. I had met
many intellectuals, or at least educated Chinese, who talked like He Ping:
ordinary Chinese did not understand democracy; it was too soon; the
Chinese had their own ways, and so on. But I had also met taxi drivers,
money dealers, workers and unemployed students who were eager to discuss
the need for human rights and the rule of law. This seemed odd at first, but
then it made sense. The most successful, most highly educated Chinese often
managed to accommodate themselves to the system, buy off the bosses,
acquire some freedom. But the others, who had no such means, suffered
more from arbitrary power.
The Hong Kong Chinese who voted for pro-democracy candidates in last
year's Legislative Council elections were not the tycoons, who have tried to
make deals with Beijing, but the people who lack the wherewithal to do deals.
They knew that the only way to make power less arbitrary (or corrupt) is to
elect one's own leaders and be protected by laws. This kind of thinking, more

than capitalism or free markets as such, could lead to more democracy in

China.
The desire for money is only one reason for Shanghainese to feel nostalgia
for the past, even as its physical remains are disappearing by the day. The
other is local pride, the desire for an alternative to Government propaganda.
Now that a new Shanghai is being constructed to fit the new age of wild
economic expansion, intellectuals are looking to the old Shanghai for
inspiration. Like Berlin, whose Roaring 20's were remarkably similar to
Shanghai's (cabarets, movies, revolution), Shanghai is in the process of
reinventing itself, and its prewar past, with all its peculiar contrasts, is
serving as the only model at hand. And yet, although there are some striking
parallels, it is impossible to connect the new Shanghai with the old and cut
out what happened in between. Too much happened in between.
As is the case with Berlin, vital human ingredients are missing, or rather,
were destroyed, humiliated or chased away. Berlin lost its Jews. In Shanghai
it is the old cultural elite that has gone, the collectors and connoisseurs, the
literati whose presence leavened the crude materialism of the businessmen
and the gangsters. In the last few years some members of the old elite have
returned from Hong Kong, London and New York, to retire or to help the
city open up to the world again. There is a small network of Old Shanghai

families, who play tennis together and meet for discreet Peking Opera
evenings in private apartments. They have learned to keep their heads down.
Zhang Rushi is such a man. I meet him at the Shanghai Center, a large new
twin-towered office complex erected on the site of several Renaissance-style
villas. Zhang enters the room carrying a black leather bag that contains
scrolls of his own very fine calligraphy. He rolls them out carefully on a desk.
There is a delicacy about him, a daintiness, that seems at odds with the
brash, booming city outside. Zhang is in his late 60's, with a soft round face
and gentle features. He tells me that he worked from 1969 to 1979 as a rice
cooker in the canteen of a steel mill near Nanjing. The only things that kept
him going during those years were his calligraphy and his poems.
Zhang's life story is about the destruction of the Shanghainese elite; not the
Westernized business elite but the cultivated gentry. His father was a
mandarin of the old school: a former vice-minister of finance, a landowner
and a collector of Chinese paintings, books and porcelain. Zhang was sent to
Beijing with his mother in the late 1930's, when his father decided to settle
in Shanghai with his concubine. In Beijing, Zhang attended a missionary
school that was taken over by Japanese Army officers in 1941. Still, he
learned the classical Chinese arts, including opera singing.
After the war, Zhang worked for a foreigntrading company in Shanghai. He
passes over this period lightly: he had done well, "made them a million

pounds." When his story reaches the 1950's and 60's, he begins to giggle, as
though embarrassed to call attention to his misfortune. "They called me a
reactionary," he says. He lost everything -- his money, his possessions, even
his daughter, who was sent to a remote part of China to "work in agriculture
-- well, as a peasant, actually." His father was forced to sell his paintings
cheaply to Communist Party cadres, and the rest of his collection was
confiscated during the Cultural Revolution, never to be returned to the
family.
While Zhang was confined at the steel works, his wife suffered from serious
heart disease, but he was unable to visit her. Nor did he ever again see his
father, who died in 1972. After Zhang was released in 1979, he found he
could no longer sing. His voice was wrecked by years of hard labor. "They
spoiled everything," he says, giggling softly.
Chinese antiquities are back in vogue now. Most are being snapped up by
Chinese from Hong Kong and Taiwan, as well as the new rich of Shanghai.
There are many new rich here. You see them shopping on Huai Hai Road,
the former Avenue Joffre, which runs across the old French Concession.
Huai Hai Road has Armani boutiques, French bakeries and Japanese
restaurants, and on the side streets there are discreet little bars that serve
cocktails with profane names. New-rich women hang out in these bars,

wearing short leather skirts from Tokyo and high-heeled Italian shoes from
Hong Kong.
The new rich own nightclubs called Venue or Paris Dreams and drive
Mercedes-Benzes, sometimes bearing police license plates bought from
well-connected friends. They make their money in entertainment, smuggling,
real estate and finance. Some of them are in the army, others are children of
powerful party cadres and others still are out-and-out gangsters. In fact, the
categories blur into one another. A gangster cannot get rich without
connections in the army, or the police, or the Government. But a public
official might need to know the right gangsters to better his fortunes. ALL
THIS IS INDEED rather like the old Shanghai: everyone works his own
angle. Before the war, the British, the French and the Chinese had their own
police forces. Gang bosses knew how to deal with them. One such figure,
known as Pock-Marked Jinrong, served simultaneously as the boss of the
"Big Eight Mob" and as chief superintendent of Chinese detectives in the
French Concession police force. A gangster named Snake Eyes enjoyed an
excellent relationship for years with the French authorities: they helped him
deal drugs from the French Concession in exchange for a percentage of the
profits. When this arrangement ended, he carried on his trade in the Chinese
municipality, where very conveniently he was appointed head of the
Shanghai Opium Suppression Bureau.

It is impossible to prove exactly what deals are being made in Shanghai

today. A Hong Kong magazine called Asia Inc. caused a stir two years ago
when it published detailed allegations of shady dealing between the People's
Liberation Army (P.L.A.), the Public Security Bureau (Shanghai's police
force) and local as well as overseas criminal organizations. The bureau, the
magazine said, specialized in opening small- and medium-size brothels,
whereas the P.L.A. and the city government operated larger, more exclusive
establishments, sometimes in partnership with triads (Chinese crime gangs)
from Hong Kong and Taiwan. An anonymous P.L.A. officer is quoted as
saying: "Of course we earn a lot of money" -- from clubs, restaurants and
other commercial enterprises. "With this money we can treat the army
better." The other reason, which, if true, certainly matches the situation
before the war, is that army and police officials hope to control organized
crime by coming to mutually profitable agreements with the gang bosses.
The least one can say is that it is impossible to operate any business in
Shanghai without the right connections. Every business establishment,
whether a brothel or a trading firm, has to have the protection of an official
institution. At least one fashionable discotheque, Parliament, is guarded by
men in Public Security Bureau uniforms. And one of the most popular bars
in town, Judy's Place, is owned by the daughter of a powerful police official
and is in a building owned by the local militia, the People's Armed Police.

Connections, guanxi, are an obsession of conversation in Shanghai.

Cultivating the right connections is what the representatives of foreign firms
spend much of their time doing. What has changed over time is not so much
the method of doing business in Shanghai as the nature of the connections.
Alliances shift dramatically: Snake Eyes was a ferocious anti-Communist
who helped Chiang Kai-shek in his bloody war against the revolution; his
son, known as Papa Du, is well connected in the Communist Government.
Historical feeling in this world of shifting relations is necessarily flexible, but
not wholly absent.
The British firm of Jardine Matheson & Company, for example, still has an
image problem in Shanghai. Jardine was one of the companies that
precipitated the Opium Wars by demanding the help of British naval power
in the 1830's to open the Chinese markets. After graduating from opium to
transport, industry and real estate, Jardine Matheson became the leading
foreign firm in Shanghai. The old Jardine office, a granite-faced,
Renaissance-style building, still squats heavily on the Bund. The taipans
(foreign executives) at Jardine were the closest thing the British community
in Shanghai had to royalty. After the revolution, Jardine moved to Hong
Kong, with whose fortunes the firm is still closely associated.
The present headquarters of Jardine Matheson in Shanghai is a modest
office in a new building behind the Bund. I had lunch with the current

representative, William Hanbury Tenison, in the Chinese restaurant -restored to the original 1920's style -- of the Peace Hotel, only a few doors
away from the old Jardine building. Hanbury Tenison has a lively sense of
history. He likes to think of himself as the last taipan, only partly in jest.
Fluent in Chinese, he has a deep interest in classical Chinese culture. But he
is unfazed by the present transformation of Shanghai. As far as he is
concerned, he says, they could pull down the former Jardine building: "It
was an aggressive commercial statement then, just as the new high-rise
buildings are aggressive commercial statements now."
He is right, of course. Instead of preserving its past, Shanghai is remaking
itself in the light of its past. Where a deliberate attempt has been made to
preserve, it is usually tacky and sad, like the old jazz band in the Peace Hotel
cranking out Dixieland numbers for package tourists in search of Old
Shanghai. As in New York, what connects old and new in Shanghai is
aggressive commerce. In 1934, Lu Xun, the most famous Chinese writer of
the 20th century, described the difference between Beijing and Shanghai as
that between an imperial capital and a business center. The literati in Beijing,
he said, were like officials, and those in Shanghai like merchants. The former
"help the officials to win fame," while the latter "help the merchants to make
money, filling their own bellies in the process."

This is precisely how most people I met in Shanghai still summed up the
difference between their city and its main rival. "Even rock singers in Beijing
are more political than in Shanghai," says Wang Weiming, the editor of Life
Weekly. He mentions Cui Jian, a national folk idol in the mold of the old Bob
Dylan. Yen Bufei and He Ping, the publishers of Entertainment Weekly,
sound almost proud of their political apathy. "Only the Shanghainese
understand our paper," one of them says. "We never deal with political
issues, only sensational stories. After reading our paper, people don't know
what to believe." They both laugh.
Wang Weiming gropes for the right words to give a sociological analysis of
the two cities. "Beijing culture," he says, "is harder, more ideological, while
Shanghai is soft. The landscape, the atmosphere, they are soft." As though
sensing that this explanation is not really adequate, he pauses to think.
"Beijing culture," he continues, "is native Chinese culture. Shanghai is more
Westernized, more open, but also rootless."
I ask him when he first encountered Western culture. He says it was after he
became a factory worker in the 1970's. Like many Chinese who grew up in
the 60's and 70's, Wang is largely self-educated. During the Cultural
Revolution, when the schools were closed, he used his pocket money to bribe
another boy into lending him "forbidden" books. That is how he started to
read Dostoyevsky. Later he read Dickens, Daniel Defoe and Thomas Hardy.

"The style of Shanghai intellectuals," says Xu Jilin, a cultural scholar, "is not
to pay much attention to politics." As an example, he cites the case of a
political scientist at Fudan University in Shanghai. When this professor went
to Beijing to act as an adviser to President Jiang Zemin (formerly the Mayor
of Shanghai), "he became a laughingstock in Shanghai," Xu says. I ask him
why it was, then, that Shanghai had so often been the source of political
unrest, in the 20's and 30's but also the 60's. After all, the Gang of Four, who
directed the Cultural Revolution, had been based in Shanghai. "Yes, but that
had nothing do with the common people," says Xu, "or even with Shanghai
intellectuals."
There was something strange about this disavowal of political interest,
something a little strained. I thought of Lu Xun, a key figure in prewar
Shanghai literary culture and in Chinese intellectual history, the only writer
whose reputation has never been touched. He was the opposite of the "soft,"
apolitical intellectual posited by Xu Jilin and the others as typical of the
Shanghai spirit. Lu Xun was a political satirist of the highest order. He
cannot have imagined that he would be remembered one day as an "official"
writer, a stuffy icon of political rectitude, commemorated in a public park by
a pompous bronze bust, as though he were Marx or Engels. One can visit his
old house in Shanghai, which stands in a modest row of red brick terraced
houses. It is a shabby, lifeless place, with nothing but a few tables and chairs.

One gets no sense of the writer's personality, his sharp humor and radical
spirit. The alarm clock next to his bed remains set at the time of his death.
There is, of course, another explanation for the relative lack of political
activity in Shanghai compared with Beijing. Xu Jilin pointed out that
Shanghai had been "economically liberated" but was "culturally
conservative." For culture you must read politics. After I pressed him to say
more, Xu became specific: "The official policy in Beijing is to keep things
under control in Shanghai, so the economy can develop. Culture and
ideology are precisely the areas where things can go wrong. They don't want
intellectuals to cause them any problems."
In effect, a deal has been struck. For decades, Shanghai was punished for
being a cosmopolitan center of business, vice and intellectual freedom. Now
it is encouraged to get rich again, but only on condition that its artists and
thinkers stay mute. Shanghai is more tightly controlled than other cities in
China, because it was never trusted by Beijing and because it must make
China into an economic superpower, beat Hong Kong in five years and so on.
Jiang Zemin, the current Chinese President, is from Shanghai, as are some
of his top officials. They are sometimes called "the Shanghai mafia."
But this doesn't mean Shanghai dominates Beijing. Rather, Beijing has
co-opted Shanghai. President Jiang and his colleagues must help China get
rich and glorious, but this means, as Xu observed, that "the President wants

no trouble from Shanghai." BEFORE LIBERATION, Shanghai used to be not

only the center of the Chinese movie industry but also the center of the mass
media. He Ping and Yen Bufei give examples of how the current policy of
economic development and political control has affected the local press.
They say that papers in Guangdong and Beijing give far more space to
political issues than is possible in Shanghai. Sometimes stories printed on
the front page of Beijing papers could not even be published in Shanghai.
They mention a notorious fraud scandal on the Shanghai stock exchange. It
was printed everywhere but in Shanghai. I ask them why. Surely people in
Shanghai could read about it anyway in the national papers. That misses the
point, they say. Refusing to run these stories in Shanghai is just a way to
show Beijing that Shanghai is behaving.
This is why old and new Shanghai are hard to connect. Prewar Shanghai was
hardly democratic, and crime and corruption were rife in the foreign
concessions as much as in the Chinese districts. But the main, foreign part of
the city was shielded from the interference of the central Government. Then,
as now, the Chinese Government was less beholden to the rule of law than to
the ups and downs of factional strife and the whims of bureaucrats. Chinese
artists, businessmen, intellectuals and political radicals flocked from all over
China to the foreign concessions to escape from mandarins and censors. By
the late 1920's, the International Settlement was the only place in China
where Lu Xun was still able to have his books published. It was the lack of

central control that made Shanghai the richest, most creative city in China.
Today the same city is supposed to get rich again by central diktat.
Now that Shanghai is directly controlled by Beijing, there is no point for an
artist, businessman or thinker to move to Shanghai -- even if he or she were
able to get a residence permit. One might as well move to the capital, where
the political action is, where the best connections are. And businessmen
have more freedom in cities farther away from Beijing than Shanghai, like
Xiamen or Guangzhou, or Shenzhen, the town near Hong Kong known for
its high-rises, brothels and get-rich-quick scams. Shanghai, as a result, has
become a bit provincial. The intellectual and commercial outsiders, who
gave prewar Shanghai its zest, no longer come. Shanghai is now a city of
insiders who feel they are in the shadow of Beijing.
Shanghai's problems are really China's problems. The tension between
central control and individual freedom always was the main issue in China,
wherever the center happened to be. Too little control has resulted in
warlordism and anarchy; too much of it caused poverty and cultural
stagnation. Only rarely has exactly the right balance been found.
The present Government in Beijing wants political control and economic
prosperity. It wants to give people the right to make money but not to govern
themselves. As a result, Shanghai today is the nearest thing I have seen to
Bertold Brecht's vision of Mahagonny, the metropolis of gangster capitalism,

where money and only money rules. He probably had Chicago or New York
in mind, certainly not the main entrepot of Communist China. Hong Kong,
too, has elements of Mahagonny, but so far the gangsters have been held
within bounds by British rule. Now that this rule is nearing its end, there is
increasing talk of gangsters doing deals with commissars.
Singapore used to be congenial to gangsters. But one of the achievements of
its leader, Lee Kuan Yew, was to get rid of all the patrons and bosses by
making his Government the only patron in town. His one-party Government
has effectively bought the people, and the few who will not be bought are
given not carrots but the stick. The rulers of China cannot possibly do the
same. China is too large for one patron, the regional differences too vast.
Even if Shanghai could be as rich as Singapore, the rest of China would be a
long way behind. The social, economic and cultural differences between
Shanghai -- let alone Hong Kong -- and the backwoods of Anhui or Gansu
are bigger than the gap between Manhattan and Patagonia.
So the old dangers still threaten China; disintegration and perhaps another
lurch into anarchy, followed by dictatorship. This might not happen as soon
as Deng Xiaoping dies, as some people predict. China is more likely to
muddle through with an authoritarian, nationalistic regime, which will use
all the traditional methods of unelected government: exhortation, threats,
police surveillance and draconian punishment for dissidents. But the longer

that goes on, in an increasingly prosperous society, the greater the threat of
violence, which remains the last resort for rebels as well as for their
oppressors. The miracle of Old Shanghai, with all its vices, was that the city
was able for about 100 years to escape from this karma of Chinese politics.
The chief legacies of that period are bits of grandiose architecture, some of
which might be preserved; a bracing desire to make Shanghai modern again,
and a certain inimitable style that makes every other city in China, including
Beijing, appear dowdy by comparison. The heat and the noise of Shanghai,
the anonymity of the crowds, the sheer metropolitan congestion encourage
individual liberties that are less evident in the big, empty places of the
capital. A good place to observe the Shanghainese is a public park on
Nanjing Road. It was built after 1949 on the site of the old racecourse, which
was perhaps the only place where people of all classes and races in Old
Shanghai used to mix. It is now called People's Park.
People's Park, like Washington Square in New York, or Hyde Park in London,
is a typically urban public place, divided into hundreds of private spaces. I
see old men slowly twirling their arms and legs in tai chi meditation. Young
couples are kissing on stone benches. A lone man is practicing a jazz riff on
his trumpet. Families are having picnics, eating out of rice bowls or plastic
KFC boxes. Middle-aged women, exercising the arts of qi-gong, are rubbing
their backs against trees, hoping to absorb the powers of nature. And there,

among the picnickers, the qi-gong enthusiasts and the young lovers, I catch a
glimpse of the quintessential Shanghai style. In the middle of a water lily
pond, on a concrete platform with a red-tile roof, is an old man in two-tone
shoes, teaching a younger woman, with the utmost grace, how to dance the
tango.
Photos: Once a "Calcutta with the buildings of Chicago," Shanghai nowlooks
more like Hong Kong. (pg. 28-29); A new housing development among the
corporate headquarters, factories and expressways of the Pudong industrial
zone. (pg. 30); Repairing potholes. (pg. 31); The trappings of capitalism:
From cafes like this to nightclubs to Armani boutiques, businesses cater to
Shanghai's new rich. (pg. 33); China glitz: The Oriental Pearl Television
Tower looms over fast-vanishing neighborhoods. (pg. 34); Pudong is typical
of the "instant cities" cropping up all over China, replacing traditional
structures with granite and glass. A Shanghai discotheque.
(PHOTOGRAPHS BY GUEORGUI PINKHASSOV/MAGNUM, FOR THE
NEW YORK TIMES) (pg. 35)

OUTLOOK '96: THE ECONOMY;Why China Is

Ready To Cool Off
By SETH FAISON
Published: January 2, 1996

SHANGHAI CHINA's economy may be coming to the end of its wild ride.

The background is still a little scary: Beijing lives in an uncertain political

climate, the gray economy has grown so large and unwieldy that no one
knows its actual size and the danger of high unemployment looms like a
cloud that could break into rain anytime.

Yet the foreground looks surprisingly upbeat. The Government's efforts to

get its eye-popping high growth rate under control began showing results
last fall, and inflation is coming down, too.

Best of all, it looks like in 1996 China might be able to pull off its anticipated
"soft landing" -- a gradual, rather than sudden, drop in its growth rate to
about 10 percent, a place it hasn't been since 1991.

"We're pretty optimistic," said Joan Zheng, an economist who follows China
for J. P. Morgan in Hong Kong. "We believe things will perk up slightly this
year."

Perk up, however, is a relative term. With China's real gross domestic
product in double digits for 8 of the last 12 years, economic growth has
needed anything but perkiness. Rising to 13.6 percent in 1992 and 13.4
percent in 1993, economic growth eased to a more manageable 11.8 percent
in 1994 and to 9.8 percent in the first nine months of 1995.

When Ms. Zheng looks ahead, she is pleased with what she sees. Exports and
foreign investment are robust, and the declining growth rate is not cutting
into domestic consumption. She expects growth to move along at 10.3
percent in 1996, avoiding the sharp fall many economists feared when the
central Government began an austerity program in 1993.

The last time China saw an economic slowdown, in 1989-91, production and
consumption crashed, with the gross domestic product falling from 11.3
percent in 1988 to a relatively meager 3.9 percent in 1990.

This time, the drop should be less jarring, and that is no small achievement.

A year ago, many economists laughed at Beijing's goal of reducing inflation

to 15 percent, mostly because China's unwieldy economy seemed almost
beyond the control of the nation's leaders. But by the time November's retail
price index came in at 9.2 percent, compared with 26.5 percent for

November 1994, inflation was estimated to end the year at precisely 15

percent.

That has taken some pressure off China's central bank, the People's Bank of
China, which has been trying to execute a tight credit policy since 1993.

In China, "tight credit" does not just mean adjusting the discount rate or the
issuing of Government bonds, but ordering state banks to severely cut the
number and amount of loans it allows. Not having a working monetary
system, said Edward Chan, head of China Research for Standard Chartered
Securities in Hong Kong, "means you have to control credit with quotas."

One of the peculiarities of China's politically dominated economy is that the

state industries with the most political clout get the loans, regardless of how
well they perform, which has contributed to their unusually heavy debt load.

When China's economic policy makers gathered for a conference in Beijing

last month, Wu Bangguo, the Deputy Prime Minister, acknowledged that the
debt-to-asset ratio at state industries had climbed to 80 percent. The
conference ended with a familiar call by the Government to "deepen reform"
of state enterprises, a vague process that has been going on for years with

minimal success. So it is state-owned industries that, despite the optimism

among economists, make the long-term outlook for China cloudy.

Many economists agree that China should allow a far greater number of its
state-owned industries to go bankrupt or be bought by collectively owned
and privately owned companies that are succeeding. Only 28 percent of
state-owned industries make a profit, according to a recent survey.

Yet leaders are afraid of unemployment, and they don't want to risk turning
loose large numbers of urban workers. So far, employment has maintained
precedence over efficiency.

Looming over all big political decisions, of course, is the frail health of the
paramount leader Deng Xiaoping, who is 91 years old. In such an
environment, hard choices are rare and stability is prized.

Yet the struggle to succeed Mr. Deng has been under way for some time. If
he dies in 1996, with the economy essentially on track, it is unlikely that a
sudden change in policy would affect the economy significantly.

For the first time since allowing foreign investment in 1978, China is not
clamoring for it, having received close to $35 billion in actual investment in
each of the last two years.

The executives of foreign companies might have groaned in late 1995 when it
became clear that many of the tax incentives they had enjoyed would be
revoked in 1996, but overall foreign investment is not expected to drop
precipitously in 1996. If it does, however, leaders have said it would help
them to keep inflation under control.

At the same time, the frenzy of building activity in China's coastal cities that
pushed the national growth rate in fixed-asset investment to 58.6 percent in
1993, began to fall closer to earth -- to 27.8 percent in 1994 and to an
estimated 20 percent in 1995.

"As long as credit control is loosened, I suspect that things will continue to
look up," Ms. Zheng said.

Graph: "A Slower Pace, by Chinese Standards" tracks real G.D.P. growth and
change in the retail price index from 1990 through a projected 1996. (Source:
Standard Chartered Securities)

China Economy in 1997

9.5% Growth In China Stuns Experts Again

By SETH FAISON
Published: July 23, 1997

BEIJING, July 22 The Chinese economy is growing at an amazingly

fast clip, yet it confounds economists by spurring remarkably little
inflation.

Reaffirming China's claim as the fastest-growing economy in the world,

officials from the State Statistical Bureau announced today that the gross
domestic product grew 9.5 percent in the first half of the year, compared
with the first half of 1996. During the same period, the retail price index,
China's benchmark for inflation, rose just 1.8 percent.

''Miraculous,'' said David O'Rear, a regional economist in Hong Kong.

''Either they have been tremendously successful in bringing down inflation,
or else the data is all wrong.''

Although economic statistics in China are badly incomplete, failing to

account for an enormous underground economy, the twin trends of high

growth and low inflation are clear. And they point toward the possibility
that growth will allow Chinese leaders to work their way out of the deep
economic uncertainty posed by a failing state sector and its danger of
widespread unemployment.

The economy has chugged along at an average of 12 percent growth over

the last five years. Rising exports again played a big role in the first half of
this year, growing 26 percent, to $80.8 billion. Imports remained steady at
$63 billion. But the sharp decline in the inflation rate -- down from 24
percent three years ago -- has surprised even the most optimistic of
economic forecasters, who keep adjusting inflation projections downward.

Qiu Xiaohua, chief economist and spokesman for the State Statistical
Bureau, predicted today that the retail price index would grow only 2
percent to 3 percent this year, far below the 6 percent officially predicted a
few months ago.

One reason is that a bumper harvest has depressed grain prices, which in
China account for a major part of the price index.

Yet many economists award a big share of the praise to the tight credit
policy begun in 1993 when Deputy Prime Minister Zhu Rongji took over as
head of China's central bank. With inflation high, and the outlook wildly
uncertain, taking responsibility for the economy was a move that
prompted many political analysts to predict that it would end his career.

Instead, it made him a rising star. With his sparkling economic success,
Mr. Zhu is now widely expected to replace Li Peng as Prime Minister early
next year when Mr. Li is required to step down after two five-year terms.

Despite the strong economic news, however, China's leaders still face a
serious problem in how to handle the 100 million workers in the state
sector, where only a small portion of enterprises turn a profit and where
Government subsidies are falling fast.

Ever nervous about worker unrest and the challenge to Communist Party
rule it would pose, leaders are grappling with the question of whether
large-scale layoffs are best done now while economic growth is high and
inflation is low.

Large street protests broke out in Sichuan Province this month when
workers at a failing mill accused its managers of embezzling
unemployment-relief funds. Yet such protests are still relatively rare for a
country in the middle of tremendous economic upheaval.

Ye Zhen, chief spokesman for the State Statistical Bureau, said that more
than 10 million urban workers lost their jobs in the first half of this year,
and that roughly half of them had found alternative employment.

Mindful of the vulnerable nature of an economy in transition, Mr. Ye

described today's good news about high growth and low inflation as
''advancing in the midst of stability.''

''We have achieved the high growth and low inflation that we have aimed
at for years,'' he said.

Deng Xiaoping: A Political Wizard Who Put

China on the Capitalist Road
By PATRICK E. TYLER
Published: February 20, 1997

Like Mao Zedong and Zhou Enlai before him, Deng Xiaoping was among the
small group of revolutionary elders who fought as guerrillas for the
Communist cause and then dominated the leadership of the People's
Republic they proclaimed on Oct. 1, 1949.

Few if any figures in this century matched Mr. Deng for political longevity.

Nearly half a century has passed since Mao first installed Mr. Deng in the
upper-reaches of power in China, making him general secretary of the
world's largest Communist Party in 1954.

Twice he was to be dragged down from those heights -- purged as a

''capitalist roader'' in 1967 during the Cultural Revolution and again -- after
a remarkable comeback -- following the death of Mao in 1976.

Only with his second resurrection did Mr. Deng begin to consolidate his
power, becoming China's paramount leader in 1978. He was then 74,

seemingly too old to be anything but a transitional figure. Instead, he

reigned for a generation.

Even after his formal retirement in 1989, Mr. Deng remained an all-powerful
patriarch, ordering a purge of the military leadership in 1992 and rescuing
his economic reform program from a conservative backlash. As his health
slipped precipitously -- his last public appearance was during the Lunar New
Year festivities in early 1994 -- he seemed further removed from daily
decision-making. But still he was consulted to resolve major policy and
personnel issues.

In the 18 years since he became China's undisputed leader, Mr. Deng

nourished an economic boom that radically improved the lives of China's 1.2
billion citizens. By early in the next decade, the reforms Mr. Deng ignited
may well propel China's economy to the position of third largest, after the
United States and Japan, but China's prosperity will be diluted by the
increasing number of Chinese. Nearly 270 million will not have jobs at the
turn of the century.

At the end of his life, Mr. Deng seemed unable to chart a clear path to
economic success his economic reforms still faced daunting challenges.
China's rise as a great economic power was becoming a race against time as

population growth and incomplete reform were adding to the siege of

China's straining foundations. Shortages of water and arable land mounted,
and unchecked industrial pollution contributed to an overall degradation of
the environmental landscape.

Still, in cities and in villages, real incomes more than doubled in the Deng
era. Most Chinese who have watched a television or used a washing machine
or dialed a telephone have done so only since Mr. Deng came to power. The
struggle to survive in the Chinese countryside has greatly eased.

A former American Ambassador to China, J. Stapleton Roy, who as a young

man in Nanjing witnessed the Communist takeover in 1949, said once in an
interview, ''If you look at the 150 years of modern China's history since the
Opium Wars, then you can't avoid the conclusion that the last 15 years are
the best 15 years in China's modern history.''

During most of those years, Mr. Deng symbolized the Chinese aspiration to
move beyond the ideological extremism that had marked the Maoist era and
reclaim for the Chinese a long-denied prosperity.

But in doing so, he also came to symbolize a stubborn and inflexible

resistance to democratic stirrings. For Mr. Deng, China's economic reform
could only occur under the authoritarian rule of the Communist Party.

China's security forces, often harsh and brutal under Mao, continued to be
so under Mr. Deng. China today remains perennially criticized as a nation
whose rulers seem to respect human rights only grudgingly.

A Small Figure, A Towering Presence

Mr. Deng's early reputation as a visionary who delivered the Chinese from
suffering was blackened most notably by his leading role in ordering the
June 1989 military crackdown on pro-democracy demonstrators in Beijing.
The tank and machine-gun assault on students and bystanders that came to
be known as the Tiananmen massacre diminished his prestige as a world
leader and isolated China politically for years afterward.

A generation of students and intellectuals, many of whom had fled the

country, held Mr. Deng responsible and scorned his image. But much of the
country, particularly the peasantry, seemed grateful to Mr. Deng for
providing them with the first prolonged period of peace and stability in this

century. If intellectuals could not forgive the brutality at Tiananmen,

peasants could not forget that he had ended a long chapter of deprivation.

In foreign policy, Mr. Deng negotiated an end to the last vestige of British
colonial power in China with an agreement to return Hong Kong to Chinese
sovereignty later this year. Reunification with Taiwan eluded him, but he
worked to settle China's border disputes, normalize relations with the
United States and repair the 30-year rift with the Soviet Union.

His goal was to focus the totality of national energy on China's economic
development. Even the Chinese military had to serve the new national
priority by accepting deep budget cuts through the 1980's.

As a leader, Mr. Deng cut a most unusual figure in the Chinese pantheon.
He was emperor-like in a century in which the Chinese overthrew their last
emperor after three millenniums of imperial rule. Mr. Deng was first among
equals in the small circle of revolutionary elders who survived Mao. The
posts and titles Mr. Deng held in the Communist Party hierarchy never quite
equaled or conveyed his stature as paramount leader, a term that seemed
invented for Mr. Deng, who was still arguably the most powerful citizen of
China when he died.

Yet his physical presence offered no clue to his storied abilities to

manipulate events ''much like a puppeteer,'' as the political scientist Lucian
W. Pye put it. The conventional wisdom was that Mr. Deng was five feet tall
but, as one scholar observed, ''that was surely an exaggeration.''
In an essay in 1993, Professor Pye described an audience with Mr. Deng:
''As he settles into an overstuffed chair, his sandaled feet barely touch the
floor, and indeed hang free every time he leans forward to use the spittoon.
He has an atrocious Sichuan accent, which makes his words slur together
like a gargle. There are few signs of liveliness of mind, of wit or humor, and
no sustained, systematic pursuit of ideas.''
Xiao Rong, the youngest of Mr. Deng's three daughters, said in a biography
of her father: ''In the eyes of his children, Father is a man of introverted
character and few words. Only with old colleagues and old friends does he
like to talk, and carries on in a loud voice.''
Henry A. Kissinger, who helped to engineer the normalization of relations
with China during the Nixon Administration, once pronounced Mr. Deng a
''nasty little man.'' But others found a certain charm.
When Queen Elizabeth II paid a visit in October 1986, she was warmed by
his self-effacing greeting: ''Thank you for coming all this way to meet an old
Chinese man.''

Although he picked his political heirs carefully, Mr. Deng was plagued by the
problem of succession. In May 1989 he worried aloud to the Soviet leader,
Mikhail S. Gorbachev: ''The only thing that can't be brought to pass is the
abolition from the system of lifelong positions for leaders.''
That same year, Mr. Deng named Jiang Zemin, the current President and
Communist Party chief, as the ''core'' of the ''third generation'' leadership,
after him and Mao. But many Chinese say Mr. Jiang could face trouble
managing the party now without Mr. Deng behind him and could be swept
aside, much as Mao's nominal successor, Hua Guofeng, was swept aside by
Mr. Deng.
Neither intellectual nor poet, Mr. Deng was best known as a pragmatist who
focused on the problems of the day, unencumbered by history or ideology.
His years as a military strategist and political commissar, balancing real
military capabilities against the expectations of politicians, gave him a keen
sense of what was possible.
He is best remembered for his simple maxims rather than for coherent
policies: To defeat ideological attacks from the Maoists, he often quoted the
Maoist dictum, ''Seek truth from facts.'' To emphasize that there was no road
map for economic reform, he said the Chinese must ''cross the river by
feeling out the stones with our feet.'' His most famous aphorism was an old

proverb from his native Sichuan: ''It doesn't matter whether a cat is black or
white, as long as it catches mice.''
Fear of Disorder, Grounded in History
In this century China has been a land of warlords, invading armies, floods,
famines and revolution. Tens of millions have died violently, or wretchedly
from starvation. Mr. Deng's inherent fear of disorder and the violence it has
wrought explains his deep opposition to political pluralism.
''If all one billion of us undertake multiparty elections, we will certainly run
into a full-scale civil war,'' he told President Bush in February 1989. ''Taking
precedence over all China's problems is stability.''
There was a time when Mr. Deng appeared briefly to embrace democratic
ideals: As he struggled to regain power in 1978, he identified with the goals
of the Democracy Wall movement in Beijing. But in early 1979, after he had
gained the upper hand politically, he crushed the movement and sent its
leader, Wei Jingsheng, to prison for 15 years.
When Mr. Wei, once an electrician at the Beijing Zoo, emerged in September
1993 after serving 14 1/2 years, he was still Mr. Deng's fiercest and most
fearless critic, and found himself returned to prison seven months after his
release.
The Dark Shadow Of Tiananmen

In 1984, on the 35th anniversary of Communist rule, students at Beijing

University hoisted a banner saying, ''Hello, Xiaoping!'' showing their
affection through the familiarity of their greeting. At the outset of 1987,
Beijing University students marching for democracy chanted, ''Xiaoping,
hear our voice!'' still hoping that Mr. Deng would embrace their goal.
Instead he turned on them, crushed their movement and sacked the
Communist Party general secretary, Hu Yaobang, for encouraging the
democratic cause.
The more Mr. Deng resisted political reform, the more he seemed a guardian
of a party elite that was doing little to bring corruption under control as
China's economy gained speed. The party leaders, including Mr. Deng, were
being chauffeured around in black Mercedes sedans. Some of their children
became known as the princelings of conspicuous new wealth. And the
leaders all seemed oblivious to their hypocrisy as they admonished the
masses to guard against ''bourgeois liberalization.''
The death of Mr. Hu in April 1989 unleashed pro-democracy forces for a
third time in Mr. Deng's first decade as leader, but he was no longer a figure
of hope.
One Beijing University poster mourning Mr. Hu captured the antipathy
toward Mr. Deng. ''The Wrong Man Died,'' it said.

Zhao Ziyang, the party chief tapped by Mr. Deng as a possible successor,
showed sympathy for the Tiananmen demonstrators and was removed on
the eve of the crackdown. Mr. Zhao's liberal tone in economic reform and
political tolerance was buried by new edicts from the hard-line faction led by
Prime Minister Li Peng.
In the aftermath of Tiananmen, Mr. Deng and his family took care to
disguise his precise role in ordering the tanks and machine-gunners into
Beijing, where they killed hundreds, perhaps thousands, of demonstrators
and bystanders.
Mr. Evans, the former British Ambassador, says in his biography that Mr.
Deng was angry when he learned of the bloodshed around Tiananmen and
told the President, Yang Shangkun, and Prime Minister Li that they had
''bungled the military operation appallingly.''
The sensitivity of fixing historic responsibility for the massacre was never
lost on Mr. Deng, who understood that after his death, the harsh verdict with
which he branded the Tiananmen demonstrators as counterrevolutionaries
could be reversed and he could become history's villain.
Mr. Deng's rule brought China nearly to the end of a century that opened
with the Qing Dynasty still ensconced in the Forbidden City, the
vermilion-walled palace compound at the center of Beijing.

In the eight decades since the last Emperor, Pu Yi, was deposed in 1911, tens
of millions of Chinese have died in war, invasion and famine. Mr. Deng grew
to manhood in the midst of chaos and became a revolutionary after spending
five years in France on a work-study program, where he toiled in filthy
factories that paid subsistence wages to Chinese.
His own family members were victims of a violent century: His father, Deng
Wenming, was set upon by bandits near his home and killed in 1938.
During the Cultural Revolution of 1966-76, when Mao sought to tear down
the Communist Party leadership, Mr. Deng was branded a public enemy,
humiliated in ''struggle sessions'' and sent to work in a tractor factory. His
younger brother, Deng Shuping, was driven to suicide in 1967 after weeks of
abuse by Red Guards.
Mr. Deng's eldest son, Deng Pufang, was terrorized on the campus of Beijing
University and, according to his sister Xiao Rong, attempted suicide by
jumping from a fourth-floor physics laboratory window in September 1968.
The fall broke his back and he suffered for months without adequate medical
attention; he remains paralyzed.
Deng Xiaoping, like many of the emperors, combined the pursuit of a better
life for the Chinese people with a studied ruthlessness to preserve the
institution of power.

As a young revolutionary, he exhorted peasants to kill landowners because,

he is said to have reasoned, once the masses had blood on their hands, they
would be more committed to the Communist cause.
Mr. Deng would later earn a reputation as a pragmatist, but in the late
1950's he was an exponent of political repression and accelerated socialism.
After intellectuals responded to Mao's invitation to ''let a hundred flowers
bloom'' -- to express freely their criticisms of the Communist Party -- Mr.
Deng helped lead a witch hunt against those who had taken the invitation in
full measure.
In 1980, Mr. Deng acknowledged that the Anti-Rightist Campaign had been
excessive, but he asserted that the essence of the struggle had been
''necessary and correct.''
Ever since Emperor Qinshi united China more than 2,200 years ago, the
Chinese have looked to an imperial figure to rule them with the ''mandate of
heaven,'' a feudal concept that was used to buttress the absolute right of the
sovereign, but later evolved under Confucian traditions of benevolence and
wisdom.
The Communist revolution that raised the flag of the People's Republic of
China on Oct. 1, 1949, aimed at crushing this past and creating a perfect
egalitarian society. But neither Mao nor Mr. Deng seemed able or, indeed,
willing to completely bury the imperial tradition.

Mao created a cult of personality so broad and pervasive that he had the
whole nation mimicking his style of drab clothing, memorizing his
quotations from little red books and living under the gaze of his ubiquitous
portraits.
Under Mr. Deng, China broke out of the monochromatic Mao era to life in
full color. A walk down Nanjing Road in Shanghai today reveals the new
Chinese glitz under the sparkle of a thousand boutique windows. In the
throng of new consumers, the hairdos bounce with the latest styles from
Hong Kong above leather jackets trimmed in fur.
In contrast to Mao, Mr. Deng was no cultist. Mr. Deng preferred to
maneuver on the sidelines, out of the public eye, to exhort policies with
occasional pronouncements.
Each time that Mr. Deng was purged from power, he fought his way back.
Rehabilitated in 1973 after the worst of the Cultural Revolution, he was
purged again as Mao lay on his deathbed in 1976. Denounced as an
''unrepentant capitalist-roader,'' it appeared that the notorious Gang of Four,
the radicals led by Mao's wife, Jiang Qing, had defeated him. Mao himself
decreed that Mr. Deng should be relieved of all his posts
Mr. Deng lived under house arrest for nearly a year until one of his old
military cohorts, Marshal Ye Jian-ying, intervened after Mao's death,
insisting that Mr. Deng's voice be heard in the leadership.

The Chinese rejoiced at Mr. Deng's comeback and at the fall of the Gang of
Four. To Mao's successor, Hua Guofeng, Mr. Deng pledged his support ''with
all my heart.'' But in less than two years, Mr. Deng had rendered Mr. Hua a
harmless figurehead and had set about steering China on a new economic
course.
As the economy soared, Mr. Deng acknowledged that he was as much a
witness to history as he was its architect.
''I am a layman in the field of economics,'' he said in 1984. ''I proposed
China's economic policy of opening to the outside world, but as for the
details or specifics of how to implement it, I know very little indeed.''
Where Mao had preached ''Communes are good,'' Mr. Deng simply preached
''Markets are good.''
The Chinese did the rest.
From Sichuan Village To French Factories
Deng Xiaoping was born Deng Xixian to a landlord family in the heart of
China's most populous province, Sichuan, on Aug. 22, 1904.
The Deng household was the wealthiest in the village of Paifang. Mr. Deng's
father, Deng Wenming, controlled about 25 acres of land with an annual
output of about 10 tons of grain. When his wife could not bear children, he
took a second wife, or concubine, whose family name was Dan. Her dowry in

1901 included the red-lacquered bed in which the future Chinese leader was
born three years later.
Mr. Deng was just entering primary school in 1911 when the last Qing
Emperor was overthrown by an amalgam of forces led by Sun Yat-sen.
Revolution was gathering throughout China and Mr. Deng would soon be
part of it.
By 1919, Mr. Deng's father, joining the nation-building spirit of the times,
decided to send his son to France for a work-study program. When Mr. Deng,
age 16, and 200 other students boarded a steamer at Shanghai on Sept. 11,
1920, he was never to see his parents again.
Mr. Deng arrived in Marseilles, and found Europe a seething, ideological
vortex of the Industrial and Bolshevik revolutions. He was quickly pulled
into its currents.
In Paris he befriended the articulate and dashing Zhou Enlai, an ''elder
brother'' to Mr. Deng. By 1922, Mr. Deng had joined the Communist Party of
Chinese Youth in Europe.
To escape the French police, Mr. Deng plotted his departure from France in
1926. His route took him to Moscow, where his revolutionary training
continued.

During five years in France, Mr. Deng learned few industrial skills that could
be transplanted back to China, but he saw the power of Western technology.
He seemed unmarked by France's high culture or by its philosophers of
democracy and human rights. His daughter Xiao Rong says the reason is
that Mr. Deng was part of an under-class in France, exploited as a foreign
laborer and persecuted as a Communist.
''What he came in contact with was not democratic,'' Ms. Deng said.
Political Conversion, And Return to China
After 11 months of ideological and military training in Moscow, Mr. Deng
began taking orders from the Communist International. He returned to
China as the chief political adviser to one of the powerful warlords who had
carved up northern China.
But the Nationalist leader Chiang Kai-shek was determined to eradicate the
Communists. Mr. Deng fled south where he was reunited with Zhou Enlai at
Wuhan in 1927. There, Mr. Deng was named secretary to the Communist
Party Central Committee. He adopted the name Deng Xiaoping, whose
origin he has never publicly explained.
Civil war was raging. Communists were rounded up and executed,
particularly in Shanghai, where the party headquarters and Mr. Deng had
moved by the end of 1927.

In the chaos, Mr. Deng suffered the first of many personal tragedies when
his first wife, Zhang Xiyuan, another young revolutionary whom he had met
in Moscow, died after a miscarriage in early 1930. Mr. Deng, a widower at 26,
did not attend the funeral, his daughter wrote, because, ''Revolution came
first.''
In 1929, Mr. Deng led his first successful Communist uprising, in
southwestern Guangxi province. But his campaign toward Guangzhou
proved a disaster. His Seventh Red Army in tatters, Mr. Deng reached Mao
Zedong's base in 1931. His loyalty to Mao's vision of the revolution briefly
cost him his freedom during the internal party struggles of the early 1930's.
Mr. Deng married Jin Weiying, another party member, in 1932, but when he
came under political attack, she left him to marry his chief accuser, Li
Weihan.
In October 1933, Chiang Kai-shek marshaled one million men to crush
Mao's Communist base in Jiangxi province by building a chain of block
houses across the countryside. Thus began in 1934 a yearlong, 6,000-mile
retreat known as the Long March. Death from exposure, suffering and
frequent attacks thinned the Communist Army from 70,000 to 10,000 as it
passed through treacherous and hostile country.
Rehabilitated after his first purge, Mr. Deng set out on the Long March as
the editor of Red Star, the party paper. By the time the routed army reached

the caves of Yanan in remote Shaanxi province, Mr. Deng had nearly died of
typhoid fever. And Mao had reversed his own political fortunes and never
again lost his command of the revolution. Mr. Deng was one of his closest
lieutenants.
Japan's invasion of China in 1937 provided Mr. Deng and the Communists
the opportunity to defend the nation. It was the period of their greatest
exploits as they competed with Chiang Kai-shek's Nationalists for the
affection of the masses.
During eight years of war, Communist forces grew from 50,000 to 900,000
in strength and party membership swelled from 40,000 members to 1.2
million. Mr. Deng was appointed top political officer of the 129th Division.
By the time Mr. Deng was in his early 30's, he had traveled extensively and
commanded armies in the field, experiences giving him a keen sense of the
limits of military power and the importance of political discipline in
marshaling it. The battlefield hardships Mr. Deng endured created many
lasting bonds with China's top field commanders. These bonds also served
his rise in the party and may have saved his life when he was later purged.
Absorbed with his war duties in 1938, Mr. Deng had little time to react when
he received word that his father had been murdered by bandits back in
Sichuan. He did not return home.

But the next year, during a visit to Yanan, Mr. Deng married for the third
and last time. Pu Zhuolin, the daughter of a merchant from Yunnan province,
had came to Yanan from Beijing University, where she had studied physics.
Mao attended the wedding in September 1939.
Never active in politics, Zhuo Lin, the name she adopted in Yanan, bore five
children between 1940 and 1952 and stood by her husband through a series
of crises.
In addition to his wife, Mr. Deng's survivors are his five children: the oldest,
Deng Lin, an artist who has exhibited her work in New York and Paris; Deng
Pufang, the paraplegic son, who for the last decade has worked on behalf of
the handicapped in China; a second daughter, Deng Nan, a vice minister of
the State Science and Technology Commission; the youngest daughter, Xiao
Rong, who has served her father as a personal aide since 1989, and the
youngest son, Deng Zhifang, who studied physics in the United States before
returning in 1988 to enter high-profile business ventures.
Victory in War, And in Revolution
Victory over the Japanese and then over the Nationalists brought the
Communists to power with the founding of the People's Republic of China
on Oct. 1, 1949. Mr. Deng was dispatched to pacify southwest China and
Tibet before returning to Beijing in 1952.

Reunited with Zhou Enlai, he served his mentor and the economist Chen
Yun on the Economic Commission before taking over the Finance Ministry.
But Mr. Deng's administrative skills and wartime connections propelled him
upward. He was appointed secretary general of the Central Committee in
June 1954 and, by 1956, secretary general of the Communist Party. With
Yang Shangkun as his deputy, Mr. Deng virtually controlled the party
personnel apparatus, placing thousands of cadres in jobs and building a
party network that became the foundation of his power.
Beginning in January 1955, one of his most secret tasks was to help Mao and
Zhou create and finance the scientific organization that would build and
detonate China's first atomic bomb. With the detonation of a fission bomb
weighing 3,410 pounds on Oct. 16, 1964, China became a nuclear power.
Mr. Deng's rise to the top of the party in the 1950's coincided with Mao's
growing disaffection with those who would succeed him. When the Soviet
leader Nikita S. Khrushchev attacked Stalin in a secret speech in 1956, Mao
was appalled that his putative heirs seemed to identify with the attack. If
Stalin's position was not sacred in Soviet history, Mao reasoned, neither was
Mao's in Chinese history.
Great Leap Forward, And Many Setbacks
With a series of internal political campaigns, Mao began assaulting what he
perceived as his many enemies. The Anti-Rightist movement of 1957 led into

the Great Leap Forward in 1958. The rupture in relations with the Soviet
Union soon followed, becoming apparent in 1960 with the abrupt
withdrawal of Soviet aid. In July 1963, a final effort was made to patch up
the ideological split when Mr. Deng was dispatched to Moscow in what
proved to be the last formal contact between leaders of the two Communist
parties for 26 years.
In the early stages of the political campaigns, Mr. Deng was the instrument
of Mao's revenge, sending thousands of Chinese intellectuals to manual
labor camps and prisons.
Mao was not satisfied. He wanted to propel China forward with agricultural
communes and steel production. His Great Leap Forward was perhaps the
largest policy-induced economic disaster in history. Backyard furnaces
turned the peasantry's tools and cookware into useless molten globs. China's
harvest rotted in the fields. No one dared tell Mao of the failure; grain
exports continued. Then famine struck.
As many as 30 million Chinese died of starvation in the next four years.
The catastrophe seemed to remold Mr. Deng, and he thereafter placed more
emphasis on practical measures for economic growth, especially those that
contained incentives for China's peasantry to increase individual production.

As Mr. Deng worked more closely with Yang Shangkun and President Liu
Shaoqi, Mao began to suspect they were plotting against him. He
complained the party leadership was treating him like a ''dead ancestor'' and
he singled out Mr. Deng for making decisions like an ''emperor.''
Luckily for Mr. Deng, he slipped and broke his leg in 1958, thus avoiding the
worst confrontation over Mao's policies at the Lushan conference of 1959.
Mao mounted a withering counterattack and Mr. Deng did not escape for
long. Mao unleashed the Cultural Revolution in 1966 to destroy his
adversaries in the party. He exhorted the masses to ''bombard the party
headquarters'' and thrust China into the decade of chaos that fostered civil
conflict in every school, factory and municipality.
Thousands of young Red Guards were allowed into Zhongnanhai, the
leadership compound in central Beijing. They rampaged through the homes
of President Liu, Mr. Deng and other leaders. Mr. Deng was branded the ''No.
2 capitalist-roader'' in the party after President Liu.
Mr. Deng's mordant self-criticism had failed to appease the Red Guards.
They continued to attack him as a ''capitalist despot.''
Mr. Deng's penitence and the patronage of Zhou Enlai may have saved his
life, but he was stripped of all offices except his party membership. The Deng
family was ordered to the countryside. The children were dispersed. Mr.

Deng and his wife were sent to Jiangxi province, where they worked in a
tractor factory and gardened.
By the early 1970's, China seemed to be falling apart. Mao's chosen successor,
Lin Biao, was discovered plotting a coup and was killed in a plane crash;
Mao feared nuclear war was imminent with the Soviet Union; the economy
was in chaos, and Prime Minister Zhou had cancer.
After President Nixon's 1972 visit to China, reporters covering a state
banquet in April 1973 for the Cambodian leader, Prince Norodom Sihanouk,
were surprised to see a small man in a gray Mao suit, white socks and black
oxfords. It was Mr. Deng, recalled a month earlier to help heal the country
and perhaps succeed Zhou.
Mao threw Mr. Deng into a Politburo dominated by radicals, and they soon
turned on him. When Zhou died in January 1976, thousands of Chinese
swarmed into Tiananmen Square to praise Zhou and to express their
opposition to the radicals. Mr. Deng was blamed for the revolt and Mao,
near death, agreed to purge him for a final time. Mr. Deng was placed under
house arrest.
Mao died in September that year, and the Gang of Four was arrested the
following month. Mr. Deng pressed to return to his duties and crucial
military allies like Marshal Ye Jianying rallied behind him.

Mao's last chosen successor, Hua Guofeng, delayed on releasing Mr. Deng,
but Mr. Deng's allies prevailed. Mr. Deng's political comeback gathered
momentum through 1977 until December 1978, when he was able to
establish himself as the country's paramount leader.
Eye for Strategy, In War and Peace
Mr. Deng moved quickly to get China back on the road to economic
modernization.
In agriculture, he allowed the provinces to dismantle communes and
collective farms, but the peasants moved even faster, dividing up plots of
land for private tilling. Output soared. So did profits.
Mr. Deng told the military that the threat of world war was receding and,
therefore, the military would have to serve the civilian economy. Arms
production stopped in many factories and military modernization was
deferred, except for strategic weapons to maintain China's nuclear deterrent.
Because he had seen what modernization had done for the West, Mr. Deng's
strategic vision was broader than Mao's.
He told President Carter in January 1979, ''The Chinese need a long period
of peace to realize their full modernization.'' And to American businessmen,
he said China needed their money and technology.

After establishing full diplomatic relations with Washington on Jan. 1, 1979,

Mr. Deng made a whirlwind tour of the United States that was full of
extraordinary images, from Mr. Deng kissing the children who sang in
Chinese at the Kennedy Center to wearing a white 10-gallon hat in Texas.
Back home, it seemed for a time that Mr. Deng's openness to economic
reform would lead him to support significant democratic reforms.
He told party leaders that he endorsed the spirit of China's new democracy
movement. ''Democracy has to be institutionalized and written into law,'' he
said.
But when Wei Jingsheng and his Democracy Wall colleagues turned their
criticism on Mr. Deng, the Chinese leader smashed the movement and
persecuted its intellectual leaders. Mr. Deng began to equate democracy with
the political turmoil of the Cultural Revolution. ''Our people have just gone
through a decade of suffering'' and ''cannot afford further chaos,'' he said.
Mr. Deng wanted the energy of the economic reformers, but could not
tolerate their political challenge.
The Focus of It All: Economic Change
Of the changes that Mr. Deng oversaw, economic restructuring was central.
And the Chinese often did not wait for new policies as they ''dove into the
sea,'' the metaphor for going into business.

Farmers began raising fish, shrimp and fruit for new markets that sprang up
in every township. Private and collective enterprises multiplied as former
peasants began manufacturing toys, fireworks, bricks, clothing -- all manner
of everyday items.
The agricultural changes were easily accomplished and the farmers, by any
previous standard, were getting rich. The first thing many did was to build a
new houses, creating a huge demand in the construction industry.
In industrial reforms, Mr. Deng started cautiously, creating special economic
zones in China's coastal provinces of Guangdong and Fujian, where tax
subsidies attracted Hong Kong's manufacturing tycoons. Mr. Deng said the
coastal provinces could get rich first, but the real strategy was
incrementalism because Mr. Deng feared failure and discredit at the hands
of the party's Marxist conservatives.
The economic zones ignited an export explosion that continues today, with
China dominating the world market in toys, shoes and textiles. The zones
multiplied, forming a rimland of coastal wealth, but extending inland only to
major cities like Beijing.
Along with the wealth came scourges. Child labor and sweat shops appeared
as parents sent their children to work, not to school. Shoddy and unsafe
factories became firetraps where thousands died in accidents or fires.

Fly-by-night companies produced dangerous or useless products, including

one ubiquitous contraption that promised to make people taller.
Criminal gangs, prostitution and the sale of women into bondage spread
from rural to urban areas. Old Communist cadres who wiped out narcotics
trafficking in the 1950's were repulsed at its return. Heroin and opium were
back.
Grafting the success of the coastal provinces onto the larger Chinese
economy proved beyond Mr. Deng's capabilities. Today the core of China's
economy, the state-owned industrial sector, remains largely unreformed,
mired in debt, a slave to party apparatchiks, many of whom are corrupt or
incompetent.
Over 18 years, Mr. Deng's attempts to restructure this monolithic sector, the
source of the Communist Party's power and revenue, have led to a series of
''boom and bust'' inflationary cycles that continue today.
Mr. Deng wanted the party to reform the state factories, to make the
managers responsible for their profits and losses, and to raise worker
productivity.
Bankruptcy, as a concept, entered the Communist lexicon for the first time.
But the political consequences of widespread layoffs always prevented Mr.
Deng's reformers from acting boldly.

When they did act, there were no macroeconomic levers to adjust the money
supply, only blunt instruments of jawboning from Beijing.
When inflation got out of control after the price reform drives of mid-1988,
panic buying added to the unrest that sent hundreds of thousands of workers
into the streets in support of democracy, but also to protest corruption and
mismanagement.
The military crackdown at Tiananmen Square and martial law brought the
hard-liners back to pre-eminence in economic policy and Mr. Deng had to go
along. After the removal of Zhao Ziyang in 1989, Mr. Deng and the other
revolutionary leaders could not agree on who should rule. Their compromise
was Jiang Zemin, the Shanghai party boss whose strongest suit was
consensus-building.
The economic bubble that had expanded in the late 1980's finally burst, the
economy fell in on itself, production ground to a halt in many industries,
foreign investors fled and credit dried up.
In November 1989, Mr. Deng announced his retirement from his last formal
post, head of the Central Military Commission. But the emphasis in Chinese
culture on seniority made it impossible for him to leave politics, or for
politics to function without his intervention.

The failed Soviet coup in August 1991 and the subsequent collapse of the
Soviet Communist Party seemed to convince Mr. Deng that the most
powerful antidote to such a fate for Chinese Communism would be economic
growth. He began to criticize conservatives who obsessed over Western
''plots'' to topple Communism through ''peaceful evolution.''
''Say less and do more,'' he admonished them, trying to return their focus to
practical steps to promote economic growth.
The reforms were turning loose forces that eventually would challenge the
party, whose ideology had lost its moral sway. Millions of Chinese were
turning to religion and Confucianism, seeking a moral structure to replace
the void left by the party.
Mr. Deng understood that economic reform and the forces that it unleashed
in Chinese society would eventually challenge the Leninist rule of the party.
Thus began a period in which the Communist Party's legitimacy arose from
its ability to deliver economic growth and rising incomes.
''In the end, convincing those who do not believe in socialism will depend on
our nation's development,'' Mr. Deng said in late 1991. ''If we can reach a
comfortable standard of living by the end of this century, then that will wake
them up a bit. And in the next century when we, as a socialist country, join

the middle ranks of the developed nations, that will help to convince them.
Most of these people will genuinely see that they were mistaken.''
One Last Battle Against Conservatives
But even as Mr. Deng spoke, the hard-liners in Beijing refused to act and
Jiang Zemin was paralyzed by the lack of consensus.
At the beginning of 1992, Mr. Deng was rampant against his old adversaries,
principally the hard-line faction led by the conservative patriarch Chen Yun.
Mr. Chen and many other elders retired as Mr. Deng dominated the 14th
Party Congress, which enshrined a new national goal of creating a ''socialist
market economy'' by 2000.
Mr. Deng also moved against Yang Shangkun and his younger half-brother,
Gen. Yang Baibing, who had created a power base in the military that was
threatening the post-Deng political order.
But the pace of reform was too fast for Mr. Deng's successors, who craved
social stability above all to consolidate their rule. Unemployment, sagging
state industries and labor unrest bedeviled the leadership up to the moment
of Mr. Deng's death.
And the pro-democracy forces have gradually been suppressed. Instead of
charting a clear path, Mr. Deng's successors stumbled politically, seeking

concessions from the world on trade and human rights but offering little in
return.
A Clinton Administration review of human rights reported that by the end of
last year, public dissent had been ''effectively silenced,'' by intimidation,
prison or exile.
As long as Mr. Deng drew breath, it seemed that China could cope with its
contradictions. But as his health inexorably declined, the Chinese seemed to
pause and to wonder about the future.
Photos: Mr. Deng at the age of 16, just before he left for a work-study
program in France in 1920. He spent five years working for subsistence
wages in squalid factories there; At the height of the revolution, in March
1949, Mr. Deng, center, conferred with Chen Yi, right, and Zhang Dincheng
at a session of the Seventh Central Committee of the Communist Party in
Hebei Province. (New China Pictures/Eastfoto); In July 1963, Mr. Deng
attended talks on Communist ideology in Moscow as the Chinese-Soviet rift
widened. He was greeted at the airport by Mikhail A. Suslov, a member of
the Politburo, who led the Soviet delegation. (United Press International); At
Mao Zedong's home in 1974, Mr. Deng, left, joined Mao, third from left, in
talks with Prime Minister Zulfikar Ali Bhutto of Pakistan. Others at the
meeting were Prime Minister Zhou Enlai, second from right; Wang
Hongwen, a Deputy Chairman of the Communist Party, far right, and an

interpreter, Tang Wensheng. (New China News Agency via Associated

Press)(pg. A12); In 1974, Mr. Deng went to New York for talks with Secretary
of State Henry A. Kissinger. Mr. Deng was the highest-ranking Communist
Chinese official to visit the United States. (UPI/Bettman); Mr. Deng spoke at
a news conference with President Carter in Washington in January 1979.
(Teresa Zabala/The New York Times); Mr. Deng, left, playing a hand of
bridge with friends in Beijing. (New China News Agency via Agence
France-Presse); During the June 1989 showdown with demonstrators in
Tiananmen Square, one man halted a column of tanks as he pleaded for an
end to the killing of demonstrators. Bystanders pulled him away and the
tanks moved on. (Associated Press); Mr. Deng remained paramount leader
even after he had given up most of his official posts. In 1985 he reviewed
troops in Beijing as chairman of the Central Military Commission. (Xinhau
via Agence France-Presse)(pg. A13); In one of the last known photographs of
him as China's leader, taken on Feb. 7, 1994, Deng Xiaoping was shown with
his wife, Zhuo Lin. The photo was distributed as his official portrait. Zhuo
Lin, who was his third wife, and their five children survive him. (Reuters)(pg.
A14)

Chinese Economy in 1998

CLINTON IN CHINA: THE ECONOMY; China
Tells U.S. It Won't Devalue Currency
By MARK LANDLER

Published: June 27, 1998

BEIJING, June 26 A day before President Clinton's meeting with President

Jiang Zemin, China today gave the United States fresh assurances that it
does not plan to devalue its currency.
Playing economic advance man for Mr. Clinton, the Secretary of the
Treasury, Robert E. Rubin, held a daylong series of meetings with senior
Chinese officials here, in which he said ''there were unambiguous statements
of intent to maintain'' the exchange rate of the Chinese currency, the yuan.
Persuading China to maintain a stable currency has become a top priority of
the Clinton Administration, which fears that a devaluation by Beijing could
spark another wave of copycat devaluations across Asia. Mr. Rubin praised

China today for being an ''island of stability'' in a region buffeted by

economic turmoil.
Countries that devalue their currency can usually sell their goods more
competitively, and the concern of the United States and several other
nations is that the Chinese would devalue to avoid losing markets to several
other Asian countries whose currencies have been weakened by the
economic crisis in the region.
Although today's meetings were held in Government offices in the heart of
Beijing, the focus of the talks was more than 1,000 miles to the east, in
Japan.
Asia's latest economic relapse was caused by a sharp decline in the Japanese
yen, and Mr. Rubin used the meetings here to keep up the pressure on Japan
to mend its fractured economy. He said the Chinese officials had told him
that they were very concerned about the economic turmoil in Japan, in large
part because the weak yen was having an ''adverse impact on the region.''
''I said that we, too, were deeply concerned about the economic condition in
Japan,'' Mr. Rubin said in a briefing for reporters after he met Prime
Minister Zhu Rongji, who is leading China's ambitious economic reforms.
The contrast between a stable, reform-minded China and a shaky,
equivocating Japan has become a favorite theme of policy-makers and
currency traders in recent months. While Mr. Rubin was careful not to

criticize Japan, he drew some pointed distinctions between Beijing and

Tokyo.
Of the Chinese decision not to devalue, Mr. Rubin said, ''They were very
prescient, and they are getting and deserve a great deal of respect in the
world for this decision.'' Of Japan, he said, ''I've not spoken to any person in
the financial or political world who does not believe Japan must solve its
problems.''
Last week, the drop in the yen prompted the United States and Japan to
prop up the value of the currency by buying $4 billion worth of yen in
foreign exchange markets. Many financial experts believe that China played
an influential role in forcing the intervention by complaining about how the
weak yen was hurting its exports and by dropping hints that the yuan might
have to be devalued.
Today, before their morning meeting, the governor of the central bank, Dai
Xianglong, made a show of thanking Mr. Rubin for the intervention. Mr. Dai
had been among the Chinese officials who raised alarms in recent weeks
about how a weak yen was putting pressure on the yuan.
But the effects of the move have largely worn off. After a brief rebound, the
yen has settled to about 142 to the dollar, and currency traders are once
again betting on when the United States will be forced to buy yen to raise its
value again.

Mr. Rubin was resolutely noncommittal today about whether the United
States would continue propping up the yen. But he is known to be skeptical
about the efficacy of such interventions. He would clearly prefer that Japan
tackle its more deep-seated economic problems, which include a banking
sector that staggers under $600 billion in bad loans and a web of onerous
financial regulations.
As for China, Mr. Rubin said it, too, faced formidable economic challenges.
Mr. Zhu is embarking on a broad reform of China's banking system, as well
as privatizing thousands of state-owned enterprises.
''You certainly got the feeling of people who understand the problems,'' Mr.
Rubin said.
He said the Chinese leaders were sticking to their forecast of 8 percent
economic growth in 1998. But with exports dwindling and domestic demand
sluggish, he added, ''it's not clear where they expect to come out.''
Mr. Rubin met Mr. Zhu in an ornate building called the Pavilion of Purple
Light, purple being a color that the Chinese regard as auspicious. The setting
was appropriate, for despite all the questions about China's economy, this
was likely to be the most trouble-free stop on Mr. Rubin's trip. In the coming
week, he will travel to Malaysia, Thailand and South Korea -- countries that
are grappling with more nettlesome problems than slowing growth.
In Malaysia, Mr. Rubin will face a potentially unstable political environment.
On Wednesday, the Malaysian Prime Minister, Mahathir Mohamad, named

his close adviser, Daim Zainuddin, as a Cabinet minister in charge of the

economy. That would appear to undercut the Deputy Prime Minister, Anwar
Ibrahim, who had overseen the economy and has been widely considered to
be Mr. Mahathir's heir apparent.
Mr. Ibrahim has clashed publicly with his boss in recent weeks over how
Malaysia should respond to the economic downturn. Although Mr. Ibrahim
says he is loyal to Mr. Mahathir, political experts in Malaysia believe Mr.
Ibrahim might challenge him if he felt he was being shunted out of power.
In Thailand and Korea, the Governments are struggling to impose harsh
economic reforms mandated by the International Monetary Fund in the face
of mounting opposition from labor leaders and populist politicians.
Photo: Robert E. Rubin, left, the United States Treasury Secretary, met with
Prime Minister Zhu Rongji yesterday at a guesthouse in Beijing. (Agence
France-Presse)

OUTLOOK '98: INTERNATIONAL; Chinese

Face Uncertainties From Asia's Financial
Chaos
By SETH FAISON
Published: January 5, 1998

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SHANGHAI The numbers look good. It's what they hide that is not so
pretty.

China's economy is still bustling along at high speed, growing 8.8 percent in
1997 and expected to increase nearly as fast in 1998. It is almost as though
China were operating in a different hemisphere from that of its Asian
neighbors who are now engulfed by financial meltdown.

Inflation, once the greatest cause of fear to Chinese leaders who remember
how it helped lead to widespread unrest in 1989, is now close to zero and is
expected to remain in the low single digits. Just a few years ago, even the
most optimistic Government planners did not envision such a combination
of muscular growth and low inflation.

''Strong economic growth will continue next year,'' said Ye Zhen, a

spokesman for China's State Statistical Bureau. ''Inflation will remain at the

lowest level in the 1990's, leaving much room to coordinate economic

growth with stable consumer products.''

But the economy has a gritty underside: a morass of dilapidated industry left
over from state-planning days, tens of millions of grumpy, underemployed
workers and insolvent banks trying to wean Chinese companies from an
irrational system of ''loans'' that are still effectively state handouts.

All these factors make the 1998 economic performance highly unpredictable.
Such a deep divide separates the old, state-planned way of allocating money
and the new, market-driven methods, which have only seeped halfway into
the financial system, that it is impossible to know where change will come
smoothly and where it will not.

In a sense, the Asian financial crisis could not have come at a worse time for
China. In 1997, Chinese leaders essentially accepted the inevitable by finally
deciding to cut loose the bulk of state-owned industries, once the mainstay
of the socialist economy, because they have been draining state coffers more
heavily each year.

In the coming year, Chinese leaders hope to start engineering a huge sell-off
of the state-run sector, opening the door to the near-certainty of even greater

numbers of layoffs, with the aim of essentially restructuring the nation's

system of ownership within three years.

With the regional economy tumbling downward, precisely at a time when

China most needs stable income, Beijing has become vulnerable to falling
foreign investment and increased competition for its exports. Asian
investors, in particular, are expected to back away from sinking new money
into China.

Though farmers still make up the vast majority of China's population of

more than a billion, the urban work force is up to 120 million, mostly
employed by state-run industry. Many are underemployed -- not working,
but still officially on the payroll at salaries as low as $10 a month in some
cases -- and the restructuring is expected to lead to widespread layoffs.

A largely unknowable factor is how many of those workers and their families
are already surviving on China's enormous underground economy. The
combination of high taxes and poor enforcement is a powerful incentive to
many businessmen to keep their entire operations off the books. No one has
any reasonable estimates for the size of China's black economy.

Perhaps the greatest uncertainty is what new form of ownership will emerge
as the sell-off of Government-run companies takes shape. Economists have
resisted the term ''privatization,'' because even as local governments seek
buyers, they are expected to oppose the concentration of economic power in
the hands of any one individual.

''I think it will look more like South Korea, less like Russia,'' said an
economist who studies China for Standard Chartered Securities in Hong
Kong but refused to be identified. ''They are going to be much more
comfortable with large Government-backed conglomerates than with
sprawling empires run by private entrepreneurs.''

In any case, there are still sharp limits on the opportunities for foreign
investors. And actual foreign investment, after reaching $44 billion in 1997
as a number of contracts signed in previous years came to fruition, is
expected to fall sharply in 1998.

Exports, going gangbusters with 20 percent growth in 1997, are expected to

keep growing, but at a slower rate. Several Government economists predict
an 8 percent increase for exports in 1998, reducing China's overall trade
surplus, which by Chinese statistics reached $40 billion in 1997 and is likely
to drop to $32 billion in 1998.

Because a major portion of China's exports are goods involving the assembly
of raw materials or parts that were imported from Southeast Asia, initial
costs will fall because of the declines in those countries' currencies, possibly
making China's exports cheaper as well.

Slower export growth, mostly because of competition with Southeast Asian

countries whose goods are now less expensive, may also reduce trade
disputes with the United States, China's biggest trading partner.

INTERNATIONAL BUSINESS; China Says

Banking System Faces a Sweeping Overhaul
By SETH FAISON

Published: January 17, 1998

BEIJING, Jan. 16 At the heart of the financial crisis in Asia is a badly kept

secret: many bank loans throughout the region are based on a personal or
political relationship between banker and borrower.

Cronyism is widespread in Asian business, and in China -- as much as

anywhere -- friendship and position can outweigh the law. But crisis can
open the way for change.
Today, the governor of China's central bank disclosed a sweeping
reorganization of the banking system aimed at making it more professional
and less political, an undertaking that reflects the desire of Chinese leaders
to keep Asia's financial crisis from engulfing them as well.
Dai Xianglong, who heads the People's Bank of China, said that curing the
nation's epidemic of bad debt would require a different system of
supervising state banks, one modeled on the Federal Reserve in the United
States.
''We have to insure that commercial banks will operate according to law, and
not be open to interference by any organization or individual,'' Mr. Dai told a
news conference.
Yet the plans Mr. Dai outlined involve such a deep shift in business practice
and philosophy that it is highly questionable how much real change can be
achieved. Coming just as China is undergoing a wrenching shift from a
planned to a market economy, the financial overhaul may also be more
difficult at a time when China faces falling investment and slowing economic
growth.
Mr. Dai argued this juncture was precisely the time for a bold reorientation,
and he pledged to complete the job in just three years, mirroring the

Government's plans to sell the bulk of the state-owned enterprises by the

end of 2000.
''Just as state-owned enterprises are the key to enterprise reform, the central
bank is key to financial reform,'' Mr. Dai said.
Under the plans he outlined, the central bank would eliminate its main
branches in each of China's 30 provinces and replace them with regional
headquarters along the lines of the Federal Reserve system. Doing so, Mr.
Dai said, would help prevent the local authorities from forcing local banks to
finance favored projects, even when they made no sense financially.
A Chinese bank official said the reorganization was likely to centralize
financial decision-making power under the control of Zhu Rongji, the
Deputy Prime Minister whose authority over economic affairs often puts him
at odds with provincial-level officials. Closing so many local bank offices
would also mean at least 20,000 layoffs, the official said.
''The idea is that regional bank heads will outrank provincial governors, and
won't have to listen to them,'' said the bank official, who said he supported
Mr. Zhu's plans and spoke on condition of anonymity.
One of the modern mysteries of China's financial system, and biggest burden,
is the question of how many loans to money-losing enterprises will ever be
repaid.
Mr. Dai said today that 20 percent to 25 percent of all loans in China were
overdue, but he argued that only 5 percent to 6 percent were actually

unrecoverable, a figure that sounds optimistic. Yet even he seemed to

acknowledge that China's statistics were incomplete.
''You can argue about whether this 5-6 percent is accurate or not,'' Mr. Dai
said. ''But I don't want to hear anyone repeating those rumors that it is
25-30 or even 40 percent. That would be irresponsible.''
Even the lower estimate, however, requires a sizable amount of cash if
China's banks are to remain solvent. Mr. Dai said the central bank would
allocate more than $6 billion to cover unpaid loans in 1998, and another $7
to 8.5 billion in 1999 and 2000.
For many ordinary people in China, a major question of the day is whether
the central bank will devalue the currency, the yuan, which will help China's
exports but could cause higher inflation. Today, Mr. Dai insisted that the
need for financial stability still outweighed the possible benefits of a
devaluation. He said China would not devalue its currency this year.
Mr. Dai also expressed support for the determination of Hong Kong to keep
its currency's value linked to the dollar, even if doing so drove up interest
rates and damaged the stock and property markets.
''Of course China would like to see the stock market and inflation rate
remain stable as well,'' Mr. Dai said. ''But compared with these aims,
stabilizing the exchange rate is more important.''
Mr. Dai described the collapse of Peregrine Investments Holdings, a Hong
Kong investment bank that led the market for Chinese share offerings there,

as ''very regrettable.'' But he said it would not affect China's plans to list
shares of more mainland companies in Hong Kong.
Over all, Mr. Dai offered a relatively optimistic picture for China's economy
this year, predicting growth would exceed 8 percent. Growth last year was
8.8 percent. He also said the country's foreign exchange reserves totaled
$139.9 billion at the end of 1997.

China Economy in 1999

OUTLOOK 1999: INTERNATIONAL -- CHINA;
China Thrives, but Critical Year Lies Ahead
By SETH FAISON
Published: January 4, 1999

SHANGHAI While much of Asia stagnates, China is still growing at a

relatively healthy rate.

Economists had predicted throughout last year that China would eventually
follow its neighbors on a downward spiral, but it has stubbornly refused to
slow down. Its economy grew nearly 8 percent last year and is expected to
grow more than 7 percent this year.

There are two main reasons: an ambitious spending program by the

Government and an unrelenting appetite among consumers. Falling exports
have devastated other Asian economies, but in China the domestic market is
so large and so hungry for consumer goods that it almost does not matter.

''Even though exports are pretty flat, the growth rate is steady,'' said Andy
Xie, chief China economist at Morgan Stanley Dean Witter in Hong Kong.
''We expect that to continue in 1999.''

This year will be critical for China. As the country's leaders proceed with a
painful program of weaning state-owned industry from endless Government
handouts, raising the specter of huge layoffs, they are eager to spur other
forms of employment.

The omnipresent danger is that if the economy slows suddenly, millions of

newly unemployed urban workers could cause unrest. But if the economy
continues to grow steadily, small companies are expected to absorb the vast
majority of those workers.

As a result, leaders decided last year to start a New Deal-type spending

program on infrastructure projects. State investment in fixed assets, the best
measure of China's Government spending, totaled about $190 billion in
1998, up 22 percent from 1997.

Unlike the governments of many of its neighbors, China's has the resources
to keep spending heavily. Largely because there are few investment choices
available in China, ordinary citizens have deposited $600 billion in state-run
banks, giving the Government a deep well to tap for its spending.

For instance, some of the building projects that started last year were
financed with a special $12 billion bond sold by Beijing to its banks, which
were forced to buy it with customer deposits.

The country's $130 billion foreign debt is relatively well managed, mostly in
medium-term and long-term debt. It is also backed by $144 billion in
foreign-exchange reserves, making the risk of an external debt crisis
minimal.

''China is a developing country that must strengthen development of its

railway, highway, higher education and medical care sectors,'' said Hu
Angang, a senior Government economist in Beijing. ''China's accelerated
urbanization, environmental protection and ecological projects offer vast
opportunities.''

Overcapacity in a wide array of sectors, however, has led to a sharp decline

in prices. While inflation was a top concern a few years ago -- it peaked at 24
percent in 1994 -- the main retail price index actually fell 3 percent in 1998.
Inflation is expected to be about zero this year.

''Increased market competition has forced many companies to adopt a

strategy of less spending for product upgrades,'' said a recent economic

analysis by the official New China News Agency. ''China's ongoing reform of
the housing and medical care sectors have led to a retrenchment in spending,
and massive layoffs have sharpened the public's awareness of the possibility
of financial instability.''

When Chinese authorities announced that monthly measurements of prices

fell again in November -- by 2.8 percent -- they were marking the 14th
consecutive monthly decline in the retail price index. Retail prices fell 2.9
percent in October and 3.3 percent in September.

The Government has responded by trying to halt deflation with new rules on
minimum prices and by cracking down on smuggling, which has become a
serious problem recently.

At an economic conference in Beijing last month, the country's top leaders

set their priorities for 1999. The priorities include shoring up domestic
demand, halting the slide in exports, reforming state-owned companies and
increasing wages for urban and rural workers. That is a tall order, yet the
overall outlook remains promising.

China's leaders also promised not to devalue their currency, the yuan, this
year. Rumors that China would be forced to devalue echoed around Asia

throughout 1998. Yet they fed on an analysis of statistical figures that

fundamentally misunderstood political and economic reality in China today.

Naturally, there are some reasons for Beijing to devalue, like the need to
spur exports at a time when the economy is weakening, when foreign
investment is falling and when millions of urban workers are facing
unemployment.

Yet there are deeper reasons for Beijing not to devalue. China is in the
middle of a wrenching shift from a state-run to a market-oriented economy,
trying to sell the bulk of its Government-owned industries, and probably the
last thing leaders in Beijing want is a further cause of disruption.

Making China's exports cheaper, many economists argue, is an inefficient

way to strengthen its economy. In the long run, they say, maintaining the
currency makes economic sense by providing a stable environment for
investment, foreign and domestic.

Paradoxically, one of the causes of China's current stability is that its

economy is not yet fully integrated with the rest of the world. China's
currency is not freely convertible, so there is little immediate market
pressure on the yuan.

More important, Beijing's decision-making process is weighted heavily

toward political concerns, not market sensitivity. Although China's leaders
face internal lobbying from exporters, they seem to stake far greater political
capital on their promise not to devalue.

Photo: China spent about $190 billion last year on a New Deal-type spending
program on infrastructure projects like the construction of Xiaolangdi Dam
in Henan Province.

A HALF-CENTURY IN CHINA: THE

CROSSROADS; Communist China at 50: It's
Stability vs. Reform
By ERIK ECKHOLM
Published: October 1, 1999

BEIJING, Friday, Oct. 1 Wang Ruoshui was on Tiananmen Square that

electric day half a century ago today when Mao Zedong announced: ''The
People's Republic of China is founded! From this time on, the Chinese
people have stood up!''

Mr. Wang, who was an underground Communist as a student and would

become a leading journalist and party theoretician, remembers how proud

he felt. ''We thought we were creating a new history,'' he said. ''We believed
we were creating a new, free, strong, democratic and prosperous China.''

Democratic it is not, but when Chinese people weigh the revolution that
began 50 years ago, they express pride that the nation is united and finally,
as Mao promised, standing up in the world.

If asked about events they would rather forget, Chinese say that Mao's
unbridled political campaigns -- the economic fantasies that caused millions
of famine deaths, the vicious purges that scarred generations and brought
the nation to a standstill -- were a terrible mistake. They go on, though, to
heap praise on Deng Xiaoping's economic opening two decades ago that
brought prosperity and more control over their personal lives, if not their
political choices.

But among many in the older generation of Communists, there is also a

sense of loss. Though not all of them have come to share Mr. Wang's belated
conviction that democracy is the only answer, many old revolutionaries
wistfully recall a time of idealism, when the young revolutionaries were
uncorrupted and respected. While they may marvel at today's wealth, these
elders lament the widespread corruption of officials, and the growing
economic disparities.

Mr. Wang, now 73, rose to be deputy chief editor of the Communist Party's
newspaper, People's Daily, before he was fired in 1983 for his liberal
leanings. Today he rails against corruption like everyone else. But more than
that, he decries the lack of restraints on party power that facilitates it, and
the lack of political choices and press freedom.

That he is one of the rare Chinese who dare to question the political order in
public is revealing in itself.

''The current leaders say stability takes precedence over everything, but what
they really mean is the survival of their regime,'' Mr. Wang said. ''China does
need stability, but not the kind that protects corruption. Political reform is
the best way to prevent instability.''

After the savage chaos of the Mao era, which followed decades of invasions
and civil war, a yearning for stability was understandable. In the late 1970's,
after Mao's death, stability was Deng's prime concern as he laid out a simple
strategy for modernizing the insular and dispirited country: on the political
side, preserve Communist Party dictatorship; on the economic side, start
opening to the world and tapping the power of market incentives.

''Look to the future!'' Deng exhorted the nation, steering it away from
recriminations that could destroy the Communist Party.

Deng's approach was remarkably successful, yielding two decades of

startling economic growth and social change. And the country, making a pun
on the Chinese word for ''future,'' enthusiastically transformed his slogan
into ''Look to the money!''

Farmers resurfaced their dirt floors with concrete and bought televisions.
Urban professionals bought stylish clothes and started saving for cars and
foreign vacations.

Instead of memorizing Mao's sayings, students now delve into the Internet.
Once-cowed workers take to the streets when their wages go unpaid, and
aggrieved farmers are apt to try suing local officials.

Today, the leaders under President Jiang Zemin still follow Deng's basic
prescription: pursuing deeper changes in the economy while zealously
guarding the party monopoly and holding ''stability'' as gospel. But the
society is vastly more complex and demanding than before. It is increasingly
wired to the unforgiving global market, and there are signs that the era of
easy 10 percent-plus growth rates has ended.

The central question facing China today, many scholars here and abroad
believe, is whether Mr. Deng's aging formula has run its course.

''Deng's approach turned out to be workable for two decades, and China
made enormous progress,'' said Minxin Pei, a Chinese-born political
scientist with the Carnegie Endowment for International Peace in
Washington. ''But now they've got to do better.''

Without a political loosening and far stronger legal checks and balances, Mr.
Pei and other critics say, China cannot conquer the widespread official
corruption that even party leaders admit is corroding their authority.

In China, practical arguments for democracy are nothing new. But so far, the
country has continued jailing or exiling dissidents who push too hard. And
there are still those, even outside Government circles, who think that the
current approach may be the only realistic one for now.

Xiao Gongqin, a historian at Shanghai Normal University, said he agreed

that as society grows more complex, democratic channels must emerge to
deal with the demands. ''But I feel China is not yet at that stage,'' he said.
''It's at the most trying stage of modernization.''

Dali Yang, a Chinese-born political scientist at the University of Chicago,

thinks the leadership deserves more credit than it gets. He noted that the
Government is in the midst of an ambitious ''rebuilding of the institutional
sinews of the state,'' including revamping the tax, banking, legal and
regulatory systems in addition to the painful pruning of state industries.
Progress with these, Mr. Yang contended, ''will eventually allow the
Chinese leadership greater room for political liberalization.''

If there is one area where even critics give the Government some credit for
articulating change, it is the economy. China's leaders have put forth
serious plans for shaking up bloated state-run enterprises and creating
modern social welfare and pension systems, for example.

In its bid for membership in the World Trade Organization, China appears
prepared to accept major new jolts of market competition.

''There is a real attempt to produce a second economic revolution, this

time with a more coherent blueprint,'' said Anthony Saich, a professor of
international affairs at Harvard University, who spent the last several
years in China. ''But what kind of society do they want, what kind of
politics? These issues are in limbo because nobody can talk about them.''

Far from providing an inspired vision of political change, party leaders

seem united above all on the necessity of continued Communist rule. They
appear to fear that any sign of weakness could cause their power to unravel.
That fear is reflected in the obsessive security surrounding the 50th
anniversary parade, whose aim is to prevent demonstrations or violence by
workers, ethnic separatists, democracy activists or members of the banned
Falun Gong spiritual movement.

Mr. Jiang is using the anniversary celebrations to portray himself as the

next great leader in the mold of Mao and Deng. Speaking this week to
many of the world's top corporate executives in gleaming Shanghai, he
vowed again to create ''a wealthy, strong, democratic and civilized modern
socialist country.''

With Mao-style Marxism totally discredited, Mr. Jiang constantly evokes a

fuzzy ''Deng Xiaoping theory'' as the nation's guide, and he often appears
to be groping for his own true course. He is a leader who one week can
mount the harsh repression of Falun Gong then another week select a
daring modern French design for a national theater right next to the Great
Hall of the People; a leader who in the same statement can pledge radical
economic reform and call for a stronger role for the party in managing
companies.

As long as the party leadership remains united and resolute, its power
seems secure for now. But many scholars think that the brew of slower
growth, rising unemployment, spreading inequality and popular
resentment of corrupt officials will give rise to more turmoil.

''One thing authoritarian regimes don't have is residual legitimacy,'' Mr.

Saich said. ''People say, if they don't produce the goods, what's the point?''
He said that with a credible promise of political opening, people may give
the party more leeway.

Yet the leaders may have reason to fear that if they give too much political
ground too fast, the Communist edifice could swiftly crumble.

Photo: Prime Minister Zhu Rongji spoke to Communist Party leaders

yesterday at a banquet marking the 50th anniversary of the People's
Republic of China. (Associated Press)(pg. A12)

INTERNATIONAL BUSINESS; Chinese Raise

Interest Rates on Dollar Deposits
Published: March 10, 1999

BEIJING, March 9 China raised interest rates today on United States

dollar deposits in an effort to stem a flow of hard currency out of the country
that has come as international banks cut credit lines to Chinese borrowers.

The Bank of China, acting on orders of the central bank, raised the rate on
one-year dollar deposits in Beijing to 4.66 percent from 3.75 percent. It also
increased one-year rates for deposits denominated in the Hong Kong dollar
-- which is linked to the American currency -- to 5.25 percent from 5 percent.

The rate increases ''will encourage repatriation of hard-currency earnings by

Chinese exporters,'' said Fred Hu, executive director of Asian Economic
Research at Goldman, Sachs in Hong Kong. He called the increase a
''correction'' that brought Chinese bank rates more in line with international
rates.

Other Chinese banks typically follow the lead of the Bank of China, a large
commercial bank here. The new rates will vary among Chinese cities and
banks.

Despite the higher rates paid on deposits of dollars, local currency rates ''still
have room to go lower,'' Mr. Hu said.

Seeking to rekindle economic growth, and to lower the interest payments

that state-owned companies must make, China has cut interest rates paid on
deposits of the local currency, the yuan, five times since November 1996.
The economy is projected to grow 7 percent this year; although that is much
faster than the growth expected in other Asian countries, it would be the
slowest expansion in China since 1990.

Chinese banks currently pay 3.78 percent on one-year yuan deposits.

In 1997, China's foreign-exchange reserves rose by an average of $3 billion a

month. But last year, despite increases in the trade surplus and in foreign
investment, exchange reserves rose about $400 million a month.

The concern over currency reserves comes as foreign banks have instituted a
near-freeze on new loans to Chinese companies. The foreign banks curtailed
lending after the collapse in October of the nation's second-biggest trust
company. Many of them are also demanding early repayment of loans to
minimize further losses if more Chinese companies fail, bankers say.

Still, the $5 billion gain in reserves last year brought China's total to $144.96
billion at the end of 1998, second only to Japan's.

Today's interest-rate increase will narrow the gap between Chinese and
foreign rates. The Bank of China's rate of 4.66 percent for one-year dollar
deposits in Beijing is below the average of 5.23 percent offered by banks in
the United States. The 5.25 percent rate offered for Hong Kong dollars is still
below the 7 percent that Hong Kong banks are paying in Hong Kong.

Still, the increases may prove to be an incentive for Chinese exporters to

repatriate some of their foreign funds. Exporters are permitted to retain 15
percent of their foreign-currency earnings, much of which is believed to
remain outside China.

A VISIT FROM CHINA: THE WHITE HOUSE;

China Pact Near, Clinton Outlines Benefits for
U.S.
By KATHARINE Q. SEELYE
Published: April 8, 1999

WASHINGTON, April 7 With a partial trade accord with China nearly

in hand, President Clinton argued today that America would benefit by
helping guide the world's most-populous nation toward economic stability.

Mr. Clinton's speech on relations with China came just hours before Prime
Minister Zhu Rongji arrived here for a three-day visit, which included an
informal private meeting with the President tonight at the White House.

Administration officials said Mr. Clinton planned to announce on Thursday

that the two countries had reached agreement on several issues that could
help pave the way for China to join the World Trade Organization this year.
They said China had made broad concessions in a wide range of areas critical
to American companies, from cellular telephone providers to insurers
seeking to sell policies in China, which has 20 percent of the world's
population.

At a meeting this afternoon at the White House, President Clinton's top

advisers debated how they could cast a partial agreement as a victory if they
could not announce a final deal. They left the issue unresolved.

Today, on the eve of the planned announcement, China's Trade Minister and
American negotiators were still scrambling to narrow differences in an

enormously complex deal that would require China to dismantle state

control of its economy and open state-owned companies to foreign
competition. But several issues remained unresolved, among them how to
enforce China's compliance.

China has sought entry to the World Trade Organization for 13 years, for
prestige, and to guarantee it the economic protections afforded to most
trading nations.

But any deal would require support in Congress, which is uncertain, given
concerns over assertions that China stole nuclear secrets, its questionable
campaign contributions to President Clinton's 1996 re-election campaign
and worsening political repression in China. This afternoon the Senate
majority leader, Trent Lott, announced he opposed a deal.

''Letting China into the W.T.O. at this time shows how far this
Administration is willing to go in an effort to salvage its failed policy of
strategic partnership with China,'' Mr. Lott, a Mississippi Republican, said in
a statement. ''This is the wrong decision at the wrong time.''

Nonetheless, Mr. Clinton tried to create the basis for an announcement of

some kind of agreement, saying in a speech here: ''If China is willing to play

by the global rules of trade, it would be an inexplicable mistake for the

United States to say no.

''Getting this done and getting it done right is profoundly in our national
interest. It is not a favor to China. It is the best way to level the playing
field.''

But a top Administration official said that unless Mr. Zhu approved
additional concessions, Mr. Clinton could not announce a deal to include
unconditional Administration support for China's membership in the trade
group.

In any case, Congress would have to amend a cold-war law that allows it to
vote each year on China's trade status, and Mr. Lott's statement suggested
that Congressional concerns about other topics, from human rights to
espionage, would stand in the way of any accord. He said he did not want to
let Mr. Clinton reward China with entry into the organization because he
was skeptical that even with a deal, China would end what he said were its
''predatory'' trade practices. The United States trade deficit with China was
$57 billion last year.

Senator Charles E. Grassley, Republican of Iowa, has introduced a bill to

give Congress 60 days to review any deal. But he too said today that approval
seemed remote. ''Republicans feel, do you want to trust China and give them
a feather in their cap while they're stealing our military secrets?'' he said.

Members of Congress who visited China last week and met with Mr. Zhu
gave a preview of the Chinese leader as a tough negotiator. Senator Kent
Conrad, Democrat of North Dakota, said the Americans raised all of the
sensitive issues raging in Congress and said Mr. Zhu's response was that
they were trying to politicize an economic issue.

Senator Conrad also said that unless the trade deal clearly gave American
companies the same access to Chinese markets that China has to American
markets, Congress would not approve it. ''Even if it's perfect, it will be a
tough challenge in this environment,'' he said.

Mindful of anti-China sentiment in Congress, Mr. Clinton, in his speech

today, offered an unusually critical analysis of a country whose leader is on
his doorstep. He criticized China for political repression, saying ''a tight grip
is actually a sign of a weak hand.'' He said China's backward industries were
polluting its countryside. But he insisted that the United States must use its
influence to coax China toward democracy.

''As we focus on the potential challenge that a strong China could present to
the United States in the future,'' Mr. Clinton said, ''let us not forget the risk
of a weak China, beset by internal conflicts, social dislocation and criminal
activity, becoming a vast zone of instability in Asia.''

Mr. Clinton also tried to deflect the condemnation of his policy by

Republican Presidential candidates, appealing to them to avoid ''a
campaign-driven cold war'' that would give comfort only to ''the most rigid,
backward-looking elements'' in China.

Mr. Clinton has been eyeing the vast markets that China offers and has
become a strong advocate of engagement with the Chinese Government.

In negotiations on the trade accord, complete agreement had been reached

by tonight in one of the most contentious areas -- removing Chinese barriers
to American agricultural imports, especially wheat and meat. And there has
been all but complete agreement on other issues of market access, with
China agreeing to phase out many of its trading restrictions and high tariffs
in three to five years. Foreigners will be allowed to invest in Chinese
telecommunications companies, but not to take a controlling interest in
them.

One issue still open is import quotas. China has accused the United States of
trying to prolong American import restrictions on Chinese-made textiles -quotas that were supposed to end in five years. The United States,
responding to pressure from Congress, now wants to extend the quota
system for 10 years.

The United States and China did agree today on a civil-aviation accord that
will double passenger and cargo flights. Lael Brainard, a White House
official who specializes in international economic issues, said the agreement
would allow an additional United States airline, which she did not identify,
to fly to China and let more American cities have direct air service to China.

Photo: President Clinton spoke about China policy yesterday at the

Mayflower Hotel in Washington before Prime Minister Zhu Rongji's arrival.
(Stephen Crowley/The New York Times)

Chinese Restate Goals to Reorganize State

Companies
By ERIK ECKHOLM
Published: September 23, 1999

BEIJING, Sept. 22 A four-day meeting of the Communist Party's top

leaders ended today with a reaffirmation of China's commitment to

reorganizing state-owned enterprises and making them competitive in the

global marketplace.

The plenary meeting of the party's 189-member Central Committee also gave
Vice President Hu Jintao a symbolically important new position as a vice
chairman of the Central Military Commission. That adds to the evidence that
Mr. Hu, at 56 the youngest senior leader, is President Jiang Zemin's choice
as a successor in several years.

In a statement this evening, the Central Committee called the overhaul of

state enterprises ''an important and urgent task.'' But it mainly restated
problems and goals set out repeatedly in the last two years and said that
reforms had ''reached a crucial stage, and some deeply rooted problems need
to be dealt with'' -- suggesting that progress has been ragged.

In sometimes vague and contradictory language, the statement called for

modern management of state enterprises and, in a break with tradition, to
offer direct performance-related financial incentives to top managers of
larger state companies. But it also called for improved ''ideological and
political work'' in such companies.

Combined with much language about markets and preparing industries to

meet ''fierce global competition,'' the statement at several points stressed the
need for Government to retain control over pivotal industries, including
emerging high-technology industries.

China is struggling with a huge number of money-losing, inefficient and

redundant state enterprises, some dating from the Mao Zedong era and
others built up even as the country started introducing market forces in the
1980's and early 90's. By wide agreement, they are a serious drain on the
economy, and their huge debts imperil the banking system.

In 1997, Mr. Jiang Zemin, also the Communist Party chief, called for a major
reorganization of larger industries, including bankruptcies, mergers and new
stockholding schemes. Smaller companies were to be left to sink or swim.
Last year, Prime Minister Zhu Rongji vowed to turn around the sinking state
sector within three years.

The shake-up of coddled state enterprises is closely linked to China's drive to

join the World Trade Organization, because membership would require
reduced tariffs on imports and additional opportunities for foreign
businesses to compete in China.

But the ailing state-run companies also provide jobs and welfare to millions
of people and power to industrial ministries and local politicians. The
backlash of threatened interests, corruption in the dismantling of companies
and Chinese leaders' concerns about the political and social effects of layoffs
have all hampered change.

From the statement today, it was unclear whether conservative forces had
blunted a drive for more sweeping and rapid change or triumphant
reformers had assuaged the opposition with bromides about preserving state
control.

In a typically convoluted sentence, filled with the code phrases suggesting

opaque bureaucratic battles, the statement said: ''The strategic adjustment
of the layout of the state sector of the economy needs to be combined with
optimization of and improvements in the industrial and ownership structure,
sticking to advancement in some areas and retrenchment in others and
refraining from some things in order to do others, so as to increase the
ability of the state sector to control the economy.''

China Reaffirms Drive to Overhaul Bloated

State Industries
By ERIK ECKHOLM
Published: March 6, 1999

BEIJING, March 5 Senior Chinese officials today reaffirmed their

determination to squeeze dead wood and red ink out of bloated
state-owned enterprises, vowing to make nearly all of them competitive
and profitable by the end of next year.

Reporting on his first year as Prime Minister, Zhu Rongji told the annual
session of the National People's Congress that, despite the ''grim
environment at home and abroad,'' China would forge ahead with the
overhaul of state industries as well as a streamlining of Government
bureaucracy.

While his speech was mainly devoted to economic policy, Mr. Zhu
implicitly acknowledged the social unrest that has flared as urban
unemployment grows and farmers protest taxes and corruption.

In a statement that seemed to be aimed as much at local officials and the

police as at potential protesters, Mr. Zhu said such conflicts should be
resolved promptly, ''eliminating them before they grow.''

Mr. Zhu said the Government projected 7 percent economic growth in

1999, compared with an official figure of 7.8 percent for 1998, and would
continue its effort to stimulate the economy -- which has been battered by
the Asian financial crisis and a shrinkage of domestic demand -- by
pumping large sums into capital investments.

But the determination to wring out state-owned enterprises was the clear
theme of the day.

In a news conference after today's opening of the congress, the official in

charge of revamping state industry sought to rebut the perception that
economic reforms had stalled.

''We have continued to quicken the pace of state enterprise reform,'' said
the official, Sheng Huaren, chairman of the State Economic and Trade
Commission, noting progress in closing of excess textile mills and coal

mines, and restructuring of the petroleum, petrochemical and

metallurgical industries.

Mr. Sheng gave a surprisingly upbeat assessment of some of the challenges

facing the Chinese economy.

Mr. Sheng said the Government aimed to stabilize 7,680 large and
medium-size public companies, of which 2,300 are now losing money. The
goal, he said, is to end the losses of one-third of those companies this year,
and the losses of an additional one-third next year, leaving no more than
15 percent of the surviving companies in the red.

Last year, 48,000 company officials were demoted or fired for poor
management, Mr. Sheng said, and under a system of inspection by outside
auditors, more incompetent or corrupt managers will be removed.

Fearing Deflation, Chinese Set Limits On New

Factories
By SETH FAISON

Published: August 19, 1999

BEIJING, Aug. 18 In a drastic move aimed at reversing a steady fall in prices, Chinese
officials announced today that they would ban any new construction of factories that make a
broad range of ordinary consumer items, from refrigerators and air-conditioners to candy, apple
juice and liquor.
The ban also covers the construction of luxury hotels, apartment and office buildings and
department stores, which have also suffered sharp falls in prices for many months as the market
has become glutted. In some Chinese cities, these buildings sit empty or barely used.
By withholding approval for any new production lines, while allowing existing output to
continue, officials apparently hope they can shackle China's deflation, a self-perpetuating spiral
of falling prices and falling demand that has become a serious new economic threat in Asia's
biggest country, where growth has started to falter.
China's economic troubles are compounding just as modest revivals are happening elsewhere in
Asia, where a severe financial crisis flared two years ago and sent shudders through markets
around the world.
Prices of consumer goods in China have fallen for 22 months in a row. While that is good news
for Chinese consumers, fewer and fewer are buying. Instead, deflation is causing many factory
stockpiles to overflow and forcing producers to suspend their output, even though most are
required to keep paying the same number of workers.
Deflation also is prompting price wars among many producers, a new phenomenon for Chinese
officials, who find it unsettling. ''Producers have resorted to malicious competition by slashing
prices drastically for survival,'' was how the official New China News Agency put it today as it
announced the ban, which begins Sept. 1. The duration of the ban was not announced, but it was
clearly aimed at industries that produce goods for domestic consumption.
It was unclear how effectively the ban will be enforced. Although it applies to consumer-goods
producers all over China, such central directives are often quietly ignored.
Still, economists expressed concern that the ban includes hidden dangers that could worsen the
deflation problem. Nicholas Lardy, a senior fellow at the Brookings Institution in Washington
who specializes in China, said the ban could worsen the situation by forcing cutbacks in
construction jobs.

''It could mean less employment and more deflation,'' he said. ''With fewer people working,
demand will go down.''
In many industries, state regulators have imposed minimum prices to try to prevent producers
from undercutting each other with price slashing. Meantime, financial authorities have
authorized several interest rate reductions to encourage consumption by lowering the cost of
borrowing. But the success of that effort has been limited.
Weak demand for consumer goods has grown out of a serious deterioration in consumer
confidence. Many ordinary consumers fear that the economy will continue to weaken, and that it
may lead to job losses and a reduction of welfare benefits, including pensions. So instead of
spending their money they are saving it.
Some Chinese economists have gently begun recommending that Beijing consider a devaluation
of China's currency, the yuan. That would theoretically help stem deflation by raising the cost of
imports and would stimulate the economy by raising foreign demand for China's exports, which
have been falling. But a devaluation could have destabilizing effects in China and elsewhere in
Asia by unnerving foreign investors and raising the cost to China of repaying foreign loans. It
appears that the authorities remain unwilling to devalue the yuan for the time being, at least until
they see if falling exports and prices can be controlled.
''The yuan is unlikely to be devalued this year and early next year,'' Joe Lo, senior economist at
Citibank in Hong Kong, told Reuters. ''A devaluation can be an option if exports continue
performing poorly and the economy is not improving after exhausting other measures.''
China's trade surplus in the first half of 1999 reached $8 billion, down from $22.5 billion a year
earlier. Exports in the first half fell 4.6 percent compared with the same period last year while
imports surged 16.6 percent. At the same time, foreign direct investment declined 9.2 percent to
$18.6 billion.
Government economists have said that if Beijing does decide to devalue its currency, it is likely
to orchestrate a gradual process in several steps, unlike the last time it devalued in 1994, by 33
percent in one step.
For China's leaders, long afraid of inflation and the potential social disruption it could cause,
deflation is a new phenomenon that few took seriously until recently. But it has continued for
much longer than anyone expected, and now threatens to seriously undercut Government
projections that economic growth will reach 7 percent this year, compared with 7.8 percent in
1998.
''China doesn't need a cheaper currency,'' wrote Gilbert Choy, head of China research at
Dresdner Kleinwort Benson Securities (Asia), in a recent report. ''Chinese exports continue to
gain market share in their major overseas markets. More important, the growth of exports is
roughly in sync with the recovery of China's neighbors.''

Mr. Choy argues that because a substantial percentage of China's exports involve processing of
imported materials, even a substantial devaluation is unlikely to strengthen exports by much.
''The real solution is to have the central bank, the People's Bank of China, print money,'' Mr.
Choy wrote. ''The best way to give the economy a boost is to inject a massive dosage of wealth
effect, changing the psychology of consumers to expect a rise in permanent income.''
Other economists recommend that Beijing continue to expand its issuing of treasury bonds to
finance the setting up of social safety net, including a nationwide social security system and a
national medical insurance plan.

Capitalists to Be Granted Official Status in

Communist China
By ELISABETH ROSENTHAL
Published: March 15, 1999

BEIJING, March 14 Sitting under stirring photographs of the young

Chairman Mao, Chen Jinfei relaxed recently in the plush 35th-floor offices of
his billion-dollar corporation and reflected on the love-hate relationship
between China's Communist Government and private businessmen like
himself, who have helped push the country's economy forward.

''Private entrepreneurs run counter to the ultimate aim of the party, which is
to eliminate the exploitation of man by man,'' he said, adding with a grin:

''But I think there's a tension here between ideology and reality in our
changing society. And I don't expect I'll be eliminated any time soon.''

On Monday, China's Parliament will tip its hat to the new entrepreneurs,
amending the Constitution to declare private business ''an important
component of the socialist market economy.'' Parliament will also amend the
Constitution to incorporate the rule of law.

To Western ears the official elevation of the private sector sounds like a
declaration of the obvious. But to China's fast-growing business class, the
change brings a new sense of legitimacy and protection in a country where
business owners are still likely to face significant political, economic and
social discrimination.

''Only now will we have any political and personal status,'' said Mr. Chen,
chairman of the Beijing Tong Chan Investment Group, who has lobbied for
the change.

At a practical level, business executives say the change can help end a vast
array of discriminatory practices that make it hard for them to buy land, for
example, or get loans. They hope too that it will at least indirectly safeguard

their property rights -- a looming fear in a country that nationalized all

business more than 40 years ago.

''I do think the official recognition will give us better opportunities and more
space to develop,'' said Zhang Lifan, whose company designs computer
networks. ''As a businessman and as an individual, I appreciate the
amendment.''

In fact, Mr. Zhang, son of a famous Shanghai businessman who was

demonized by Mao, is a living testament to how much things have changed.
His father, Zhang Naiqi, served as a Government minister in the early years
of the People's Republic but was later dismissed by Mao and lived in poverty
until his death 20 years later.

In 1968, at the outset of the Cultural Revolution, the family home was
ransacked and later confiscated by Red Guards. The father was tortured. ''I
had a very unhappy childhood, discriminated against by teachers and
students,'' Zhang Lifan now recalls, at his office's polished conference table
in an elegant turn-of-the-century building.

Of course, business executives have made vast inroads in the last 10 years.
They have even started moving into the fringes of official politics.

Mr. Chen, 36, is a member of China's People's Political Consultative

Congress, an advisory body, as well as a representative to Beijing's main
governing council. But in the whole country there are still only 64 private
businessmen at such high levels of government, Mr. Chen said.

A 1988 change in the Constitution upgraded the status of businessmen

somewhat. The 1954 Constitution said capitalists must be ''used, restricted
and taught,'' which was changed to ''guided, supervised and managed.''

But business executives are forever kept out of country's most exclusive
political club, the Communist Party, and lack the contacts that membership
confers. Party members who go into business are supposed to renounce
membership, and ''private entrepreneurs are fully aware that they should
not even apply,'' said Mr. Chen, whose company is involved in real estate,
building materials and restaurants, among other things.

While much admired by today's college students, those in private business

are still looked down on and despised by many Chinese. Said Mr. Zhang:
''Westerners say, 'God helps those who help themselves,' and work hard to
get rich. But many Chinese still have a more revolutionary idea and want to
kill rich people.''

But China's business owners today care less about status than the
impediments that a society laced with Communist ideology throws their
way.

Executives say they have a hard time getting loans from state-owned banks,
while public enterprises are generously financed. Private companies are
banned from many sectors, including real estate and telecommunications,
although entrepreneurs often gain access by going into partnership with
state companies.

The executives add that in practice, factory managers and local governments
often balk at buying goods or services from the private sector for fear that
they will be criticized for not supporting the state. And until last month,
private businesses were forbidden to export their products, required instead
to sell them to Government trading companies for export. China now allows
64 companies to export on their own.

''We have to work a lot harder than the state-owned enterprises to survive,''
said Mr. Zhang.

The new constitutional amendment does not specifically address any of

these practices, nor does it specifically protect private property -- a change

that many entrepreneurs hoped for. Still, many say that it lays a good
foundation for such change and that they now feel more secure doing their
capitalist work in a Communist country.

''A number of businessmen have acquired status as a resident of a foreign

country, just in case there's a rustle here,'' said Mr. Chen, whose company
has offices in Paris and New York. ''I haven't. I think I can have a good
relationship with the Government and can handle things here.''

But all this talk seems rarefied and theoretical to people like Zhou Dashan, a
more average Chinese businessman, who owns a small shop selling lamb,
snacks and sundries in an alley in west Beijing.

Mr. Zhou, a wrinkled man with a blue Mao cap and an fake Izod
windbreaker, had been in the trade since 1981, when he took early
retirement from a factory job he had had for 30 years.

He says he is glad for the change in the Constitution, of course. ''The change
is very good,'' he said. ''Why, when I first started we didn't dare speak out
about anything, since we were told to 'cut the capitalist tail.' ''

But like many small business owners, he has more immediate concerns:
taxes, too much competition on a street now lined with indistinguishable

stalls and a local crime wave that has forced him to sleep on his store's
chopping board to guard against thieves.

And he worries that the new Constitution will not change the behavior of
some neighborhood officials, who disparage local shopkeepers and insist on
taking food for free .

''Of course we support this amendment,'' he said. ''But however big the
leaders' hands, they can't reach every corner.''

China Points Finger at Culprit of the Week

By SETH FAISON
Published: January 13, 1999

SHANGHAI, Jan. 12 These days China's press is hauling out one big
fish after another, as each is caught in the net of a national campaign against
corruption and smuggling. The point, as with all political campaigns in this
country, is to show the virtuous determination of the authorities, without too
much concern for details like evidence or legal procedure.

The culprit featured over the weekend was Chu Shijian, who led the nation's
largest tobacco company for 17 years, operating an extensive
cigarette-smuggling operation and, according to the official version of events,
embezzling $3.5 million. A court in Yunnan Province, presumably with
guidance from Beijing, sentenced him to life in prison.

Last week the chosen offender was a deputy minister of public security, Li
Jizhou, who supervised antismuggling operations. Mr. Li was the
highest-ranking security official ever charged with corruption in Communist
China, and it seemed particularly galling that an antismuggling inquiry
should yield the man in charge of running antismuggling units.

But these two cases, as with dozens of other corruption cases that have come
to light in recent weeks, seem to be more about politics than about crime,
and more about who has or has lost connections than about legal evidence.

Corruption has become so extensive in China that people frequently tell poll
takers it is the gravest threat to the country. Smuggling has become a
particularly shocking variety of lawlessness, because even the Government
now admits that the main perpetrators are military and police officials.

Yet smuggling has been rampant for years, as China's fast-growing economy
has fed demand for imported goods facing extremely high import duties.
Official estimates indicate that $30 billion in goods -- cars, oil, computers,
mobile telephones and cigarettes, above all -- were smuggled into China in
1998. The true figure may be far higher.

Caught Between Eras: China's Factory Workers

By ERIK ECKHOLM
Published: November 18, 1999

BEIJING, Nov. 17 The middle-aged workers outside the aging Beijing

No. 2 textile factory said today that they already knew their days of
employment were numbered -- that they knew it even before China signed a
landmark agreement this week to open its doors wider to global competition.

Their biggest worry, they said, is not the impact of China's probable
admission to the World Trade Organization. They agree that it is essential
for China's future, and they know that it should eventually expand the
country's exports of textiles, like the cotton cloth their factory makes.

What worries them now, said the two workers, who stopped for a discreet
conversation, is how well the government will support them after they get
the inevitable notice from their factory, which sheds more workers every
month. Will they get a livable allowance? What if they need expensive
surgery? Will they have any help finding new jobs in a fast-changing
economy?

''I hope they won't just throw us out into the society,'' said one of the workers,
Mr. Wu. Now in his late 40's, he said he doubted that he could ever find
another job, because his health had been damaged by 28 years of loud noise
and cotton dust in the plant.

Mr. Wu and a fellow worker, Mr. Tang, in his early 50's, spoke candidly
about their fears -- and their surprisingly bitter feelings toward their factory
managers -- on condition that their full names be concealed.

Workers like these two toiled for a pittance for decades, with the lifetime
promise of a Communist state's ''iron rice bowl.'' Now, caught between two
economic eras, they feel betrayed.

Mr. Tang pulled his last pay slip from his pocket and pounded on a table, his
voice quivering. ''Look at this!'' he said. ''Eighty dollars a month, after 35
years of work!''

''We haven't had a pay raise in seven years, but during that time the wallets
of the managers have grown fatter and fatter,'' Mr. Tang said. ''In this
country the workers have the lowest status.''

Such fears and angers, shared by millions across the country, add up to one
of China's greatest challenges. And it will be even greater if China fulfills the
market-opening commitments it made on Monday to the United States in
return for American endorsement of its application to join the World Trade
Organization.

That challenge is the creation of a better safety net for the tens of millions of
workers who are being displaced in this wrenching transition.

Even more daunting than the problem of urban workers, and receiving far
less official attention, is the task of creating new jobs and lives for millions of
inefficient farmers who are expected to lose out to global trade and may join
the country's vast floating population of migrants who compete for
bottom-rung jobs in the cities.

''China's social security system is far from ready for the structural change in
employment that would be brought about by W.T.O. accession,'' concluded a
recent report by the China International Capital Corporation, an investment
bank in Beijing that is a joint venture of the Chinese government and
Morgan Stanley Dean Witter.

The country has only begun to create Western-style unemployment, welfare,

pension and health insurance systems -- all vital to smoothing the transition
from the old government-run economy to a modern market one.

''It's inevitable that older state enterprises and economic sectors here are
going to lose out,'' said Hu Angang, an economist at the Chinese Academy of
Sciences. ''I think it's crucial that government aid should not go to the losing
enterprises to prop them up.

''Instead, the aid should go directly to the laid-off workers. That's the key to
a successful transition.''

The government has been acutely aware of the problem in the last two years
as laid-off workers and retirees in dozens of cities have held protests when
promised subsistence allowances were not paid.

In the past, state enterprises had lifelong obligations to their workers,

including living allowances and medical care for those laid off. But in the
1990's many ailing or moribund enterprises have simply had no money to
give out.

To stave off spreading unrest, last year the government mandated the
creation of thousands of ''re-employment centers'' in every city and required
local governments to share the costs of living stipends with laid-off workers'
former companies.

Workers enrolled at the centers are supposed to get training and job
referrals, and in the meantime are supposed to receive monthly subsistence
payments of about $20 to $35, depending on the location.

But the coverage is spotty, and many failing companies still pay little or
nothing to their former employees, leaving them to fend for themselves. And
under current policy, the re-employment centers are supposed to be phased
out at the end of 2001.

The No. 2 textile mill on the east side of Beijing, where Mr. Wu and Mr. Tang
work, employed about 7,000 workers in the early 1990's. Since then it has

laid off 3,000, with more sent packing every month. The nearby No. 3 textile
factory, which employed 6,000, shut down entirely in June.

Workers from those plants have no re-employment center, the men said, and
have had to search for new jobs on their own. They are receiving monthly
stipends of $28. A few former co-workers have found jobs mopping floors at
new shopping centers, the men said, while some sell items in street markets.

For laid-off workers and for those who, like Mr. Wu and Mr. Tang, still have
jobs because of their seniority, one of the greatest worries is health care.

Even when they use the company clinic and hospital, workers are expected
to pay for many services and drugs, to be reimbursed later for most of the
cost. But because their company is so short of money, the two men said,
workers are kept waiting a year before they are repaid.

Class divisions in the company's medical system are another source of

bitterness. ''Workers have to go to one clinic while the managers go to
another one, on the third floor of the hospital,'' Mr. Tang said. ''The workers
can't even get herbal medicines for a common cold, but the managers get
whatever they need.

''The managers get a free health checkup every two years, but the workers
don't get any checkups.''

The two men have heard that the textile industry should boom some time
after China enters the World Trade Organization, since the United States
would be required over five years to end the quotas that limit American
imports from China.

But they know that this brighter future may be beyond their own grasp.

''Only when a textile factory can get better machinery, and better-educated
and more skilled workers, can it compete,'' Mr. Wu said. ''So the immediate
effect of converging with the world economy is that even more workers will
be laid off.''

Still, and perhaps remarkably, both men seemed to offer sincere and
unqualified support for Chinese membership in the trade group.

''Without more global competition, China will be hopeless,'' said Mr. Tang,
who knows at first hand about bad management and shabby equipment.
''China can get rich only by competing with capitalist societies.

''We know that this factory will no longer exist in the next few years. We all
hope it will be transformed into a new factory in a capitalist system.''

Photo: Chinese textile factories, like this one in Beijing, are slashing their
work forces to compete globally. Though they may approve of joining the
World Trade Organization, workers fear that their safety net is vanishing.
(Agence France-Presse)

INTERNATIONAL BUSINESS; Goldman

Offering Underlines Problems of Doing
Business in China
By MARK LANDLER
Published: February 4, 1999

HONG KONG, Feb. 3 With a slowing economy, debt-ridden corporate

sector and recurrent rumors of a currency devaluation, China has lost much
of its sparkle for investors. That is why rivals of Goldman, Sachs & Company
here are watching with keen interest -- and no little relish -- as the
investment firm struggles to sell shares in a Chinese power company.

If successful, the initial public offering would be the most significant listing
of a Chinese company for Goldman since it led the highly successful offering
of China Telecom in 1997. But rather than focus on the superlatives, analysts
here are dwelling on the uncertainties, many of which have little to do with
the company, Shandong International Power Development Ltd.

Shares of mainland Chinese companies have declined in recent weeks after

the bankruptcy of China's second-largest investment trust company,
Guangdong International Trust and Investment. Today the Chinese
Government announced that it would shut down five other investment trusts.
Experts say this is the first act of an epic change in China's corporate sector.

''It's certainly a challenging environment for an offering,'' said John Pinkel,

head of China research at Merrill Lynch & Company.

That may be a diplomatic understatement. Analysts and fund managers said

today that Goldman, Sachs was getting a chilly reception for the offering,
which seeks to raise up to $282 million for Shandong, one of the largest
power producers in the northeastern province of Shandong.

Goldman could always try to support the offering by buying the shares itself.
But several analysts said it was more likely that Goldman would lower the

price of the shares. And some even raised the prospect that the offering
would be shelved if it did not draw enough subscribers.

Two other Chinese companies, Heilongjiang Agriculture and Zhujiang Steel

Pipe Holdings, canceled planned stock offerings late last month after they
could not drum up interest among investors.

A spokesman for Goldman Sachs Asia, Peter Rose, declined to comment on

the Shandong stock offering, which is scheduled to be priced on Friday and
begin trading here on Tuesday.

Shandong International is not Goldman's only difficult foray into China. The
firm is directing the overhaul of a troubled state company, Guangdong
Enterprises Holdings, which alarmed its foreign creditors last month when it
disclosed that it had higher-than-expected debts of $2.9 billion.

Since then, Guangdong Enterprises has been buffeted by reports that its
Hong Kong subsidiary improperly used money to speculate in the stock
market. Hong Kong's anticorruption authority has arrested a former
executive of the subsidiary, Guangnan Holdings Ltd., on fraud charges.

Guangdong Enterprises declined to comment except to say that it would

conduct its own investigation of the allegations.

Goldman, meanwhile, has told creditors that it will report on the company's
finances at the end of month. But it has otherwise been stingy with
information, said one person who represents the creditors. That has added
to fears that the company's financial troubles may go even deeper.

In the case of Shandong, Goldman must surmount more than fears about
China. The Government has announced plans to deregulate the power
industry, using Shandong Province as a sort of guinea pig. While Shandong
has some of the lowest operating costs of any Chinese power company,
deregulation could reduce tariffs and chip away the company's profits.

''If you can tell me exactly what the regulatory environment is going to be in
China in three years, I would buy this stock,'' said Russell Young, a power
analyst at Nomura International here. ''But if you're walking into a
deregulatory environment, you shouldn't rush to embrace it.''

Mr. Young is also troubled by two special dividends, valued at $94 million,
which the company declared last December. The dividends are to be paid out
this year, mostly to its majority shareholder, Shandong Electric Power
Group. Its offering document said the company would use ''internal
resources'' to pay the dividends. But some analysts fear Shandong is short of
money.

In a note to its clients, G. K. Goh Securities said, ''We believe the company
could be quite desperate for cash by coming to the market at this particular
moment, given the poor sentiment regarding mainland companies.''

The Shandong offering has some strong selling points -- not least that a
major American utility, the Southern Company in Atlanta, has agreed to buy
40 percent of the shares of the offering, which would leave it with 10 percent
of the company's capital. Rumors circulated today that a large European
utility company might also take a stake in Shandong.

Not everybody thinks Goldman is doomed to failure.

''I really don't think investors have deserted China as a country,'' said Bill
Kaye, the senior managing director of the Pacific Group, an asset
management fund in Hong Kong. Noting that he had not read the offering
document for Shandong, Mr. Kaye said, ''In some respects, there is a price
for everything.''

China Grimly Pledges to Push On With

Reforms
By ELISABETH ROSENTHAL
Published: March 5, 1999

BEIJING, March 4 In a businesslike speech short on party rhetoric and

long on macroeconomics, Prime Minister Zhu Rongji addressed the opening
session of Parliament, saying that ''despite a grim economic picture,'' China
would push on with economic and social reforms and continue ''opening our
country wider to the outside world.''

It was a sobering speech that enumerated China's many current problems -from unemployment to official corruption to a flagging export market. But
he said that China would continue its recent policy of massive deficit
spending to bolster the economy, and he expressed confidence that doing so
would insulate China from the worst of Asia's economic woes.

Departing from the practice of declaring a precise yearly growth target, Mr.
Zhu predicted that China would have an economic growth of ''around 7
percent'' in 1999, down from the official 7.8 percent of 1998.

''To protect ourselves against the effects of the Asian financial crisis, we
adopted a policy of increasing investment and boosting domestic demand at
the beginning of last year,'' he told the delegates to the National People's

Congress. ''However, the crisis became broader and deeper than we had
anticipated, exerting more of an impact on China than we had expected.''

Last year, the Government offered more than $12 billion in loans to
underwrite investment in infrastructure. Mr. Zhu said the 1999 budget
deficit would be about $18 billion, compared with $12 billion in 1998.

Mr. Zhu's speech to the Chinese Parliament, which meets for two weeks each
spring to approve proposals presented by the party, was essentially the
Prime Minister's public progress report on the ambitious reforms he
proposed a year ago -- before the full impact of the Asian crisis and this
year's devastating floods in China hit.

The Parliament will also consider several constitutional amendments,

including one that elevates the status of private business.

Last year, Mr. Zhu's proposals included downsizing China's bloated

Government by 400,000 employees, pruning its 300,000 inefficient
state-owned industries through sell-offs and mergers, and doing away with
state-supplied housing in cities by July 1998.

But even then, some of the reforms were regarded as almost impossibly
ambitious. And while Mr. Zhu noted substantial progress in some areas, like

bank reform and the formation of a social security system, he acknowledged

setbacks.

He alluded to the fact that the sell-offs of small state-owned industries have
been mired in corruption, saying: ''We must resolutely stop erroneous
practices such as selling them off for a nominal price while in fact giving
them away.'' He did not mention that, at a time of widespread layoffs, his
housing reforms have been at least temporarily shelved.

In an unusual statement at such an important political event, Mr. Zhu

criticized local officials for levying arbitrary taxes and for law enforcement
abuses, saying they should not use ''dictatorial means against the people.''

Although there were scattered appeals to ''Deng Xiaoping Theory,'' overall

the speech focused less on class struggle than on puritanical virtues. ''We
should advocate hard work and plain living and building our country
through thrift,'' he said.

INTERNATIONAL BUSINESS; Without Detail,

China Curbs Foreign Transfers of Its Currency
By SETH FAISON
Published: June 4, 1999

SHANGHAI, June 3 Chinese authorities announced today that they

were tightening control over international transfers of the yuan, the nation's
currency.

Although the news rekindled fear in international markets that a

long-discussed devaluation of the yuan was finally coming, the central bank,
the People's Bank of China, quickly denied any such plans.

Prime Minister Zhu Rongji has repeatedly promised not to devalue the yuan,
also known as the renminbi, any time this year. Currency traders around the
world have been incorrectly predicting a devaluation of the yuan for nearly
two years, but economists who closely follow China say they see no such
likelihood in the near future.

Fears of a yuan devaluation are partly rooted in the role that currency
movements played in the Asian financial crisis. In July 1997, Thailand
devalued its currency, the baht, which helped set off a wave of instability
that quickly spread to the economies of Thailand, Malaysia, Indonesia and
South Korea, and later to Russia and some of Latin America. Amid all that,
rumors of an impending yuan devaluation were bandied about from time to
time.

A currency devaluation could theoretically help China's economy by making

its exports cheaper and more competitive. But a devaluation could also could
set off another wave of financial instability in Asia, just as signs of recovery
have started appearing in some countries whose economies were devastated.

The new rules, effective next Thursday, suspend all yuan remittances into
China from outside. They also abolish all yuan accounts in banks outside
mainland China.

Central bank officials said the new restrictions were intended to cut down on
what they called illegal transactions, but they did not elaborate on the nature
or extent of the problem.

Apparently intended to curb the transfer of foreign currency out of the

country, the move is expected to reduce demand for the yuan in markets
such as Hong Kong, where limited trading of the yuan has been growing in
recent years.

International bankers familiar with China's banking system described the

new rules as one of several steps Beijing has been taking since last year to
improve control over its currency flows. Many Chinese companies had been
finding ways to move foreign-currency holdings outside China and beyond
official supervision.

New measures are making it harder for Chinese companies to transfer cash
in and out of the country. All foreign-currency transactions larger than
$10,000, for instance, must now be approved by the Government.

The yuan is not yet a freely tradable currency. Although China recently
began allowing it to be exchanged for trade-related purposes, outdated rules
technically ban anyone from taking yuan out of the country.

In practice, however, yuan can be exchanged in Hong Kong, Macao and

Thailand at banks and at international companies that do business in China.

It is unclear how the new rules will affect such trading. But more than 3,000
financial institutions in Hong Kong have participated in yuan transactions.

It has become apparent in the last year that Chinese companies eager to
move foreign currency out of the country were finding ways to buy yuan in
Hong Kong and then remit them back into China in exchange for American
dollars and other currencies. Chinese bank regulators estimate that
companies have found ways to move more than $100 billion in foreign
currency in and out of China through improper channels in the last five
years.

The new rules, issued by the State Administration of Foreign Exchange, were
not fully made public.

School a Rare Luxury for Rural Chinese Girls

By ELISABETH ROSENTHAL
Published: November 1, 1999

LIJIAGOU, China At first glance, Hong Mei, a willowy 12-year-old in a

long floral skirt and hoop earrings, seems a beacon of color and
sophistication in this poor mountain village where the streets, the mud
homes, even the crops are the same drab dusty brown.

But her story is depressingly typical of poor Chinese girls: Although nine
years of education is compulsory in China, Hong Mei has never been to
school. ''Of course I'd like to go, but it's too expensive and my mother needs
my help at home,'' she quietly explained. Her three younger brothers are all
enrolled.

School fees in Lijiagou have risen from $2.50 to $7.50 per five-month
semester in the last five years -- a huge sum in a region where per capita
income is $50 a year and the payback for literacy seems far away. And the
Hui Muslims who live here in Ningxia Hui Autonomous Region, like families
in much of poor rural China, have never seen much point in educating
daughters anyway.

All told, only 20 percent of girls -- and 40 percent of boys -- are now in
school in Lijiagou.

In many parts of poor rural China, economics are keeping an increasing

number of children out of the classroom. Required fees at state schools have
grown exponentially since the central government largely stopped
subsidizing primary education a decade ago. Today education is increasingly
a luxury item in China's poorest villages, purchased only when finances
allow -- and far more often for boys than for girls.

An aggressive government campaign to achieve 100 percent enrollment by

the year 2000 has pushed attendance up in more prosperous regions,
experts say. But in a number of poor rural areas, they add, only a fraction of
children are in school. The government has exhorted local officials to work
harder on education and has solicited charitable donations to subsidize
schooling through Project Hope, run by the China Youth Development
Foundation, and the Spring Bud Project for girls, run by the Women's
Federation. Each has had success in the towns where it operates.

Hai Minglian, a shy 10-year-old Hui girl with tattered cloth shoes and a red
thread holding back long black hair, is now in a second-grade class, one of
two organized by the Spring Bud Project, in the village of Kaicheng, also in
Ningxia.

Every day after school, she packs up her pencil stub and the razor blade she
uses as a sharpener and trudges back to the cave her family calls home. She
feeds the ox and prepares a meal for her parents when they return from the
fields. ''Without Spring Bud,'' she said, ''there is no way I could go to school.''

But the drop-out problem generally dwarfs the resources available to combat
it. There are only 48 Spring Bud classes in Guyuan County, which includes
Kaicheng, spread among 127 poor towns. Even Project Hope, the biggest

educational assistance program in the country, sponsors only one-third of

eligible children in the poor counties it assists.

After an investigation of five provinces and cities last month, Peng Peiyun,
deputy head of the National People's Congress, estimated that only two
percent of counties officially designated as impoverished had met state
standards for education as of last year.

And most experts say it is hard to know the true magnitude of the problem,
since statistics collected by the local governments are notoriously unreliable,
tweaked to meet government goals.

Recently, China's most popular investigative television show, Focus, profiled

a middle school in rural Anhui Province where school officials forced 200
children who had dropped out to masquerade as students for the annual
inspection.

''The government campaign for universal enrollment has had two results,''
said Yuan Fang, a researcher at the National Research Center for the
Development of Science and Technology, who has studied the impact of
Project Hope. ''The first is that the situation in the country as a whole is
improving in the last few years. The second is that a lot of the statistics we

get from local governments are fake. In some counties we visited, leaders
just said that meeting the goal was impossible.''

In fact, primary education is based on a problematic equation, financed

almost exclusively by individual villages and towns, which, in rural areas,
often lack money.

In a report on education to be published soon, a Communist Youth League

official in Guyuan laid out his county's plight: Total revenue is less than $2
million a year in a county with half a million people and 408 schools. Just to
pay the county's 5,000 teachers requires more than $3 million annually -and that does not begin to address costs like classroom supplies and building
upkeep.

And so the schools, which are not allowed to charge tuition, instead assess
an ever-growing list of ''miscellaneous fees.'' In one typical school studied by
Mr. Yuan, these fees included a book fee, a materials fee, a
substitute-teaching fee, an electricity fee, a coal fee, even a fee to raise
matching funds for a World Bank loan.

The fees often total $20 to $35 a year, a huge amount for subsistence
farmers. And in remote rural regions, where families generally have two or
more children, parents must choose each year who, if anyone, goes to school.
Kong Lanying said she believes in education but simply cannot always afford
to enroll her 14-year-old daughter, who -- because of her erratic attendance
-- is now in the fourth grade. ''Whether she goes depends on whether we
have the money at the time,'' she said, standing in front of the mud hut in
Lijiagou that is her home, a tattered quilt serving as the front door.
The vagaries of family finances mean that many students have stuttering
educations and a single elementary school class can contain children aged
from 7 to 14.
In Guyuan's impoverished villages, less than 60 percent of boys and 50
percent of girls enter school, according to the report. Even according to the
latest central government statistics, 25 percent of students in Ningxia drop
out after one year and less than 50 percent finish elementary school,
completing sixth grade.
''In the conflict between subsistence and education, subsistence is the
priority and compulsory education is beyond talking about -- the goal of
realizing compulsory education by the year 2000 is for us a beautiful
dream,'' said the official with Guyuan's Communist Youth League.

Even without good statistics, there is evidence that the dropout rate is
climbing.
This month, in a front-page essay in the national newspaper Farmer's Daily,
an official from a poor prefecture in Shandong Province painted a grim
picture. He said many townships were spending more than half their
revenue to pay teachers, who were often paid late or not at all and have to
quit or take second jobs that interfere with teaching. School fees ''exceeded
the capacity of a proportion of families,'' said the official, Li Chang.
''In parts of the countryside, the occurrence of students resisting going to
school or dropping out has become increasingly serious,'' he said.
Likewise, a township Communist Party secretary in western Qinghai
Province, a sparsely populated area of nomadic herders, recently told the
Economic Information Daily that ''mobilizing children to go to school has
become the biggest headache for our township and village cadres.'' Herders,
the official said, are unwilling to send their children; the five secondary
schools in the region have seen attendance drop from more than 6,000
earlier in the decade to 1,170 last year.
The rising cost of education is the biggest precipitant, researchers say.
''Children can't go to school because their families can't pay,'' said Mr. Yuan.

Recent changes in China's labor market also mean poor farmers see fewer
benefits to schooling.
A decade ago, education was a reliable route for smart children to escape the
countryside -- springing from local schools, to the country's free regional
universities and on to a secure government job.
But today, China's universities have started to charge significant tuition,
beyond the reach of the very poor. Also, with China's state sector shrinking
and the economy slumping, more college graduates find themselves
unemployed.
''In the past, university graduates would all get jobs,'' said Shi Jinghuan, a
researcher at Beijing Normal University, China's most prestigious teachers'
college. ''But now it's much harder. And these rural kids don't have
connections. So they don't get jobs, and then come back to work in the fields
-- which they're not good at anyway. So unfortunately the parents say, why
bother?''
Mei-Duo-Er-Cai, a herder and local official in Qinghai, told the Economic
Information Daily that in 1997, 53 recent university graduates returned
home to her rural area, jobless. Because of China's strict system of residency
permits, graduates who do not find employment must return to their
registered homes.

Young girls bear the brunt of the hardship. The sidewalks of Beijing's clubby
Sanlitun district are dotted with school-age girls from poorer provinces,
selling flowers -- often to support a brother's tuition. Female dropout rates
are particularly high in the Muslim minority areas, like the poor villages of
southern Ningxia, where workers in the Spring Bud program fight local
biases.
In somewhat more prosperous regions, children drop out at slightly older
ages, but the problem still exists. In one study in Chongqing County, Sichuan
Province, more than 30 percent of children ages 12 to 17 in poor areas were
dropouts, and three-quarters of the dropouts were girls.
The preponderance of female dropouts reflects centuries-old biases, but also
practical considerations: In rural China, married daughters move away to
their husband's community, while married sons remain at home to support
their parents.
Shan Xinlian, a Hui woman in Nanjiao, Ningxia, has two sons, ages 7 and 12,
in elementary school and an 8-year-old daughter in a subsidized second
grade class for girls. Ms. Shan never went to school -- and freely admits that
her daughter probably would not either, if she had to pay.
''In our village, girls are not as important,'' she said. ''School is so expensive.
And what's the point of paying all that money, since she'll belong to another
family once she gets married?''

Photos: Charitable programs enable some girls, like these second graders in
the village of Kaicheng, to attend classes. (Elisabeth Rosenthal/The New
York Times)(pg. A1); Hai Minglian, a 10-year-old who attends a subsidized
second-grade class under a program organized by the Spring Bud Project,
feeds the family ox after school in the village of Kaicheng, in Ningxia
Province. (Elisabeth Rosenthal/The New York Times)(pg. A8) Map of China
highlighting Lijiagou: In Lijiagou, 20 percent of girls and 40 percent of boys
attend school. (pg. A8)

INTERNATIONAL BUSINESS; China Manages

to Keep Its Economy Humming
By SETH FAISON
Published: April 3, 1999

SHANGHAI Construction teams still work around the clock in China's

largest city, one sign among many that the nation's overall economy is
defying predictions by outsiders who expected it to sputter this year.

In a telling shift, however, construction workers are putting up fewer of the

office and apartment buildings that had sprouted like weeds in the boom

years of the mid-1990's. Instead, they are working on municipal projects like
an elevated highway, a new subway line and a new airport, part of China's
enormous spending program aimed at preventing the economy from
weakening too seriously.

Worried about slowing export growth, falling foreign investment and

declining domestic demand, Beijing spent nearly $200 billion on public
construction projects last year, and plans to do the same this year.
Government spending may be all that is keeping construction workers from
joining China's growing ranks of unemployed, but it indeed appears to be
contributing to a major portion of China's economic growth.

''Right now, I don't see a slowdown,'' said Huang Wenzhong, vice president
of the Shanghai Construction Group, the city's largest builder, which says it
earned $2.5 billion in 1998 and expects to earn about the same this year.
''We're still extremely busy.''

So far, China has escaped the economic crisis that has gripped much of Asia.
China's growth rate reached 7.8 percent in 1998 and is expected to reach at
least 7 percent this year. The reasons for that growth go beyond the
Government's ambitious spending program.

China's capital markets are highly restricted and not vulnerable to the
financial swirl that tugged currencies downward in other countries. The
steady exchange rate of China's currency, the yuan, has helped insulate the
economy from outside jolts.

Currency traders all over the world regularly recycle rumors that China may
devalue its currency. That would help the Chinese increase their exports by
making them cheaper abroad, but could set off a round of potentially
destabilizing currency devaluations in other struggling countries that are
trying to increase their exports.

There is little sign, however, that China's currency will be devalued anytime
soon.

Wu Xiaoling, governor of the Shanghai branch of the People's Bank of China,

said there was no serious pressure for a devaluation, reiterating a pledge by
Prime Minister Zhu Rongji that no devaluation would come this year.

Ms. Wu also asserted that a large number of bad loans troubling China's
state-run banks would be offset by the growing economy.

''We will be able to solve all problems caused by nonperforming loans,'' she
said in an interview in late March.

The official optimism cannot hide challenges. Among them is China's

wrenching transition from a planned to a market-oriented economy. Chinese
companies must contend with price controls, currency-conversion
restrictions and contradictory instructions from the Communist Party about
how to privatize, a term that still seems to scare officials here.

As speed gathers in the worldwide trend toward electronically connected

markets that value efficiency, flexibility and speed, the insistence by Chinese
officials that they will take a slow approach to change raises the risk that
China's integration into the world economy will endure many setbacks. So
far, that is a risk officials are willing to take.

''We are not going to open our capital markets anytime soon,'' said Huang
Qifan, director of the Shanghai Economic Commission.

But Mr. Huang expressed confidence that China would be able to grow
steadily with limited access to sources of international capital.

''China has an enormous domestic market,'' he said. ''I think China can grow
at 5 percent or more for the next 50 years.''

Mr. Huang, the construction magnate, who is no relation to Mr. Huang, the
official, also predicted that China would maintain a firm growth rate in the
immediate future.

''I think the economy will be stable,'' he said. ''Foreigners should not worry
about that. If we're satisfied, they should not worry. Living standards are
rising every year.

''I don't think living in Shanghai now is so much worse than in Hong Kong or
New York. You can buy whatever you want in the stores. I see it in my family;
we used to have 19-inch television sets, now we have 34-inch sets. My house
has three. I don't see any causes of instability. In a few years, everyone will
be buying cars.''

Photo: Shanghai workers push ahead with the Yanan Road Elevated
Expressway, which will link the city center to the airport. Fewer office
buildings are going up, but China is pouring money into public works. (Fritz
Hoffmann for The New York Times)

China Economy in 2004

In China, Troubling Signs Of an Overheating
Economy
By KEITH BRADSHERAPRIL 14, 2004

More worrisome signs of inflationary pressure emerged in China on Tuesday,

as Beijing announced that bank lending climbed briskly in March and the
central bank failed to sell all the treasury bills offered at current interest
rates.

It was the fourth consecutive week that the People's Bank of China was
unable to sell all its bills, indicating that investors expect inflation or interest
rates -- or both -- to rise markedly.

On Tuesday, Zhou Xiaochuan, the governor of China's central bank, gave

one of the grimmest assessments yet by a Chinese official of the risks that
the economy might overheat.

''There are problems in economic activity, with investment demand

expanding too fast, money and credit growing too quickly, and inflationary

pressures rising,'' he said in a statement published in The Financial News,

the bank's newspaper.

China's inflation is important to the United States and Europe because it

could start to affect prices in the United States, especially as China bids up
the price of oil and other commodities. And if the boom here is followed by a
bust, a result would very likely be an even greater wave of exports as China's
consumers lose their buying power.

Private economists differ on the likelihood that China will be able to brake
its economy gently to a more sustainable pace. The question is whether
China can avoid a recession that would cause a wave of corporate failures,
overdue loans at banks and perhaps social unrest.

Some economists are quite worried.

''Going around China, it looks like a bubble to me,'' said John Makin, a
longtime monetary policy expert at the American Enterprise Institute in
Washington who just returned from a trip to six Chinese cities at the
invitation of the Communist Party's elite Central Party School.

The biggest monetary policy challenge facing China is the flood of foreign
cash, both foreign direct investment and speculation, that is washing in. It is

being converted into yuan, pumping up the money supply and allowing
China's banks to lend more and more.

The official New China News Agency said on Tuesday that new figures from
the Commerce Ministry showed that actual foreign investments rose 7.5
percent in March compared with a year earlier. Contracts for future foreign
investments, an indicator of how much money may be entering China in the
coming months, increased by 49.2 percent.

Interest rates have already jumped more than half a percentage point just
this week for seven-day interbank loans, climbing to 2.48 percent late
Monday, and even higher on Tuesday. Rates have climbed even faster for
some bonds.

The central bank cut the volume of bills that it tried to sell this week by
three-fifths compared with last week. But the bank was able to sell less than
half of them as investors rejected the low interest rates that the bills carry at
a time when unregulated rates are rising quickly.

The People's Bank of China insisted on paying the same low interest rates as
last week -- 2.14 percent for the three-month bills and 2.82 percent for

one-year notes -- and refused to entertain low-ball bids that would allow
interest rates for these bills to rise.

Liang Hong, a Goldman Sachs economist here, said she still believed that
China could bring its swift economic expansion under control. But monetary
officials have not done enough yet, she said: China needs to let its currency
appreciate against the dollar and then raise interest rates.

''They are behind the curve,'' Ms. Liang said. ''We would like to see them
raise interest rates, but we would like to see them move on the currency
first.''

Ms. Liang pointed out that the central bank sold only $1 billion worth of
treasury bills this week, but had to pay off almost $2 billion worth of bills
coming due. So the net effect of the central bank's actions was to expand the
money supply by nearly another $1 billion, she said.

Currency appreciation and higher interest rates are the traditional Western
remedies for an overheated economy. Allowing the currency to appreciate
cools exports by making them less competitive in foreign markets. Higher
interest rates force companies and consumers to spend more money

servicing their debts (and may bankrupt some), leaving less money for
investment and consumption.

But there is no consensus among economists inside China or out about

whether these remedies will work in China's peculiar combination of
bare-knuckle capitalism in many industries and economic planning in others.
Currency appreciation, for example, might prompt speculators to put even
more money into China as a bet on further appreciation.

To make matters worse, China's banks are widely described as corrupt and
vulnerable to political pressures to lend money to well-connected borrowers
who are unlikely to repay their debts. Borrowers who do not expect to have
to repay loans, or who have access to more loans regardless of their
creditworthiness, may go on borrowing and spending even if interest rates
increase.

Credit agencies estimate that banks in China are unable to collect timely
payments of interest and principal on more than 40 percent of their loans.
Chinese officials are wary lest the loans are not repaid, which could further
undermine the stability of the banks.

The Financial News said on Tuesday that the broad M2 measure of money
supply was 19.2 percent higher than a year earlier. With banks awash with
yuan from the large conversions of foreign exchange into local currency,
total loans were up 20.7 percent from a year ago.

''The excessive size of M2 shows financing of China's economic development

has relied too much on the banking system, and the concentration of risk is
too high,'' Mr. Zhou warned in his statement on Tuesday.

The growth in money supply and domestic credit continued the breakneck
expansion these economic indicators showed in the winter, although the
money supply is rising somewhat less briskly that it was last summer, when
the People's Bank of China began to try to slow both down. The March
figures are especially important because Chinese New Year holidays
distorted the January and February data.

Stocks in China have been less affected than bonds by inflation and interest
rate worries. The Shanghai composite index dropped half a percent on
Tuesday, after falling 0.3 percent on Monday, while the Shenzhen composite
index lost 0.6 percent on Tuesday after rising 0.1 percent on Monday.

China's Economy Continues to Race Ahead

By KEITH BRADSHERMAY 14, 2004

China's economy continued to barrel ahead in April despite a series of

measures by Beijing to slow growth, a raft of statistics showed on Thursday.

Industrial production, bank lending, foreign investment, imports and the

money supply all roughly maintained in April the breathless pace they had
set in March, three government agencies announced. The only appreciable
slowing came in the growth rate for exports, which caused the trade deficit
to widen.

Beijing has been trying to slow investment in apartment buildings, factories

and other fixed assets, which rose 43 percent in the first quarter. Officials
have expressed concern that the construction-led boom may kindle inflation
in the short run, as buyers bid up raw material prices, and result later in a
glut of goods that could cause deflation accompanied by large-scale loan
defaults, hurting an already weak banking system.

The robust performance in April was partly because Chinese leaders had
taken few meaningful actions before the month began. But the strong growth
in April also underlines the difficulty of slowing the economy in China,
where an unusual combination of capitalism and economic planning means
that policy makers are limited to fairly blunt tools, said Li Kui-wai, who
teaches economics at the City University of Hong Kong.

''In China, it's difficult to slow down the economy -- you have to stop it,'' he
said.

Chinese leaders began issuing fairly strong warnings in March about

excessive growth, especially encouraging banks to slow their rate of new
loans. But most of the policy-tightening measures have had little time to take
effect, economists said, adding that the recent moves might yet put a brake
on the economic expansion.

In two heavily publicized actions in late March and early April, the People's
Bank of China, the country's central bank, raised reserve requirements by a
full percentage point for financially weak banks and by half a percentage
point for stronger banks, including the so-called Big Four national banks.
But the higher requirements, which forced banks to set aside money that

otherwise would be available for lending, went into force only on April 25
and are unlikely to have had much effect.

But another measure should have had some effect: a warning to banks by the
China Bank Regulatory Commission on April 27, ordering them to limit their
commitments to new loans for the next four days before weeklong May Day
holidays began.

Despite that order, the volume of bank loans in April was up 20.4 percent
from a year earlier, little changed from a year-over-year increase of 20.7
percent in March. The money supply was up 19.1 percent in April, the same
as in March.

Chinese officials said early this year that they wanted domestic credit and
the money supply each to increase no more than 17 percent this year.
Michael Pettis, an associate professor of finance at Tsinghua University in
Beijing and a former investment banker, pointed out that the Chinese have
not met their goal for either indicator in any month this year even though
the goals were set very high.

''Even if we were able to hit it, I would argue it is excessive growth,'' Mr.
Pettis said.

Beijing has started taking tougher measures in the last two weeks, ordering
sharp restrictions on bank lending to overheated industries like steel and
cement, and even disciplining and denouncing in the national media a group
of Communist Party members involved in the construction of an especially
costly steel plant in Jiangsu Province.

Industrial production rose 19.1 percent in April from a year earlier,

compared with 19.4 percent in March. Foreign direct investment actually
accelerated, climbing 10.1 percent for the first four months of the year
compared with the period last year. Foreign investment had been up only 7.5
percent for the first three months of the year; China reports foreign
investment figures on a year-to-date basis.

Contracts for future foreign direct investments soared 54 percent for the first
four months of this year, but that was compared with a weak pace of contract
signings a year ago. An outbreak of severe acute respiratory syndrome,
especially in Hong Kong, discouraged many foreigners from visiting China in
late March and throughout April.

Imports jumped 43 percent in April compared with a year earlier while

exports climbed 32 percent. The faster growth of imports produced a trade
deficit of $2.3 billion.

While prices have slipped in recent days for many raw materials, except oil,
China was paying dearly for these imports through most of April. At the
same time, prices were little changed for the mostly manufactured goods
that China exports.

The People's Bank of China reported on Wednesday that its index of

corporate goods prices, which tries to measure price increases for everything
that companies buy from one another, climbed 9.3 percent in April
compared with a year earlier. The year-over-year increase had been 8.3
percent in March.

A National Statistics Bureau official said that the agency would release the
April consumer price index on Friday. Inflation at the consumer level was
running at an annual pace of 3 percent in March, according to official figures
that have prompted some skepticism among independent economists.

China Says Influx of Capital Hurts Efforts to

Cool Economy
By BLOOMBERG NEWSSEPT. 3, 2004

BEIJING, Sept. 2 - China's central bank governor, Zhou Xiaochuan, said the
government's efforts to slow the economy are at a critical stage, with
monetary policy becoming harder to put in place because of rising inflows of
foreign capital.

"The amount of foreign currency converted to yuan continues to grow at a

fast pace and the central bank is still putting a relatively high volume of base
money into circulation," Mr. Zhou has said in a speech made earlier that was
posted on the People's Bank of China's Web site.

The central bank has to print yuan to exchange foreign money entering the
country in order to maintain China's currency peg against the dollar. The
process raises the money supply and crimps the government's efforts to cool
loan growth. China used 536 billion yuan ($65 billion) to soak up foreign
exchange in the first half, the central bank said in a report last month. The
yuan has been pegged at 8.277 to the dollar since 1995.

China's economy grew 9.6 percent in the second quarter, slowing from 9.8
percent in the first quarter, after the government ordered banks to restrict
lending to the steel, cement and real estate industries, along with others it
deems to be overheated.

Reflecting China's success in calming its overheated economy, the growth in

the country's measures of money supply and new lending have fallen to a
"relatively rational level," Mr. Zhou said in the speech, made during a trip to
the northern city of Tianjin. Still, any relaxation may cause investment
growth to rebound, he said.

Measurement of money supply in China is designated as M1 or M2, with M1

used to describe the narrowest measurement of money supply in its most
liquid form, like cash. Less liquid investments, like certificates of deposit, fall
into the M2 category.

M2, China's broadest measure of money supply, grew 15.3 percent from a
year earlier in July, the smallest gain in two years and the second month that
growth stayed within the central bank's 17 percent target. The bank is likely
to release August money supply data around Sept. 10.

China's investment in roads, factories and other fixed assets rose 31 percent
in the first seven months, the same pace as in the first half. Inflation reached
a seven-year high of 5.3 percent in July.

Mr. Zhou's comments are the latest in a series by senior leaders suggesting
the tightening of credit is unlikely to be eased yet. Prime Minister Wen
Jiabao said the cooling measures are not fully in effect yet and more needs to
be done to rein in investment, a state broadcaster reported in early August.

Mr. Zhou's speech did not mention interest rates. The central bank has held
off tightening borrowing costs while it studies the effect of the lending curbs.
China's one-year lending rate, 5.31 percent, has not been raised since July
1995.

China Sets Its First Fuel-Economy Rules

ByKEITH BRADSHERSEPT. 23, 2004

HONG KONG, Sept. 22 - Brushing aside concerns from the auto industry,
the Chinese government has set fuel-economy standards on new cars, sport
utility vehicles and vans for the first time, people with copies of the new
rules said on Wednesday.

The regulations represent a broad effort by Beijing to address its soaring

dependence on imported oil, a dependence that has helped lift oil prices
around the world as producers have struggled to keep pace with rising
demand.

The new rules coincide with growing difficulties in the last few months in
China for multinational and domestic automakers alike, which find
themselves stuck with large and growing inventories of unsold cars. After
rising at a rapid annual pace of 70 percent since late 2001, auto sales peaked
in March and have been falling since.

The government has been trying to forestall inflation by cooling the economy
with a variety of administrative controls. China's state-owned banks have cut
back sharply on car loans, and now finance fewer than one in 10 retail car
purchases, down from one in three earlier this year, said Michael Dunne, the
president of Automotive Resources Asia, a consulting firm based in

Shanghai and Bangkok. A government freeze on many new investment

projects has hurt consumer confidence, too.

The State Council, or cabinet, has begun an "in-depth investigation" into the
country's "swollen auto production capacity," the official New China News
Agency recently reported. In other industries, such investigations have been
preludes to restrictions on the building of more factories.

The new fuel-economy rules are identical to those in a draft prepared last
November by an interagency committee in Beijing.

Auto executives complained during the winter that the standards were too
strict on larger, heavier cars, minivans and especially S.U.V.'s, but the
executives have become largely resigned to the new standards in the last few
months and have begun improving fuel economy anyway.

Volkswagen, which dominates the Chinese auto market with more than a
quarter of industry sales, said in a statement that it "views China's new gas
mileage policy as a positive step towards modern fuel economy and
addressing the ecological impact of its rapidly growing car population and
economy."

Volkswagen executives had been more critical of the draft version last
November, saying that company representatives at a meeting with regulators
had acquiesced to the plan despite misgivings.

"They had no choice but to agree," one of the executives said then.

The Volkswagen Santana, the best-selling car in China, will meet the first
phase of the Chinese rules, which take effect next July, the company said.
But Volkswagen declined to comment on whether the Santana could meet
the stricter second phase of the rules, in 2008, saying that this would
depend on whether advanced engine technologies can be introduced, and
that this in turn would depend on whether China improves the quality of fuel
sold in the country.

Because of Volkswagen's dominant role in China's auto industry,

Volkswagen officials were given special access to the drafting process.

General Motors, which has the second-largest market share, said in a

statement that while it still needed to study the final language of the rules,
the company believed that all of its vehicles would comply at least with the
first phase of the requirements next year.

People with copies of the rules said that the regulations actually received
final approval on Sept. 2. Beijing officials have not yet released the final
version even to automakers because they plan to hold a news conference
soon in Beijing. A broad Chinese plan last month for the future of the auto
industry mentioned that fuel-economy rules would be needed, but did not
actually include them.

The new regulations are more stringent than United States standards, but
less strict than the semi-voluntary standards that the auto industry has
adopted in Europe to head off regulations there.

The rules set gas mileage requirements for cars, S.U.V.'s and minivans based
on their weight. The Chinese standards for the first phase are similar to the
averages for most cars now in the United States, with some improvements
mandated for the second phase; the Chinese standards for minivans and
S.U.V.'s are more stringent for the first phase and much more stringent for
the second phase than what such vehicles now achieve in the United States.

Pickup trucks, a tiny share of the Chinese market, and commercial vehicles
are exempt from the rules.

An Feng, the director of the Auto Project on Energy and Climate Change, a
nonprofit group in Beijing that advised the government on the rules, said
that the main effect would be to force automakers to install more gas-sipping
four-cylinder engines in their models before the second phase of the rules
takes effect in 2008.

Six-cylinder and eight-cylinder engines offer greater power and acceleration

for drivers, but burn so much more gasoline that it would be hard to build
vehicles with them that meet the new standards, Mr. An said. Extremely few
Chinese motorists use their vehicles for towing, which does require a lot of
power, because China's pleasure boat industry is in its infancy.

Partly with a focus on the planned standards and partly in an effort to

impress Chinese regulators, Toyota announced last week that it would begin
assembling Prius gasoline-electric hybrid cars in China with its joint venture
partner, the First Automobile Works Corporation, also called the FAW
Group.

The new standards could yet cause some confusion. Instead of allowing
automakers to average the gas mileage figures for many different models, as
in the United States and in the European Union, the Chinese rules set a
minimum for each model. The Chinese rules also require that to be sold at

all each model must meet the standards; that contrasts with the practice in
the United States of assessing fines on companies that offer cars that fall
short.

This would seem to make it very hard, if not impossible, to sell high-powered,
but gas-guzzling sports cars in China once the new rules take effect.

Mr. An said this was an area that the policy makers still needed to review.

Most economists say that gas mileage regulations are less effective in
controlling energy consumption than fuel taxes. This is because the
regulations affect only new vehicles coming into use, not vehicles already on
the road, and because fuel taxes tend to reduce the number of miles that
motorists drive their vehicles each year, by making it more expensive to
drive.

Chinese officials have been mulling fuel taxes for several years but have been
slow to act, fearing public anger, especially as inflation is already becoming a
problem in China.

Daniel Yergin, the chairman of Cambridge Energy Research Associates, an

energy consulting firm in Cambridge, Mass., said during a visit to Hong
Kong on Wednesday that his projections of Chinese oil demand for power

stations suggested that the overall growth rate in Chinese oil consumption
might begin to slow somewhat in the years ahead.

China Announces New Bailout of Big Banks

By KEITH BRADSHERJAN. 7, 2004

China announced a complex transfer on Tuesday of $45 billion from its

soaring foreign exchange reserves to two of the four big government-owned
banks, the third large bailout in the banking system in less than six years.

The transaction is intended to help shore up the financial institutions, the

Bank of China and the China Construction Bank, so they can sell stock for
the first time, the Chinese central bank said in a statement. The central bank
admonished the commercial banks to do a better job of controlling fraud and
limiting bad loans.

''When dealing with bad assets, they have to strictly investigate the
responsibility of the related officials,'' the statement said. ''They have to fight

fiercely against those who have tried to run away from bank loans through
illegal behavior.''

Beijing bars Chinese journalists from reporting on the full extent of the
banks' troubles, especially writers for mass-media publications read by
many depositors. But with their promises of tough action against errant
bank officers, the statements issued on Tuesday by the central bank and
other agencies hinted at a concern about public perceptions of the bailout.

The costs of the American savings and loan bailout more than a decade ago
-- $123.8 billion in public funds and $29.1 billion in supplemental deposit
insurance premiums from financial institutions -- drew considerable
complaints from politicians and the public in the United States. China has
been eager to prevent a similar controversy. Its latest bailout, while costly,
covers less than half of the nonperforming loans at two of the four troubled
banks, and in an economy that is one-eighth the size of America's.

Tao Dong, an economist at Credit Suisse First Boston, said that ''$45 billion
is probably not sufficient, but a very decent number to start with.'' Mr. Tao
said that while the latest bailout, split equally between the two banks,
showed the government's interest in cleaning up the industry, what Chinese
banks really need is to reform their lending practices so they stop making

more bad loans. ''Most important is having new credit-risk management

established,'' he said. ''Without that, any new money will be lost.''

The need for another bailout underlines the problems that have vexed
China's financial system even through two decades of rapid economic
growth. The big four banks -- the others are the Industrial and Commercial
Bank of China and the Agricultural Bank of China -- say that 20 percent of
their loans are nonperforming. But Western analysts say that up to 45
percent of borrowers do not repay loans, although this share may be falling.
By contrast, in the third quarter, loans at American commercial banks
insured by the Federal Deposit Insurance Corporation that were more than
90 days past due or were nonperforming represented 1.24 percent of all
outstanding loans.

Bankers said the Chinese banks' best chance of selling stock would be to list
their shares on Western markets as quickly as possible -- to take advantage
of the mania lately with investors asking few questions and Chinese initial
public offerings oversubscribed as much as 700 to 1.

''Why do you want to buy Chinese banks?'' a Beijing banker asked. ''What
makes you think these guys will do anything any differently in the next four
years?''

China doubled the capital base of the four big banks in August 1998, by
effectively giving them $32.5 billion through two complex swap agreements.
In 2000 and 2001, it set up four asset management companies that bought
$169 billion worth of nonperforming loans from the four banks at face value.
The asset managers, owned by the finance ministry and indirectly by the
central bank, have been struggling ever since to sell these loans for pennies
on the dollar.

After each of those bailout actions, further loan losses quickly eroded the
banks' capital bases.

Provincial and municipal governments put pressure on local bank branches

to approve loans to politically connected individuals and to money-losing
government-owned enterprises that employ large numbers of people. The
four big banks are trying to address this problem by centralizing in Beijing
their decisions on loans and by installing computer systems to monitor
lending patterns.

The State Administration of Foreign Exchange said in a statement that it was

transferring the money for the latest bailout to a new, specially created
management concern, the Central Huijin Investment Company, which will
then invest the money in the banks. The company's directors and

supervisors will come from the foreign exchange administration, the finance
ministry and the central bank, giving these agencies a continuing role in the
two banks' ownership and financial management even after they sell stock.

Beijing's use of foreign exchange reserves caught the attention of currency

traders, who have been looking for any sign that officials might allow the
Chinese yuan to appreciate in value, as demanded by American, European
and Japanese officials.

But a financial expert who insisted on anonymity said the two big banks
were required to keep the money in dollars, which would make it easier for
the central bank to continue preventing traders from bidding up the value of
the yuan.

The central bank has been printing yuan on a vast scale to buy dollars and
prevent its appreciation. It has then taken some of the extra yuan out of the
financial system by selling bonds and withdrawing from circulation the
money used to pay for them.

Enough yuan have nonetheless been issued to allow banks to lend more
money in the first seven months of 2003 than in all of 2002. This has

prompted fears that the banks may have engaged in another round of
reckless lending that will produce a fresh wave of defaults.

The central bank now keeps the yuan in a tight range around 8.28 to the
dollar. The financial expert said government officials had promised the two
banks that they could exchange the dollars for yuan later if necessary at a
rate of 8 to the dollar. This would act as a hedge against losses if the yuan
does appreciate. It could also suggest an acknowledgement by Beijing of an
eventual appreciation of the yuan.

Ryan Tsang, director for greater China financial services ratings at Standard
& Poor's, said the accounting rules would let the banks count dollars as
capital for purposes of meeting international capital requirements, without
converting them to yuan.

Desmond Supple, an economist at Barclays Capital, wrote in a research

report on Tuesday that the banks would be able to write off loans as
uncollectible and make corresponding accounting entries against their
equity without converting the dollars into yuan.

The State Administration of Foreign Exchange said the transfer to the banks
was actually accomplished at the end of last year, which will allow the banks

to show the extra capital in their year-end accounts. Several bankers said
this might make it easier for the banks to pursue stock offerings by the end
of this year. The foreign exchange agency said that even after deducting $45
billion, China's foreign reserves leaped $116.84 billion last year, to $403.25
billion.

Standard & Poor's and Moody's each welcomed the latest bailout as a sign
that Beijing was addressing difficult problems in the banking industry
instead of letting them pile up. ''It's a very good development,'' Yen Wei, a
vice president at Moody's, said. ''It really demonstrates the government's
commitment.''

China Aims to Cut Pollution From Scrap

Metal Industry
By KEITH BRADSHERMARCH 16, 2004

Eager to become the world's workshop, but wary of becoming its trash bin
along the way, China is laying plans for stricter regulation of the scrap
industry.

Under a regulation issued in mid-December, businesses shipping scrap to

China will be required to register with Beijing by July 1 and get government
approval. Chinese regulators have not yet said what standards they will set
in deciding which companies may register.

Chinese imports of steel scrap have nearly doubled in the last three years
and are expected to double again in the next two years, as the steel industry
has expanded even more rapidly than the rest of the fast-growing economy.

In addition to steel scrap, imports of copper and other scrap have also
increased, since it is considerably cheaper to remelt existing metal than to
process raw ore.

Meng Jianbin, the director of international cooperation at the Metallurgical

Council of China for the Promotion of International Trade, a Chinese trade
group, said that the scrap industry posed a continuing environmental
problem.

''The environment is better than before, but it still has not reached the best
result,'' he said. ''The scrap processors are using very old ways to do the
scrapping, which is very harmful to the environment.''

Most of the processors are still small and medium-size companies with little
money to invest in modern, less-polluting equipment, Mr. Meng said.

''The government has asked the scrap processors to report to the

government about whether the methods they use are harmless or not, but
usually the scrap processors don't bother,'' he said. ''In the past, the scrap
industry has been a mess. The government is now making rules for them to
follow.''

Felipe Tan, who used to own a scrap auction yard in Guangdong Province in
southern China and a factory that sliced open secondhand telephone cables
to extract the copper, said that he left the business after being undercut by
smaller companies with dubious business practices.

''We got competitors coming in who were burning cables, throwing fiber
scraps into the river,'' Mr. Tan said.

The Bureau of International Recycling, a Brussels-based trade association

with 500 members, including many of the world's largest scrap and waste

management companies, supports greater regulation in China, said Francis

Veys, the group's director general.

Tighter supervision should result in a cleaner environment in China, he said,

by making it harder for less scrupulous companies to dump almost anything
in containers and send it across the ocean. It will also force companies to do
more work in places like the United States and Europe, separating trash
from scrap before shipment, Mr. Veys added.

''We are very much in favor of controls,'' he said.

The rules may prompt China to shift its imports to rely less on Europe,
where regulators have been quick to work with other countries that want to
restrict trash imports, Mr. Veys said. He predicted that China might wind up
depending on the United States for a greater share of its imports as a result,
although trans-Pacific scrap shipments are already causing problems for
American smelters that have found it tough to find scrap for their own
operations.

An environmental crackdown now in China would not be the first in the

region. The scrap industry in greater China was centered in southern Taiwan
in the 1980's, but shifted to Guangdong Province, up the Pearl River from

Hong Kong, as Taiwan tightened environmental standards through the late

1980's. Guangdong, in turn, imposed tighter rules in the mid-1990's and
shut many of the smaller scrapyards.

This prompted many scrap businesses, though not all, to move 800 miles
north to Shanghai, Nanjing and cities along the lower Yangtze River, a
region that is also a big center of steel production.

Much of the scrap is mixed with pig iron, produced from iron ore, to make
the higher grades of steel that China's increasingly advanced economy needs
in large quantities, said David P. Garcia, the managing director of Asia Iron
Ltd., an iron ore company that has its operations in Nanjing and Australia
but is based in Hong Kong.

Some in China's scrap industry are skeptical that new government rules will
have much effect. David Lo, the owner of one of the largest scrap-processing
centers for copper and other nonferrous metals in southern China, said that
it would not make financial sense to modernize by installing machines
instead of relying on hand labor.

The industry provides many jobs, he noted, and is so important to China

that he doubted the government would do anything to disrupt it. ''There is a
lack of raw materials like copper,'' Mr. Lo said, ''so China needs scrap.''

China Economy in 2008

China Unveils Sweeping Plan for Economy
By DAVID BARBOZANOV. 9, 2008

SHANGHAI China announced a huge economic stimulus plan on Sunday

aimed at bolstering its weakening economy, a sweeping move that could also
help fight the effects of the global slowdown.

At a time when major infrastructure projects are being put off around the
world, China said it would spend an estimated $586 billion over the next two
years roughly 7 percent of its gross domestic product each year to

construct new railways, subways and airports and to rebuild communities

devastated by an earthquake in the southwest in May.

The package, announced Sunday evening by the State Council, or cabinet, is

the largest economic stimulus effort ever undertaken by the Chinese
government.

Over the past two months, the global financial crisis has been intensifying
daily, the State Council said in a statement. In expanding investment, we
must be fast and heavy-handed.

The plan was unveiled as finance ministers from the Group of 20 nations
met in So Paulo, Brazil, over the weekend.

It came less than a week before President Hu Jintao was scheduled to travel
to Washington for a global economic summit meeting hosted by President
Bush.

On Saturday, Mr. Hu spoke by telephone with President-elect Barack Obama

about a variety of issues, including the global financial crisis and how their
countries might cooperate to help resolve economic problems.

Asian markets welcomed news of the stimulus plan. The Japanese Nikkei
index rose 5.6 percent in trading early Monday. Stocks in Hong Kong and
Shanghai rallied strongly, jumping over 5 percent and lifting share prices
that have been depressed for much of the year.

Although Beijing has indicated that it will focus on keeping its own economy
on track, it is difficult to insulate any economy from a global downturn. After
five years of growth in excess of 10 percent, Chinas economy is beginning to
weaken. Growth in exports and investment is slowing, consumer confidence
is waning and stock and property markets are severely depressed.

The stimulus plan, though driven by domestic concerns, represents a fresh

commitment by China to keep from adding to the economic and financial
woes of the United States and Europe. It is also likely to cheer foreign
investors in Chinas economy by ensuring that the country remains a source
of growth.

Chinas package is not comparable to fiscal stimulus measures that are being
discussed in Washington. In China, much of the capital for infrastructure
improvements comes not from central and local governments but from state
banks and state-owned companies that are encouraged to expand more
rapidly.

The plan also differs from the $700 billion financial rescue package
approved by Congress, which has helped strengthen bank balance sheets but
did not directly mandate new lending or support specific investment projects
in the United States.

Chinas overall government spending remains relatively low as a percentage

of economic output compared with the United States and Europe. Yet
Beijing maintains far more control over investment trends than Washington
does, so it has greater flexibility to increase investment to counter a sharp
downturn.

It was unclear how Chinese officials arrived at the $586 billion figure or how
much of the stimulus would be spending above what Beijing normally
earmarks for infrastructure projects. Beijing said it was loosening credit and
encouraging state-owned banks to lend as part of a more proactive fiscal
policy.

The government said the stimulus would cover 10 areas, including

low-income housing, electricity, water, rural infrastructure and projects
aimed at environmental protection and technological innovation all of
which could incite consumer spending and bolster the economy. The State

Council said the new spending would begin immediately, with $18 billion
scheduled for the last quarter of this year.

State-driven investment projects of this kind have been a major impetus to

Chinese growth throughout the 30 years of market-oriented reforms, a
strong legacy of central planning.

The biggest players in many major Chinese industries like steel,

automobiles and energy are state-owned companies, and government
officials locally and nationally have a hand in deciding how much bank
lending is steered to those sectors.

The investment numbers announced by Chinas central government often

include projects financed by a variety of sources, including state-backed
entities and even foreign investors.

Beijing is struggling to cope with rapidly slowing economic growth. A

downturn in investment and exports has led to factory closings in southern
China, resulting in mass layoffs and even setting off sporadic protests by
workers who have complained that owners disappeared without paying them
their wages.

With many economists in China now projecting that growth in the fourth
quarter of this year could be as low as 5.8 percent, and amid worries that the
countrys economy could be walloped by the global financial crisis, Beijing is
moving aggressively.

Analysts were expecting China to announce a big stimulus package, but they
said they were surprised at its size. That is much more aggressive than I
expected, said Frank Gong, an economist at J. P. Morgan who is based in
Hong Kong. Thats a lot of money to spend.

Mr. Gong said that after the Asian financial crisis in 1997, Beijing undertook
a similar, but much smaller, stimulus package, earmarking huge sums to
build the countrys highway and toll-road system, projects that helped keep
the economy growing.

Arthur Kroeber, managing director at Dragonomics, a Beijing-based

economic research firm, said the government was concerned because people
in China had suddenly pulled back on spending as a precautionary move
because of worries about Chinas suffering with the global economy.

The government is sending a signal saying: Were going to spend in a big

way, Mr. Kroeber said Sunday in a telephone interview. This is designed
to say to the market that people should not panic.

Quake Hits Remote Area in China

BEIJING (AP) A magnitude 6.5 earthquake struck the remote

northwestern Chinese province of Qinghai on Monday, the United States
Geological Survey said. There were no immediate reports of casualties.

The quake struck at a depth of 6.2 miles, the agency said.

Chinas far west is fairly earthquake-prone. A 7.9 magnitude earthquake on

May 12 devastated parts of Sichuan Province, killing about 70,000 people
and leaving millions homeless.

China Plans to Bolster Its Slowing Economy

By KEITH BRADSHEROCT. 19, 2008

HONG KONG The Chinese government has begun drafting tax and
spending policies to stimulate the economy after third-quarter growth of 9
percent, the slowest pace since an outbreak of SARS in 2003.

Industrial production and construction slackened from July through

September because of weak exports, a slumping real estate market and
temporary restrictions imposed during the Olympics, the National Bureau of
Statistics announced on Monday.

Chinas State Council, or cabinet, met over the weekend and decided to shift
the emphasis toward maintaining a stable and rapid economic
development, the state-controlled media reported on Monday. The previous
policy had been to ensure growth and control inflation.

As part of the new policy, the State Council announced that it would increase
export tax rebates for things as varied as labor-intensive products like
garments and textile to high-value products like mechanical and electrical
products. Banks will be encouraged to lend more money to small and

medium-size enterprises and support programs will be drafted to help

farmers.

Government agencies will also spend more to rebuild earthquake-damaged

areas of southwestern China, to improve transportation links and other
infrastructure and to improve the social welfare system, the official Xinhua
news agency said, without providing details.

Hu Angang, a prominent Chinese economist who is the director of the

Center for China Studies at Tsinghua University in Beijing, said in an
interview on Friday that the government was drafting plans to step up its
spending on vocational training and other educational programs for adults.
The goal is to help Chinas workers move away from low-wage, low-skill
assembly line tasks in export-oriented factories and to provide these workers
with the skills necessary for an internationally competitive economy that
balances the service and manufacturing sectors.

The government needs to give consideration to human capital investment,

Mr. Hu said.

Chinese officials maintain that their country will suffer only limited harm
from the global financial crisis, mainly through slower exports. Our

economy remains vigorous and has the capability to defend itself against
international risks, Prime Minister Wen Jiabao said on Friday.

Increased export tax rebates will make Chinese exports even more
competitive in the United States and Europe, particularly as China has
intervened in currency markets to halt any further appreciation of Chinas
currency since mid-June. With the United States heavily dependent on
China to buy the Treasury bonds needed to finance a bailout of the American
financial system, the Bush administration has stopped criticizing Chinas
trade and currency policies.

Policy makers in almost any country except China would be delighted with 9
percent growth, particularly given the financial turmoil that was worsening
at the end of the third quarter.

But China faces a particularly acute need to maintain high growth rates. Its
cities are growing by nearly 20 million people a year because of migration
from lower-income rural areas.

Most economists estimate that 8 percent growth is needed to prevent urban

unemployment from rising, which could ignite demonstrations and
undermine the countrys social stability.

Clement Chen, the chairman of the Federation of Hong Kong Industries,

which represents the employers of 10 million workers in mainland China,
said that the policies chosen by the State Council would reduce the number
of factory bankruptcies and layoffs likely in the months ahead. But he
predicted the policies would not halt the overall deterioration in business
prospects for exporters in China.

The worst impact, the worst situation, is not here yet, he said. I do believe
2009 will be worse than 2008.

Corporate executives from cities across China said in interviews last week at
the Canton Fair in Guangzhou and the Global Sources consumer electronics
show in Hong Kong that while layoffs were rising, joblessness did not yet
appear to be a serious problem.

Many laid-off migrant workers in export-reliant regions like Guangdong

province, next to Hong Kong, have returned to their home villages, because
high food prices have made farming more remunerative. Others are finding
jobs in inland cities that depend more on consumer demand within China.

Workers are not yet lining up outside factory gates in search of work, as they
did a decade ago. But they are nonetheless becoming easier to find and hire,

said Bill Chen, a sales manager at the Tinly Jieyang Electro-Acoustic Devices
Company, which makes automotive stereo speakers in Shenzhen that
recently halved its work force to 100 employees.

At the beginning of this year, it was quite hard, but now it is not difficult,
Mr. Chen said of finding workers.

Employees interviewed last month at three locations in Dongguan, a factory

city in Guangdong, agreed that jobs were still available.

Standard Chartered warned in a research report Monday that economic

growth would continue to weaken, from 11.9 percent last year to 9.6 percent
for all of this year, 7.9 percent next year and just 7.1 percent in 2010. The
bank noted that the State Councils plans stopped short of calling for
government spending, while the broad goals enunciated by the State Council
with few specifics may mean that the government will not act swiftly.

Some economists had suggested in August that the forced closing of many
factories during the Olympics, to provide cleaner air for the athletes, had
been the main factor behind the beginnings of weaker economic activity. But
extensive statistics released on Monday by the National Bureau of Statistics

pointed to a much broader pattern of weaker growth than could be explained

by the Beijing Olympics.

Many factories, power plants and other operations reopened in the Beijing
area last month. Yet industrial production expanded less briskly in
September, rising 11.4 percent from a year earlier, than in August, when it
grew 12.8 percent.

China has more options than most countries to cope with slower growth.
Inflation is slowing at the consumer level the government said on Monday
that it was 4.6 percent in September, down from 4.9 percent in August and
the fifth monthly decline.

With less to fear from rising prices, Chinas central bank has already begun
reducing regulated interest rates and loosening restrictions on bank lending,
even though these steps could result in an expansion of the money supply
and an increase in inflationary pressures. With the government running a
large budget surplus, the finance ministry has begun lowering taxes on stock
market transactions.

We expect the Chinese government to continue to loosen policies on the

back of fast-slowing activity growth and dissipating inflationary pressures,

said Hong Liang, an economist in the Beijing office of Goldman Sachs, in a

research note Monday.

Growth of 9 percent in the third quarter was slower than most economists
had expected. Surveys of economists expectations for the past quarter had
found average forecasts of anywhere from 9.1 to 9.7 percent, depending on
which economists were included and when they were asked.

Output in the third quarter of this year was the least strong since the
economy expanded 7.9 percent in the second quarter of 2003, when an
outbreak of severe acute respiratory syndrome temporarily closed many
businesses.

China, an Engine of Growth, Faces a Global

Slump
By JIM YARDLEY and KEITH BRADSHEROCT. 22, 2008

BEIJING For three decades, China has fueled its remarkable economic
rise by becoming the worlds workshop and unleashing a flood of low-priced

exports. But faced with a possible global recession and weakening demand
for Chinese exports, the question now is whether the ruling Communist
Party can prevent the financial crisisfrom derailing the countrys economic
miracle.

This question is pressing not just for China but also for the rest of the world.
American officials and many economists say continued Chinese growth is
vital to the global economy as the United States and Europe face severe
downturns.

Yet to navigate the crisis, many analysts say, China will need to recalibrate
its economic model, stoke domestic investment with heavy government
spending and promote policies to increase consumer demand in a nation
known for high savings rates.

The global crisis is also arising at a politically resonant moment for China.
This month is the 30th anniversary of the reform policies that first ignited its
market-oriented growth, a milestone that has raised inevitable questions
about the next steps China must take to become a fully modern economic
and political power.

At the geopolitical level, China would seem well positioned to expand its
influence. It sits on $1.9 trillion in foreign exchange reserves, accumulated
from giant trade surpluses and heavy foreign investment in China, and it
could acquire discounted stakes in Western banks and industrial companies.

But for now, most analysts say Chinas top priority is protecting its own
economy. Chinese leaders say the domestic financial system is largely
insulated from the global crisis Chinas banks remain domestically
focused and have relatively small exposure to toxic securities sold by
American and European banks. But economic growth has fallen to the lowest
level in five years, unemployment is a growing concern, and scores of
factories are closing in the countrys export region. Domestic stock
exchanges have lost 65 percent of their value, and real estate sales have
plummeted.

China still seems likely to avoid an outright recession, but a significantly

slower growth would pose a political challenge for the Communist Party,
which derives much of its legitimacy from delivering jobs and increasing
wealth. Conventional wisdom holds that Chinas output must grow at a
minimum of 8 percent for the economy to produce enough jobs to absorb
increases in the working-age population, and many economists expect
growth to drop below that level next year.

Just last week, thousands of unemployed workers protested outside closed

toy factories in Guangdong Province, the countrys export hub. Slightly more
than half the countrys toy exporters shut down in the first seven months of
this year, mostly small companies that struggled to cope with new safety
standards as well as weakening Western demand, according to Chinas
customs agency.

If the growth rate goes below 8 percent in 2009, I think they will be quite
concerned, said Kenneth Lieberthal, a China specialist currently at the
Brookings Institution in Washington. They are always concerned about job
creation.

Already, Chinese leaders are preparing a response that could resemble the
government spending spree from 1998 to 2000 that is credited with helping
China avoid the worst of the Asian financial crisis that broke out in 1997.
Former Prime Minister Zhu Rongji poured billions of dollars into flood
control, road building and new airport projects to stimulate economic output.
Much of that infrastructure is now considered essential to Chinas
competitive advantage as a manufacturing exporter.

Today, improvements are needed in railroads and the electrical power grid.
But Chinas most conspicuous needs are the softer side of a modern

economy a health care network, lower tuition and fees for schools and
universities and improvement in the rudimentary social safety net,
economists say.

Such steps are seen as crucial if China is to give consumers especially

working-class urban residents and the 800 million people still classified as
peasants the confidence to spend rather than increase their savings.

Chinas infrastructure is excellent compare it to India, said Xu Xiaonian,

an economics professor at the China Europe International Business School
in Shanghai. Its getting harder for the government to find ways to spend
money productively. Its stimulus for the sake of stimulus.

David H. McCormick, the under secretary for international affairs at the

Treasury Department, said in a telephone interview that Chinese officials
understood that the sheer size of their economy, combined with weakening
demand overseas, meant that increasing demand for goods and services
within China would be in Chinas own interest. They cant count on exports
being such a driver of their economy going forward, he said.

To date, the most significant new measure is the land reform announced last
Sunday. Full details of the program are still unclear, but the plan allows

farmers for the first time to lease or transfer their land-use rights, a
landmark step in what is still nominally a socialist country. Economists say
they believe that the measure will improve the rural economy, though few
predict sudden benefits. To raise rural incomes more rapidly, the top
Chinese economic planning agency on Monday raised the minimum
purchase price of wheat by up to 15 percent beginning next year.

Transforming the countryside and creating a nation of consumers is likely to

prove at least as arduous as turning China into a manufacturing giant. In
recent years, President Hu Jintao and Prime Minister Wen Jiabao have
eliminated the ancient agricultural tax and increased spending on rural
initiatives. Yet the rural-urban income gap has continued to worsen. Today,
China still has more than 500 million people living on less than $2 a day;
nationwide per capita income is only about $2,000. The social safety net
remains so inadequate that most peasants save their spare earnings to
protect against a medical crisis or as a thin cushion for old age.

Andy Rothman, a longtime analyst at CLSA Asia-Pacific Markets, an

investment bank, said that the government had been promoting domestic
consumption for years but that by necessity it was a gradual process and not
one that could provide a quick fix to a global slowdown.

This isnt something you want to move ahead at light speed, Mr. Rothman
said. China trying to step into the breach by handing out credit cards to 800
million peasants would be a disaster just a few years down the road.

From a geopolitical standpoint, China would seem to have an opportunity to

fill a void created by an ailing West, especially given the countrys huge
foreign exchange holdings. President Asif Ali Zardari of Pakistan visited
Beijing this month in search of a financial edge to help his country stave off
bankruptcy an overture that could become more common as China is
perceived as sitting on a money pot.

More pertinent to the United States is whether China will re-examine its
strategy of financing American debt. Chinese experts say that the American
and Chinese economies are so intertwined that Chinese leaders will not
make any abrupt changes in their policy of directing the bulk of Chinas
foreign currency reserves to dollar-denominated assets. The United States
Treasury secretary, Henry M. Paulson Jr., and other senior American
officials have been in almost daily contact with their Chinese counterparts.

China, with the responsibility of a big country, will not make trouble for
international financial markets, said Hu Angang, a Chinese economist who
is the director of the Center for China Studies at Tsinghua University. The

Chinese government is very rational and flexible, and very clearly recognizes
any policy does not just influence domestic markets but also global
markets.

Some Chinese experts are suggesting that China could use more of its
foreign reserves to purchase stocks in Western companies and even as
leverage to gain positions on corporate boards. Doing so, these experts say,
would allow China to develop expertise and gain more experience in global
business.

But others say that China was stung when a state-owned Chinese
petrochemical company tried and failed to purchase Unocal, an American oil
company, and that it would be cautious in making any moves deemed
politically risky. Domestic pressures also exist; public criticism has erupted
after some investments by the countryssovereign wealth fund lost money.

No one is yet certain when the global financial system will stabilize, but the
crisis has convinced many economic analysts that the system itself will be
re-examined. The financial crisis is a ground-shaking event, but people are
going to stick to the same system, said Wang Tao, chief of the China
economic research unit for UBS Securities. But they are going to think

about how to reform the system, and China will probably have a stronger
voice than before.

In recent years, some Chinese experts have written analyses about the
inevitability of an American decline and how China must prepare to manage
it. But in the face of the current crisis, most Chinese analysts say China is
nowhere near ready yet to stand as a superpower.

China doesnt want to be viewed as a replacement for the States, said one
Chinese scholar who requested anonymity so that he could discuss the
mind-set of government officials. We are still a developing country. We
have more foreign reserves than other countries, but we also have more
problems.

China's Yuan Rises to a Milestone Against the

Dollar
By DAVID BARBOZA
Published: April 11, 2008

China's currency, the yuan, rose against the dollar on Thursday, reaching a
milestone that is just the latest sign of this country's growing economic
power.

For the first time in more than a decade, the dollar bought less than 7 yuan,
ending the day close to 6.992 yuan, a situation that specialists say will
probably make Chinese-made goods more expensive for American
consumers and possibly contribute to inflation in the United States.

The gains for the Chinese currency have come after Beijing's decision to end
a longstanding peg to the dollar in July 2005, when a single dollar bought
about 8.3 yuan, or renminbi.

Beijing lifted the peg after American and European officials had complained
for years that the yuan was set artificially low, making Chinese goods
cheaper and giving China an unfair trade advantage. This resulted, many
officials said, in huge trade surpluses for China and job losses for Americans
and Europeans.

But this year, partly because of soaring inflation and fears the economy
could be overheating, China's leaders have allowed the nation's currency to
appreciate more quickly against the dollar. The yuan has gained about 16
percent against the dollar since the peg ended in 2005, including about 4.5
percent this year.

Some analysts believe the yuan will continue to rise, possibly reaching 6.5
yuan to the dollar by the end of the year.

The changes are coming as the dollar weakens against other currencies,
including the euro, sapping American buying power overseas.

Indeed, despite its rise against the dollar, the yuan has weakened against the
euro in the last year. European officials continue to worry about growing
trade deficits with China.

For China, though, the yuan's climb against the dollar is helping to offset the
rising cost of goods it imports -- like oil, grains and raw materials -- many of
which are priced in dollars.

Chinese Savings Helped Inflate American

Bubble
By MARK LANDLERDEC. 25, 2008

Usually its the rich country lending to the poor. This time, its the poor
country lending to the rich.

 Niall Ferguson
WASHINGTON In March 2005, a low-key Princeton economist who had
become a Federal Reserve governor coined a novel theory to explain the
growing tendency of Americans to borrow from foreigners, particularly the
Chinese, to finance their heavy spending.
The problem, he said, was not that Americans spend too much, but that
foreigners save too much. The Chinese have piled up so much excess savings
that they lend money to the United States at low rates, underwriting
American consumption.
This colossal credit cycle could not last forever, he said. But in a global
economy, the transfer of Chinese money to America was a market
phenomenon that would take years, even a decade, to work itself out. For
now, he said, we probably have little choice except to be patient.

Today, the dependence of the United States on Chinese money looks less
benign. And the economist who proposed the theory, Ben S. Bernanke, is
dealing with the consequences, having been promoted to chairman of the
Fed in 2006, as these cross-border money flows were reaching stratospheric
levels.

In the past decade, China has invested upward of $1 trillion, mostly earnings
from manufacturing exports, into American government bonds and
government-backed mortgage debt. That has lowered interest rates and
helped fuel a historic consumption binge and housing bubble in the United
States.
China, some economists say, lulled American consumers, and their leaders,
into complacency about their spendthrift ways.
This was a blinking red light, said Kenneth S. Rogoff, a professor of
economics at Harvard and a former chief economist at the International
Monetary Fund. We should have reacted to it.
In hindsight, many economists say, the United States should have
recognized that borrowing from abroad for consumption and deficit
spending at home was not a formula for economic success. Even as that
weakness is becoming more widely recognized, however, the United States is
likely to be more addicted than ever to foreign creditors to finance record
government spending to revive the broken economy.
To be sure, there were few ready remedies. Some critics argue that the
United States could have pushed Beijing harder to abandon its policy of
keeping the value of its currency weak a policy that made its exports less
expensive and helped turn it into the worlds leading manufacturing power.

If China had allowed its currency to float according to market demand in the
past decade, its export growth probably would have moderated. And it would
not have acquired the same vast hoard of dollars to invest abroad.
Others say the Federal Reserve and the Treasury Department should have
seen the Chinese lending for what it was: a giant stimulus to the American
economy, not unlike interest rate cuts by the Fed. These critics say the Fed
under Alan Greenspan contributed to the creation of the housing bubble by
leaving interest rates too low for too long, even as Chinese investment
further stoked an easy-money economy. The Fed should have cut interest
rates less in the middle of this decade, they say, and started raising them
sooner, to help reduce speculation in real estate.
Today, with the wreckage around him, Mr. Bernanke said he regretted that
more was not done to regulate financial institutions and mortgage providers,
which might have prevented the flood of investment, including that from
China, from being so badly used. But the Feds role in regulation is limited to
banks. And stricter regulation by itself would not have been enough, he
insisted.
Achieving a better balance of international capital flows early on could have
significantly reduced the risks to the financial system, Mr. Bernanke said in
an interview in his office overlooking the Washington Mall.

However, he continued, this could only have been done through

international cooperation, not by the United States alone. The problem was
recognized, but sufficient international cooperation was not forthcoming.
The inaction was because of a range of factors, political and economic. By
the yardsticks that appeared to matter most prosperity and growth the
relationship between China and the United States also seemed to be paying
off for both countries. Neither had a strong incentive to break an addiction:
China to strong export growth and financial stability; the United States to
cheap imports and low-cost foreign loans.
In Washington, China was treated as a threat by some people, but mostly
because it lured away manufacturing jobs. Others argued that Chinas heavy
lending to this country was risky because Chinese leaders could decide to
withdraw money at a moments notice, creating a panicky run on the dollar.
Mr. Bernanke viewed such international investment flows through a
different lens. He argued that Chinese invested savings abroad because
consumers in China did not have enough confidence to spend. Changing that
situation would take years, and did not amount to a pressing problem for the
Americans.

The global savings glut story did us a collective disservice, said Edwin M.
Truman, a former Fed and Treasury official. It created the idea that the
world was doing it to us and we couldnt do anything about it.
But Mr. Bernankes theory fit the prevailing hands-off, pro-market ideology
of recent years. Mr. Greenspan and the Bush administration treated the
record American trade deficit and heavy foreign borrowing as an abstract
threat, not an urgent problem.
Mr. Bernanke, after he took charge of the Fed, warned that the imbalances
between the countries were growing more serious. By then, however, it was
too late to do much about them. And the White House still regarded
imbalances as an arcane subject best left to economists.
By itself, money from China is not a bad thing. As American officials like to
note, it speaks to the attractiveness of the United States as a destination for
foreign investment. In the 19th century, the United States built its railroads
with capital borrowed from the British.
In the past decade, China arguably enabled an American boom. Low-cost
Chinese goods helped keep a lid on inflation, while the flood of Chinese
investment helped the government finance mortgages and a public debt of
close to $11 trillion.

But Americans did not use the lower-cost money afforded by Chinese
investment to build a 21st-century equivalent of the railroads. Instead, the
government engaged in a costly war in Iraq, and consumers used loose credit
to buy sport utility vehicles and larger homes. Banks and investors, eagerly
seeking higher interest rates in this easy-money environment, created risky
new securities like collateralized debt obligations.
Nobody wanted to get off this drug, said Senator Lindsey Graham, the
South Carolina Republican who pushed legislation to punish China by
imposing stiff tariffs. Their drug was an endless line of customers for
made-in-China products. Our drug was the Chinese products and cash.
Mr. Graham said he understood the addiction: he was speaking by phone
from a Wal-Mart store in Anderson, S.C., where he was Christmas shopping
in aisles lined with items from China.
A New Economic Dance
The United States has been here before. In the 1980s, it ran heavy trade
deficits with Japan, which recycled some of its trading profits into American
government bonds.
At that time, the deficits were viewed as a grave threat to Americas
economic might. Action took the form of a 1985 agreement known as the

Plaza Accord. The worlds major economies intervened in currency markets

to drive down the value of the dollar and drive up the Japanese yen.
The arrangement did slow the growth of the trade deficit for a time. But
economists blamed the sharp revaluation of the Japanese yen for halting
Japans rapid growth. The lesson of the Plaza Accord was not lost on China,
which at that time was just emerging as an export power.
China tied itself even more tightly to the United States than did Japan. In
1995, it devalued its currency and set a firm exchange rate of roughly 8.3 to
the dollar, a level that remained fixed for a decade.
During the Asian financial crisis of 1997-98, China clung firmly to its
currency policy, earning praise from the Clinton administration for helping
check the spiral of devaluation sweeping Asia. Its low wages attracted
hundreds of billions of dollars in foreign investment.
By the early part of this decade, the United States was importing huge
amounts of Chinese-made goods toys, shoes, flat-screen televisions and
auto parts while selling much less to China in return.
For consumers, this was a net benefit because of the availability of cheaper
goods, said Laurence H. Meyer, a former Fed governor. Theres no
question that China put downward pressure on inflation rates.

But in classical economics, that trade gap could not have persisted for long
without bankrupting the American economy. Except that China recycled its
trade profits right back into the United States.
It did so to protect its own interests. China kept its banks under tight state
control and its currency on a short leash to ensure financial stability. It
required companies and individuals to save in the state-run banking system
most foreign currency primarily dollars that they earned from foreign
trade and investment.
As foreign trade surged, this hoard of dollars became enormous. In 2000,
the reserves were less than $200 billion; today they are about $2 trillion.
Chinese leaders chose to park the bulk of that in safe securities backed by the
American government, including Treasury bonds and the debt of Fannie
Mae and Freddie Mac, which had implicit government backing.
This not only allowed the United States to continue to finance its trade
deficit, but, by creating greater demand for United States securities, it also
helped push interest rates below where they would otherwise have been. For
years, Chinas government was eager to buy American debt at yields many in
the private sector felt were too low.

This financial and trade embrace between the United States and China grew
so tight that Niall Ferguson, a financial historian, has dubbed the two
countries Chimerica.
Tiptoeing Around a Partner
Being attached at the hip was not entirely comfortable for either side, though
for widely differing reasons.
In the United States, more people worried about cheap Chinese goods than
cheap Chinese loans. By 2003, Chinas trade surplus with the United States
was ballooning, and lawmakers in Congress were restive. Senator Graham
and Senator Charles E. Schumer, Democrat of New York, introduced a bill
threatening to impose a 27 percent duty on Chinese goods.
We had a moment where we caught everyones attention: the White House
and China, Mr. Graham recalled.
At the Peoples Bank of China, the central bank, a consensus was also
emerging in late 2004: China should break its tight link to the dollar, which
would make its exports more expensive. Yu Yongding, a leading economic
adviser, pressed the case. The American trade and budget deficits were not
sustainable, he warned. China was wrong to keep its currency artificially
depressed and depend too much on selling cheap goods.

Proponents of revaluation in China argued that the countrys currency

policies denied the fruits of prosperity to Chinese consumers. Beijing was
investing their savings in low-yielding American government securities. And
with a weak currency, they said, Chinese could not afford many imported
goods.
The central banks English-speaking governor, Zhou Xiaochuan, was among
those who favored a sizable revaluation.
But when Beijing acted to amend its currency policy in 2005, under heavy
pressure from Congress and the White House, it moved cautiously. The
renminbi was allowed to climb only 2 percent. The Communist Party opted
for only incremental adjustments to its economic model after a decade of
fast growth. Little changed: Chinas exports kept soaring and investment
poured into steel mills and garment factories.
But American officials eased the pressure. They decided to put more
emphasis on urging Chinese consumers to spend more of their savings,
which they hoped would eventually bring the two economies into better
balance. On a tour of China, John W. Snow, the Treasury secretary at the
time, even urged the Chinese to start using credit cards.
China kicked off its own campaign to encourage domestic consumption,
which it hoped would provide a new source. But Chinese save with the same

zeal that, until recently, Americans spent. Shorn of the social safety net of
the old Communist state, they squirrel away money to pay for hospital visits,
housing or retirement. This accounts for the savings glut identified by Mr.
Bernanke.
Privately, Chinese officials confided to visiting Americans that the effort was
not achieving much.
It is sometimes hard to change successful models, said Robert B. Zoellick,
who negotiated with the Chinese as a deputy secretary of state. It is
prototypically American to say, This worked well, but now youve got to
change it.
In Washington, some critics say too little was done. A former Treasury
official, Timothy D. Adams, tried to get the I.M.F. to act as a watchdog for
currency manipulation by China, which would have subjected Beijing to
more global pressure.
Yet when Mr. Snow was succeeded as Treasury secretary by Henry M.
Paulson Jr. in 2006, the I.M.F. was sidelined, according to several officials,
and Mr. Paulson took command of China policy.
He was not shy about his credentials. As an investment banker with
Goldman Sachs, Mr. Paulson made 70 trips to China. In his office hangs a

watercolor depicting the hometown of Zhu Rongji, a forceful former prime

minister.
I pushed very hard on currency because I believed it was important for
China to get to a market-determined currency, Mr. Paulson said in an
interview. But he conceded he did not get what he wanted.
In late 2006, Mr. Paulson invited Mr. Bernanke to accompany him to Beijing.
Mr. Bernanke used the occasion to deliver a blunt speech to the Chinese
Academy of Social Sciences, in which he advised the Chinese to reorient
their economy and revalue their currency.
At the last minute, however, Mr. Bernanke deleted a reference to the
exchange rate being an effective subsidy for Chinese exports, out of fear
that it could be used as a pretext for a trade lawsuit against China.
Critics detected a pattern. They noted that in its twice-yearly reports to
Congress about trading partners, the Treasury Department had never
branded China a currency manipulator.
Were tiptoeing around, desperately trying not to irritate or offend the
Chinese, said Thea M. Lee, public policy director of the A.F.L.-C.I.O. But to
get concrete results, you have to be confrontational.
An Embrace That Wont Let Go

For China, too, this crisis has been a time of reckoning. Americans are
buying fewer Chinese DVD players and microwave ovens. Trade is collapsing,
and thousands of workers are losing their jobs. Chinese leaders are terrified
of social unrest.
Having allowed the renminbi to rise a little after 2005, the Chinese
government is now under intense pressure domestically to reverse course
and depreciate it. Chinas fortunes remain tethered to those of the United
States. And the reverse is equally true.
In a glassed-in room in a nondescript office building in Washington, the
Treasury conducts nearly daily auctions of billions of dollars worth of
government bonds. An old Army helmet sits on a shelf: as a lark, Treasury
officials have been known to strap it on while they monitor incoming bids.
For the past five years, China has been one of the most prolific bidders. It
holds $652 billion in Treasury debt, up from $459 billion a year ago. Add in
its Fannie Mae bonds and other holdings, and analysts figure China owns $1
of every $10 of Americas public debt.
The Treasury is conducting more auctions than ever to finance its$700
billion bailout of the banks. Still more will be needed to pay for the incoming
Obama administrations stimulus package. The United States, economists

say, will depend on the Chinese to keep buying that debt, perpetuating the
American habit.
Even so, Mr. Paulson said he viewed the debate over global imbalances as
hopelessly academic. He expressed doubt that Mr. Bernanke or anyone else
could have solved the problem as it was germinating.
One lesson that I have clearly learned, said Mr. Paulson, sitting beneath
his Chinese watercolor. You dont get dramatic change, or reform, or action
unless there is a crisis.
The headline on a front-page article on Friday, on the role in the housing
bubble and consumption binge in the United States played by investment
from China, could have been misunderstood. The article described how the
United States has been tolerating a huge trade deficit with China while
Chinese authorities have invested huge sums in American government
securities from savings partly created by the inflow of American dollars.
Dollar Shift: Chinese Pockets Filled as Americans Emptied meant to
describe the complications of that situation; it did not mean to imply that
China has profited from the weakness of the American economy.

China Economy in 2012

Options Open on Economy
By ESWAR S. PRASADSEPT. 10, 2012

Chinas economy has been the leading contributor to global growth since
2009 and became the second largest in the world in 2010. Small wonder that
fears of a growth slowdown in China are causing trepidation around the
world.
The fears are palpable given that virtually all indicators of economic activity
are pointing down. Growth in gross domestic product, industrial production
and retail sales have all slowed markedly. Alternative indicators like
electricity consumption suggest an even sharper slowdown. Foreign trade
has not helped, with export and import growth falling sharply as well.
Then there are the longer-term concerns that a rapidly aging population is
going to limit the economys growth potential, snaring China in the
middle-income trap. With fear in the air, foreign capital is no longer
pouring into China and some domestic investors are even taking capital out.
Inflation has eased to 2 percent and some of the froth has come off the
property market, but these are seen by many as signs of deeper malaise

rather than as positive developments. All told, it appears to be the season for
China bears, who are exulting as their views appear finally to be
validated.
The burden of pulling along world growth while the major advanced
economies the United States, Europe and Japan continue to post
anemic growth and remain in a state of policy paralysis has clearly taken its
toll on the Chinese economy. Moreover, many emerging markets and even
some advanced economies that rely on commodity exports have been riding
on Chinas coattails during a difficult period in the world economy. Thus,
Chinas growth is seen as a bellwether of an even rockier period ahead for a
global economy whose recovery has stalled.
For all the angst about Chinas growth, the government does have room to
stimulate the economy through fiscal and monetary policies. This is in
contrast to many advanced economies, which seem to have exhausted their
policy options. With a leadership transition looming, the Chinese
government appears to be holding some of its fire to be able to respond
strongly to external shocks.
Attaining this years growth target of 7.5 percent is likely to be difficult but
not insurmountable. The real challenge Chinese policy makers face is how to

sustain growth in the short run without creating more risks over the longer
term.
A bank-financed investment surge lifted economic growth during the global
financial crisis. The temptation to use this policy tool again is strong. But
another wave of bank-financed investment would also create big risks,
including excess capacity in many industries and more bad loans in the
banking system.
The mix of policies also has implications for making growth more balanced.
Until recently, the Chinese economy was beset by two imbalances an
external one, reflected in a high trade surplus, and an internal imbalance,
reflected in a low and falling ratio of private consumption to G.D.P.
The external imbalance has dissipated, at least temporarily. Chinas trade
surplus has fallen steadily from its recent peak of 7.6 percent in 2007 to 2.1
percent in 2011, and below 2 percent in the first half of this year. Part of this
decline is because China has been growing far more strongly than its trading
partners. Another factor is that the currency, the renminbi, has appreciated
in value against the currencies of Chinas major trading partners, reducing
export competitiveness.
By contrast, domestic growth remains unbalanced, with investment still
accounting for a major share of G.D.P. growth. The share of private

consumption in G.D.P., which is only about one-third already much lower

than in virtually every other economy continues to decline.
There was a spark of hope in the first quarter of 2012, when private
consumption accounted for the major share of G.D.P. growth. But this
proved fleeting, and investment has once again taken over as the main driver
of growth. Investment-led growth of the sort China has experienced is not
entirely a plus it does not lift employment growth by much, has
deleterious environmental consequences and limits the benefits that the
average household gets from fast growth.
What is to be done? Fiscal policy, if well targeted, would be a better tool to
stoke demand in the short run without creating too many long-term risks.
For instance, a better safety net would help spread the benefits of Chinas
strong economic performance more evenly and reduce the incentives for
households to self-insure against risks of unemployment by saving more.
Raising social expenditures on health and education would not only give
households more incentive to spend rather than save but also help improve
the productivity of labor.
For the longer term, the main priority for the government is to improve
productivity rather than rely on high investment or an expanding labor force.

This will also require a better financial system and more effective policy
tools.
The financial system needs to improve its efficiency in allocating capital to
more productive uses, including providing capital for small and midsize
enterprises that could generate more employment, and providing savers
with a higher return on their deposits. A better monetary policy would help
in this objective and that, in turn, requires a greater freeing up of the
exchange rate over time so that the central bank can use interest rates to
guide credit allocation.
The economy faces other enormous challenges, including corruption and
dismal corporate governance at Chinese enterprises. The twelfth five-year
plan, issued last year, laid bare these problems and deficiencies in the
policy-making process. An authoritarian government can certainly do what
would be infeasible in a democracy, where such an admission would be
politically fatal. But it is difficult to think of another government, democratic
or not, that so bluntly acknowledges major problems and areas where its
policies have failed to deliver much progress. In the midst of the gloom, that
allows a glimmer of hope that Chinese policy makers will continue to
embrace an agenda of much-needed reforms.

Despite the difficult economic environment and a looming,

rockier-than-anticipated political transition, there has been progress. This
includes modest but significant steps taken in recent months toward greater
flexibility of the renminbis exchange rate, liberalization of domestic interest
rates, and freeing up of restrictions on capital inflows and outflows.
This opportunistic and gradual approach to economic overhauls is one way
to make progress given the significant constraints, both political and
institutional, that the government faces. But Chinas leaders may not have
the luxury of time or a benign environment, either domestic or global, to
limit themselves to such a slow, even if steady, pace.
The countrys policy makers have proven adept at managing a high-wire
balancing act for a number of years, keeping growth strong even while
managing the many problems the growth process has created. Gusting winds
from abroad have now exposed many of these tensions and threaten to bring
the act crashing down.
A more aggressive push for reforms is needed to help secure short-term
growth while improving future prospects and reducing risks. Not moving
forward on these reforms may be the biggest risk of all.
Eswar S. Prasad is a professor at the Dyson School of Applied Economics
and Management of Cornell University and a senior fellow at the Brookings

Institution. He is a former head of the China Division of the International

Monetary Fund.

China Politics Stall Overhaul for Economy

By ANDREW JACOBSSEPT. 26, 2012

BEIJING When it comes to confronting economic slowdowns, the Chinese

government has not been shy about making bold moves. Faced with the
contagion of global recession four years ago, policy makers created a $585
billion stimulus package that helped inoculate the nation against the
economic malaise still sapping the United States and Europe.
But today, even as Chinas vaunted export manufacturing juggernautloses
force and the Shanghai stock market remains in a slump, the Communist
Party appears so distracted by its politically tangled once-a-decade
leadership transition that it is unwilling or unable to pursue the more
ambitious agenda that many economists say is necessary to head off a far
more serious crisis in the future.

Although the departing government has tried in recent months to address

decelerating growth by easing bank loan restrictions, increasing pensions
and offering tax breaks to small businesses, a lack of consensus among the
top stewards of the economy has stymied a more muscular response,
insiders say.
Similarly, many analysts question whether the incoming leadership has the
political will to overcome the resistance of the so-called princelings and
other well-connected families that have prospered under the current system.
Chinas standard economic formula, they say, is losing its potency:
overzealous government investment and lagging consumer spending are
creating serious imbalances that are expected to lead to a much more painful
reckoning, perhaps not long after the new raft of younger leaders assumes
power in early 2013.
There are tough choices to make, but the central government appears to be
so paralyzed they are just sitting on their hands, said Ho-Fung Hung, a
political economist at Johns Hopkins University in Baltimore. The situation
is looking increasingly dire.
The economic data is indeed glum. Direct foreign investment has fallen for 9
months out of the past 10, and industrial output is rising at the slowest rate
in three years. Last week, Frederick W. Smith, the chief executive of FedEx,

the global airfreight titan, warned of more trouble to come, saying that
Chinas faltering exports pointed to a weakening global economy in the
coming year.
Since the death of Deng Xiaoping, the wily leader who steamrollered his
conservative opponents to introduce market reforms in the 1980s and 90s,
Chinas political system has increasingly operated through consensus. The
horse-trading, involving a dozen or so men who negotiate in secrecy, has
dimmed the prospect of significant political or economic change.
The slogans are loud and the plans are grand, but when it comes to
implementation, the constraints are many, said Zhao Xijun, an economics
professor at Renmin University in Beijing.
Prime Minister Wen Jiabao is a vocal advocate of what many experts see as
the kind of change China needs: breaking up state-owned monopolies,
encouraging more consumer spending and reducing reliance on investment
in real estate and heavy industry. But he has already been rendered
something of a lame duck because of his planned retirement in March. He
lacks the political capital to undertake a more ambitious overhaul of the
economy, particularly anything that would undercut the favored position of
state monopolies, analysts say.

Wen is a spent force, said a person with close contacts in the upper levels
of the Chinese government.
To be sure, Chinas developing economy enjoys many advantages over those
of most other major industrial nations, with growth still robust enough to
prevent unemployment from rising significantly. But unrest is increasing,
as riots at a big Foxconn electronics factory on Sunday demonstrated, and
there is so much uncertainty surrounding economic policy and the
leadership hand-over that few are willing to hazard a prediction about the
future.
The system is so opaque and the new guys are such unknown entities that
no one really knows what to expect, said Alistair Thornton, senior China
economist at IHS Global Insight.
Supporters of Xi Jinping, the man expected to be Chinas next president, and
Li Keqiang, who is all but certain to replace Mr. Wen as prime minister, have
been quietly putting out the word that the new team plans to introduce a
more far-reaching agenda once the incoming leaders are secure in their new
posts. Some even argue that the worse things get, the better the chance the
new leaders will have to deal with Chinas biggest challenges after the
successors are announced at the 18th Party Congress, expected to take place
next month.

When the bubble bursts, there will be an initial period of pain, Li Zuojun, a
prominent government economist, said in a recent speech, but it would be
good news for the new leadership because it would be clear who is to blame
their predecessors. The new leadership can start over on solid ground.
But so far, Mr. Xi has offered almost no clues as to where he stands on
overhauling the economy, while Mr. Lis track record during his time as a
provincial governor and party secretary suggests he is more of a risk-averse
technocrat than a reformer.
For the moment, the worlds second-largest economy is drifting, as exports
to Europe and the United States wane. Some economists even suspect that
the official figure of an annual rate of growth of 7.6 percent in the second
quarter is overstated; indicators like electricity generation are rising much
more slowly. Moreover, part of the growth led only to producing stocks of
unsold appliances, toys and coal that are piling up at warehouses and ports.
Still, Beijing has largely held back from the kind of prodigious investment in
housing and public works that propped up the flagging Chinese economy
during the global downturn. In an editorial published this month, Peoples
Daily, the partys influential mouthpiece, conveyed the official view, saying
the central government should resist the temptation to spend its way out of
the slowdown.

In a speech this month at a World Economic Forum session in Tianjin, Mr.

Wen agreed that the government was holding its fire, but said that it would
step in forcefully if necessary. Beijing has a budget surplus of $158 billion,
with $16 billion more in a reserve fund, he noted.
We will use that money at a right moment for pre-emptive policy and
fine-tuning to propel stable economic growth, Mr. Wen said.
Local governments, alarmed by a slowdown they fear could lead to mass
unemployment and the kind of sluggish growth that can dent political
careers, have decided to take matters into their own hands. In recent months,
a number of cities have proposed extravagant infrastructure projects they
hope will be financed in part by newly liberalized bank loan policies.
Tianjin claims $236 billion will be spent in the petrochemical, aerospace and
other industries. Xian, home of the famed terra cotta warriors, plans to
invest tens of billions of dollars on nine new subway lines. In Guizhou, one
of Chinas poorest provinces, officials said they hoped to funnel $472 billion
into tourism-related development.
In Changsha, the provincial capital of Hunan, officials brag of 12.9 percent
growth as they spend billions of dollars on a new subway system, a ring road,
an intercity rail line and a pair of bridges to knit together its transportation
system.

We havent felt any impact from the crisis in Europe, said Liu Maosong,
chairman of the Hunan Economics Association and an adviser to the
Changsha government. Our guiding philosophy is investment, investment,
investment.
Even if many such projects turn out to be wishful thinking, economists have
expressed alarm that municipalities are still chasing debt-financed growth.
It almost scares me to death, said Mao Yushi, a prominent economist.
Local governments are using the peoples money for investment, but when
they cant repay the banks, the financial system will snap.
And Liao Jinzhong, an economist at Hunan University, worries that much of
the spending is misplaced. What we really could use is a functioning sewage
system, he said, speaking from his sixth-floor apartment in a crumbling
faculty building that has no elevator.
Mr. Liao said he gave frequent lectures at the local party school about the
dangerous fixation on propping up growth figures at all costs. He said
officials often congratulated him on his frank views.
But then they admit they cant change the way they do things, he said.
Given that the whole system is oriented toward bolstering the careers of
officialdom, I just dont see things changing any time soon.

China Economy in 2003

CHINA IN SPACE: THE OUTLOOK; Milestone
for China: Dragon Has Landed
By JOSEPH KAHN
Published: October 16, 2003

BEIJING, Oct. 15 The technology is vintage Kennedy and Khrushchev,

the secrecy is reminiscent of the cold war and the popular reaction is a bit of
a fizzle, but China's seemingly successful effort to put a man into orbit is a
sign that it intends to become a peer of the United States.

The goal may still be 50 years away, but the direction is clear.
Technologically and militarily, China is determined to retrace the steps that
made the United States the world's unmatched superpower.

Sending a man into orbit in a capsule only slightly modified from the
Russian Soyuz seems almost quaint when Russia has all but abandoned its
space program as uneconomical and the United States is debating the utility
of manned space flight after the second explosion in its troubled shuttle
program.

But to listen to the addresses on Wednesday by the Chinese president, Hu

Jintao, and the military chief, Jiang Zemin, is to be reminded of
schoolteachers lauding the virtues of Latin. China will only become a great
power, they said, if it can show that it grasps the roots of modern science and
technology.

''The symbolic significance outweighs the strategic value of this mission,''

says Lei Yi, a historian at the Chinese Academy of Social Sciences. ''It is
meant to show that China is arriving as a scientific and technological
power.''

The Shenzhou mission is part of a broader push for international recognition

that also prompted China's prolonged and highly emotive campaigns to play
host to the Olympics and join the World Trade Organization, which were
also successful.

Unlike those efforts, though, putting a man into space gives China bragging
rights to a scientific achievement that only two other nations have equaled.
European countries and Japan have discussed manned space programs but
never followed through. India has space ambitions but lags behind China in
both rocket and satellite technology.

Catching up with the West has been a national obsession in China since the
19th century, when British cannons and light infantry demolished a
hopelessly ill-equipped imperial army and later contributed to the collapse
of the Qing Dynasty.

Sun Yat-sen, Chiang Kai-shek, Mao Zedong, Deng Xiaoping and now Mr.
Jiang and Mr. Hu, a succession of Nationalist and Communist leaders who
otherwise have little in common, all emphasized the urgency of acquiring or
recreating the technological hardware that they see as essential to modern
development and military security.

Shenzhou 5 is just the most recent in a string a technological achievements

that have in fact made China a regional power, if still not yet a true peer of
the United States. China has had nuclear weapons for nearly 40 years. It has
had its own satellites in orbit since the early 1970's. It has intercontinental
ballistic missiles that can reach America's heartland.

Its main strategic focus is relatively modest, to eventually regain full

sovereignty over Taiwan. China also seeks to maintain regional stability so
that it can continue to develop its economy.

But in the longer term the military is seeking to project force beyond its
shores and into the heavens. A big motivation for spending billions of dollars
on manned space flight, Chinese scientists say, is to develop the ability to
fight outside the Earth's atmosphere, which could be critical in the
competition with the United States, especially if Washington deploys
space-based missile defenses.

China's newly appointed leaders are themselves engineers and technology

enthusiasts. Mr. Hu, trained as a hydrologist, looked like a physics student at
a science fair as he wandered through the control center on Wednesday. The
Shenzhou mission seems certain to prompt a fresh round of government
investment in civilian and military technology.

But the leadership's efforts to mimic foreign technology have often been
clumsy and incomplete, in part because officials reject Western politics and
social norms -- the software -- as threatening to Communist rule.

Chinese science tends to be top-down, and the giant bureaucracy often stifles
innovation. China has not yet developed a viable commercial aviation
industry, for example. As with its space program, China's navy and air force
still depend heavily on dated Russian technology.

Most important technology projects are treated as state secrets today, much
as they were during the cold war. Even the most basic details of the manned
space program, like the names of astronauts, were not disclosed until the
launching took place. The merits of putting men into space is not discussed
openly at all. The lack of publicity left many Chinese unprepared, and
notably underwhelmed, by the event.

Though China now has the world's sixth-largest economy, some scientists
reckon that it ranks far below that in technological sophistication. He Zuoxiu,
a physicist at the Chinese Academy of Science, says that as a percentage of
its overall economic output, China devotes far less to scientific research than
the United States or Japan and often neglects its most pressing needs, like
energy, to pursue vanity projects.

''People should not have the misperception that this launch makes us a
scientific power,'' Mr. He said. ''There are certain reasons for becoming one
of the countries in outer space, but from a scientific standpoint there may
well be more pressing areas that need investment.''

But while the United States is fighting a global campaign against terrorism,
China is posing a different challenge. It is taking pages from the American
playbook, laboriously and expensively recreating the technology that it
believes will sooner or later make it a first-world power.

ECONOMIC VIEW; China's Strange Hybrid

Economy
By KEITH BRADSHER
Published: September 21, 2003

HONG KONG FROM the popcorn stands at the amusement park to the
jewelry stores of the Mongkok shopping district, many retailers here post the
exchange rate they offer for purchases made with mainland China's currency,
the yuan. That makes life convenient for the flood of mainland tourists
arriving now that Beijing has relaxed visa restrictions, but not for China's
central bank.

After shifting more than halfway from Communism to capitalism, China has
a strange hybrid economy. Goods can flow freely in and out of the country
with few restrictions -- especially since November 2001, when China joined
the World Trade Organization. But large flows of money in and out of China
are still regulated or even prohibited. Keeping the controls in place is
becoming harder, however, as Zhou Xiaochuan, the governor of China's
central bank, the People's Bank of China, admitted in a speech here last
week. ''Whether the effectiveness of capital account controls is good enough
is a matter of debate'' among Chinese officials, Mr. Zhou said.

Particular problems, he said, lie in the large sums of yuan already circulating
in Hong Kong and Taiwan as well as the ease with which 60 million Chinese
overseas can work with friends and relatives on the mainland to pull money
in or out of China depending on the attractiveness of mainland investments.

Mr. Zhou acknowledged what some Western economists have been saying
for years: that the ''errors and omissions'' line in China's balance of
payments is an indicator of unreported money flows in and out of China. If
anything, he added, these figures understate the true extent of capital flight
from China in the early 1990's.

But the same line in the balance of payments now shows that unreported
flows of money have reversed since last year, as investors pump money into
China partly on the speculation that international pressure may force China
to let the yuan jump in value against the dollar.

Bankers say huge sums are also moving in and out of the country as
exporters in China either undercharge or overcharge their foreign
subsidiaries or partners, so as to transfer money between the books of
domestic and overseas operations.

Even within China, there are ''hot money'' flows into the yuan, said Sun Bae
Kim, an economist with Goldman Sachs. Some Chinese companies and
families are allowed to keep part of their foreign revenues as dollar deposits
at Chinese banks. But the value of these deposits as a percentage of total
banking deposits has been declining steeply as these companies and families
voluntarily convert more money into yuan than required.

Nobody really knows how much yuan is already circulating outside the
mainland, including here, beyond the control of the central bank.

''It's not as obvious as someone coming into the banks with a suitcase full'' of
Chinese currency, said David Carse, the departing deputy chief executive of

the Hong Kong Monetary Authority, the separate central bank that manages
this Chinese territory's fully convertible currency, the Hong Kong dollar.

China's capital controls have stayed in place mainly to keep depositors from
pulling their savings out of China's huge and insolvent banking system and
investing them in safer places, like the Hong Kong branches of Citibank or
HSBC. By artificially holding within China the enormous savings generated
by an increasingly affluent population that saves 40 percent of its income -one of the highest savings rates in the world -- China has been able to
finance a tremendous amount of factory construction.

THE question is how much of that investment is simply being wasted on

unproductive projects.

South Korea used to take much the same approach to controlling money
flows, building itself into an economic power but then running into serious
financial difficulties. In China, the state-run banks are notoriously corrupt
and inefficient, issuing huge loans to well-connected people and businesses
that do not repay them. The banks do not receive timely payments now on
nearly half their loans.

Chinese officials know they must strike the right balance so as to let families
and companies invest overseas without sucking the domestic banking
system dry of deposits, as has sometimes occurred in Latin America.

''At some point,'' Mr. Zhou said, ''you have to invest some of your money
overseas because you find the investment opportunities overseas are better
than the investment opportunities domestically.''

Chart: ''Flight Reversed'' Net unreported money flowing into or out of China.
Graph tracks net unreported money flowing into or out of China from 1990
through estimated 2003. (Source by Peoples Bank of China)

THE SARS EPIDEMIC: ECONOMY; Outbreak of

Disease Brings Big Drop-Off In China's
Economy
By KEITH BRADSHER
Published: April 28, 2003

GUANGZHOU, China, April 27 The outbreak of a new respiratory

disease has inflicted the greatest blow to the Chinese economy since the
Tiananmen Square killings in 1989, causing a plunge in retail sales, a
slump in demand for some Chinese exports and a near-collapse in
domestic and foreign tourism.

J. P. Morgan Chase, which does investment banking in China, estimates

that after expanding at a torrid annual rate of 9.9 percent in the first
quarter, the Chinese economy is actually shrinking at an annual rate of 2
percent in the second quarter.

Some government policies adopted to slow the spread of the severe acute
respiratory syndrome, or SARS, are increasing the economic damage.

The municipal government in Beijing ordered the closing of all movie

theaters, Internet cafes, discos and other places of entertainment today.
The government of Guangdong Province said today that tour groups may
not enter or leave. The national government has already shortened what
was to be a weeklong holiday starting Monday, further discouraging retail
spending and tourism.

''The economy has come to a standstill,'' said Andy Xie, an economist with
Morgan Stanley, adding that if China does not get the epidemic under
control soon, ''it's going to be very, very difficult and we cannot
underestimate the downside risk.''

In trying to preserve its political legitimacy, the Communist Party has

relied heavily on China's position over the last two decades as the world's
fastest-growing major economy. If the current economic downturn proves
prolonged, that could damage the party's claim to be the best way to offer
greater prosperity to 1.3 billion Chinese.

The initial economic impact has fallen most heavily on businesses that
provide services, which are most dependent on consumer spending and
make up a third of the Chinese economy. But there are signs that the
enormous manufacturing sector, which accounts for half of economic
output, could begin to feel indirect effects soon, too.

Taiwan, whose companies own and manage much of China's huge

electronics industry, said today that nobody except Taiwan citizens may
enter from China, Hong Kong, Singapore or Canada because of SARS.

People coming home to Taiwan from these places will be required to spend
10 days in quarantine regardless of their health.

The announcement came as Taiwan, which has had 55 cases of SARS,

reported its first fatality.

There are many signs of the slowdown here in Guangzhou, the largest city
in southern China, with 10 million inhabitants, and the center of an
outbreak of SARS over the winter that China carefully hid from the outside
world.

The long-distance bus station should be mobbed at this time of year

because of the coming May Day celebration, which customarily lasts all
week. Instead, there are few riders for drivers like Fu Jian, a long-haul bus
driver who ate fried rice with chopsticks from a plastic container in the
front of his bus here this afternoon as he waited for passengers for the
overnight trip to Yizhou in Guangxi Province.

The national government already trimmed May Day to a three-day holiday,

just Wednesday, Thursday and Friday, in the hope of discouraging travel.

Many intercity bus services have been canceled and the drivers laid off,
and the remaining buses are less than half full, Mr. Fu said.

Travel between cities has become more difficult, he said, with the police
setting up roadblocks staffed by nurses who check the temperatures of
drivers and passengers and disinfect buses in the hope of containing the
disease.

Glancing back warily at the half-dozen passengers who had already

trickled aboard his bus, Mr. Fu added that he would not mind being laid
off himself. ''I can take a rest, and there's much less risk'' of infection, he
said.

At Guang Xiao, a series of red-roofed Buddhist temples with elaborately

carved and painted statues here, the usual throngs had disappeared and
even the fortune tellers had gone home for lack of business. At the Huang
Zhi Qiang Cold Tea Shop, which sells herbal elixirs across the street from
the temples, a sales clerk complained that business had dropped by half.

''It's worse than it used to be, because people simply don't go out of their
homes,'' she said.

What remains unclear, however, is how long the economic slump in China
will last. That will depend on how long the disease persists and how long
people's fears of it will last, two variables that are impossible for
economists or anybody else to predict.

For now, Western banks are predicting a sharp but short drop for the
Chinese economy if the Chinese government can bring the outbreak under
control quickly. Assuming that happens by the end of June, said Joan
Zheng, an economist at J. P. Morgan, China will resume growing at an
annual rate of nearly 8 percent in the last three months of this year. She
said, however, that the third quarter, July through August, could still see
growth at half that level as companies will need to sell the supplies of
goods they are now accumulating before they order more from factories.

The economic consequences of the outbreak would be more severe if China

were more developed and had more businesses providing services, as such
businesses, including the nearly empty restaurants and department stores
here, are most susceptible to the kind of steep decline in consumer
confidence that fears of SARS create.
Service businesses represent close to two-thirds of the economies of
developed countries like the United States and five-sixths of the economy of

Hong Kong, which exists as a trading center and has been economically
devastated by its SARS epidemic.
By contrast, China's manufacturing sector is enormous because of heavy
foreign investment and soaring exports.
Exports to the United States do not appear to have been affected, said Craig
Pepples, chief operating officer and president of Global Sources, a company
in Hong Kong that helps put foreign buyers in touch with Chinese factories
of all sizes, using the Internet and local employees in this and other Chinese
cities so that buyers do not have to make the trip themselves.
''As long as people in the States are going to Wal-Mart and Home Depot, the
buyers are going to have to get the stuff for the shelves,'' Mr. Pepples said.
Global Sources works with many factories across China and has not seen any
sign that SARS is disrupting production. In interviews at two factories in
mid-April, workers said that they were not aware of any cases.
The reality is that China may have considerable extra manufacturing
capacity and labor as well. ''If they get infected, there are so many other
places in China that will clamor to get into the breach,'' Mr. Pepples said.
But Michael Lee, a self-employed broker of electronic goods in Singapore,
said SARS fears had hurt sales throughout east Asia at many department

store chains, which had responded by cutting back their orders to him by a
third.
Mr. Lee said he had been afraid to travel to China lately and this had been a
problem because he was not able to check shipments at the factory before
they were exported.
For one recent order, the factory did not silk-screen ''Made in China'' on
each of a large order of stereo speakers, so the customer in South Korea had
it done and billed Mr. Lee a substantial sum for the work.
Economists predict that many multinational corporations may reconsider
further investments here if SARS persists, but no projects appear to have
been canceled yet. David Bodkin, a spokesman for Delphi, the world's largest
manufacturer of auto parts, said that the company had restricted corporate
travel into and out of China but that no consideration had been given to
moving operations.
China's agricultural sector makes up another one-sixth of the output here,
but economists doubt that farm production will be disrupted.
While dozens of SARS cases have been reported in rural areas, and more
may not have been reported, rural unemployment is one of China's biggest
problems. Surplus labor has been estimated as high as 150 million adults, a
population greater than the entire work force of the United States.

Some investment banks have waxed enthusiastic about the ability of a

repressive country like China to bring SARS under control. Singapore and
Vietnam have also had some success in limiting the spread of the disease
through stringent quarantines and other measures, while Hong Kong was
initially leery of trampling on civil liberties and has had far more cases.
''Once China's leaders focus on problems and are determined to take action,
they usually manage to resolve them -- sometimes with brutal efficiency,'' a
Goldman Sachs report concluded. ''You may call that a virtue of
authoritarian government.''
Photos: Fu Jian, a driver for a bus line in Guangxi Province, says he would
not mind a layoff, which would mean a rest and less chance of infection.;
Service businesses, a third of China's economy, have been devastated by
fears of SARS. Bus schedules have been cut, and at the Huang Zhi Qiang
Cold Tea Shop, across the street from a tourist site, business is down by half.
(Photographs by Justin Guariglia/Contact Press Images, for The New York
Times)(pg. A14) Chart: ''The Ripple Effect'' An outbreak of SARS has hurt
the Chinese economy, sending its gross domestic product into decline this
quarter, according to a revised forecast. The forecast assumes that the
disease will be brought under control by the end of June and that unsold
stocks of goods will be easily sold from July through September. Graph
tracks the G.D.P., annual percentage change since 1996. Projected in 2003

Graph tracks the G.D.P., annual percentage forecast before SARS and the
projected revised forecast for the rest of 2003. (Source: J. P. Morgan
Chase)(pg. A14)

A Heated Chinese Economy Piles Up Debt

By KEITH BRADSHER
Published: September 4, 2003

GUANGZHOU, China, Sept. 3 Looming through the gray smog of

every big Chinese city these days, high above the incessant rattle of
jackhammers, are the construction cranes, slowly swinging back and forth
over huge steel and concrete boxes wrapped with fine lattices of bamboo
scaffolding.

The question here and across the country, though, is how much longer the
cranes will stay busy, and with them an economy that is powering a big
chunk of the world's growth and terrifying trading partners from Tokyo to
Washington to Brussels.

While this week's visit by Treasury Secretary John W. Snow has focused
attention on the value of China's currency, the yuan, the worry in China is
that the economy is overheating. This is a particular worry in sectors that
involve investments in new buildings and equipment.

Mr. Snow and his Chinese counterparts agreed today that China should
eventually allow the yuan to be traded freely on world markets, but the
Chinese reject calls to move quickly in that direction. [Page A3.]

China's central bank expresses growing alarm that reckless bank lending,
reminiscent of the pattern that preceded the American savings and loan
collapse in the late 1980's, may be causing an unsustainable boom that could
end badly. In a rare statement on Aug. 23, the central bank said its economic
policy units ''unanimously think that the loans right now are increasing too
fast.''

Chinese banks issued more new loans in the first seven months of this year
than in all of last year, and the pace is still accelerating.

Yet in a sign that China remains stuck halfway between Communism and
capitalism, the central bank has found itself with curiously little power to
stop the runaway lending. Chinese financial markets are not well-enough

developed for the central bank to do the kind of trading in overnight credit
markets that the Federal Reserve uses to move short-term interest rates.

The bank has also renounced the authority that, under central planning,
gave it the power to dictate how much could be lent to certain sectors of the
economy, and by whom.

''The central bank is clearly concerned about signs of overheating,'' said Fred
Hu, a Goldman Sachs economist with close ties to top Chinese economic
policy makers. ''There's not a whole lot they can do.''

The lending is fueling rapid growth in capital investment. China's huge steel,
chemical, construction materials and mobile phone industries are each
forecast to double its capacity in the next three years. If that happens,
another wave of Chinese exports can be expected.

But the scale of such investment will allow factories to increase output so
much that prices for their products may fall, making it less likely that the
projects will earn enough for the borrowers to repay the banks. This could
set off another round of loan defaults, said Dong Tao, a China economist
with Credit Suisse First Boston. While few economists predict the Chinese

economy might actually shrink, lending problems could be a severe brake on

growth for years, increasing unemployment.

Real estate has received a large share of recent investment, in part as

Chinese repatriate profits from overseas. Yet even as new buildings rise, 17
percent of the modern offices in Beijing and Shanghai are empty and rents
are slipping, according to a report by Jones Lang LaSalle, a big property
company.

The government owns China's banking industry except for minority stakes in
a few small and midsize institutions in the larger cities. While the banks
might some day earn profits or sell stock to cover some losses, most of the
costs of reckless lending are ultimately borne by taxpayers.

If Chinese banks go on making bad loans, the eventual cost will keep rising.
But if the central bank overdoes its adjustments of banking reserve
requirements, or if government inspectors of banks' books crack down too
quickly on new lending, the economic and political damage could be
enormous.

And any sharp slowing of Chinese economic growth would ripple through
the global economy. Prices of commodities like oil and iron ore could drop

because China's vast imports would slacken. American exports could also be
expected to falter, hurting companies like Boeing and growers of crops like
soybeans.

It is the domestic dangers that have prompted Chinese officials to allow

brisk bank lending for so long. ''Unemployment remains the primary
concern,'' said Desmond Supple, managing director of Asian research at
Barclays Capital.

After spending almost as much to clean up bad loans in the last five years as
the United States did to rescue the savings and loan industry, the Chinese
government is already facing calls from banks for another bailout. With a
rising budget deficit, Beijing is ill prepared for the prospect that many
recently issued loans could also end up in default.

Standard & Poor's estimates that borrowers have defaulted on nearly half of
all bank loans in China. Bankers and economists say the banks continue to
lend money to politically connected customers and make little effort to
charge higher rates to riskier borrowers. A series of investigations has found
evidence of inappropriate links between borrowers and lending officers.
So far, the banking system, awash in deposits, has held up. The economy has
grown 8 percent a year, and Chinese households have among the world's

highest savings rates. Most savers have few options except bank accounts, so
the banks constantly receive fresh money to lend.
Indeed, almost all that money comes from Chinese citizens. Stock markets
are small and shaky, and the bond market is underdeveloped. So savers,
particularly in the countryside, have few other options, even though
regulators have kept interest rates on deposits extremely low.
At least until recently, foreign investors have shown little interest in putting
money into Chinese accounts earning less than 2 percent.
In the late 1990's, the central bank set up a monetary policy committee that
resembled the rate-setting Federal Open Market Committee. Trying to
manage an economy that may be overheating, the bank appears to have
copied some favorite maneuvers of Alan Greenspan, the Federal Reserve
chairman.
Two months ago, it changed some rules and tightened the enforcement of
others to encourage banks to demonstrate more prudence in lending to
property developers and construction companies. Bankers and construction
executives say, though, that the changes have had only limited effect.
''The growth is continuing in the construction industry,'' especially in Beijing,
said John Wong, the China director of Gammon Skanska, a big Asia
construction business.

When the central bank began trying on Aug. 23 to constrict the money
supply for the first time in five years, it partly followed the script Mr.
Greenspan used when he pushed up short-term rates in February 1994. It
issued its first detailed statement on the economy. It also increased the share
of each bank's assets that must be deposited as reserves by only one
percentage point, to 7 percent, in an attempt to signal to the financial
markets a new policy trend without causing too much alarm.
China's central bankers ''have really tried to bring their operation to an
international standard,'' said Joan Zheng, chief China economist at J. P.
Morgan.
Raising reserve requirements is a blunt instrument, with unpredictable
effects on lending, the money supply and economic growth. The Federal
Reserve controls reserve requirements in the United States but has seldom
used this power as a tool of monetary policy since the early 1980's.
The Chinese move is expected to hurt mainly smaller banks that have been
keeping minimum reserves on deposit, and have been among the most active
in the property market. By contrast, the bigger banks have kept more
reserves on deposit than required, to the point that the average reserve for
the entire system is 8.2 percent, well above the new requirement for
individual banks.

The central bank granted an exception for rural credit cooperatives, which
are still allowed to keep just 6 percent of their assets as reserves. By drawing
huge deposits from the countryside and lending them mainly in urban areas,
to borrowers with better political connections, the banking system pumps
about $80 billion a year out of the countryside.
Shanghai, the hometown of many top Communist Party figures, has been the
principal beneficiary of the politics-laden lending process at state-owned
banks, booming in the last decade partly because of huge loans, many of
them not repaid.
Guangzhou, a commercial hub of southern China, increasingly relies on
lending by the more regulated banks in Hong Kong but also has many
projects financed by state banks. Its skyline bears testimony to the perils of
excessive lending -- dotted with the concrete shells of unfinished skyscrapers,
a national problem, even as new towers continue to be built.
Guangzhou was stuck with dozens of these hulks in the late 1990's, but has
managed to finish some of them lately because growth here has been among
the fastest in China. Liu Yuan He, the city's executive vice mayor, said in an
interview today that he was confident his city's businesses could continue
growing strongly.

''Most of them borrow money from the state-owned banks, but there won't
be a problem of repayment,'' he said at city hall, an ornate building that
predates the Communist victory in 1949.
Gauging whether the Chinese economy is overheating is hard because
official statistics show practically no inflation. A comparable frenzy of
business activity in a Western economy would, if accommodated by the
central bank, result in companies bidding up the prices of scarce materials
and the wages of workers.
Oddly enough, official Chinese statistics show that the overall price level has
changed little this year. But the figures may be deceptive; although China
has not disclosed the basket of goods it uses to calculate its consumer price
index, Western economists estimate that food accounts for as much as half
of it.
Food prices have been falling, partly because China joined the World Trade
Organization and is beginning to let in cheaper imported food. This may
mask rising prices for other goods and for services.
Official data on economic growth may also underestimate the scale of the
boom. Analyses by Goldman Sachs have found that China tends to smooth
out its growth figures, overestimating them when growth falters but
underestimating them when, as now, the economy seems to be expanding at
a pace that Goldman puts at more than 10 percent.

Swift growth in bank lending, poor controls on who receives credit and a
boom mentality among borrowers are all potential ingredients for a serious
financial or economic crisis some day.
''Assets are overheated,'' Mr. Supple of Barclays said, ''and that will
inevitably spill over into the rest of the economy.''
Photo: Rapid urban growth is evident in Guangzhou, China, where bad loans
and scant access to new money can mean bustling office towers and
apartment buildings, or half-completed building projects and strewn lots.
(Photo by Justin Guariglia/Contact Press Images for The New York
Times)(pg. C4)

China's Bounding Economy Fuels Both Hope

and Concern
By THOMAS CRAMPTON
Published: November 11, 2003

HONG KONG, Nov. 10 China reported on Monday that industrial

production surged in October, highlighting again its torrid economic growth.

''The Chinese economy is absolutely red hot,'' said Dong Tao, chief regional
economist at Credit Suisse First Boston. ''This is great news for the world
economy and people selling machinery or iron ore to China.''

China, Asia's second-largest economy, behind Japan's, said that industrial

production soared 17.2 percent in October from the month a year ago.
Although economists cautioned that the data could be heavily revised, the
figure illustrated both China's economic might and the dangers that can
accompany an overly rapid expansion.

China's economy grew 8.5 percent in this year's first nine months. Analysts
said that they expected a similar rate for the full year.

''When China accelerates, the world follows,'' Mr. Tao said. ''When China
slows down, the world will hurt. China is no longer just another
emerging-market economy.''

His sentiments were echoed in Bangkok at a meeting of central bankers from

industrialized nations.

Jean-Claude Trichet, president of the European Central Bank and chairman

of the Group of 10, a gathering of central bank officials from the world's 10
richest industrial nations, credited Asia with helping accelerate global

growth to a faster pace than many economists and policy makers had
expected.

''Asia's economy, being one of the major sources of global growth, is

experiencing intraregional trade, which is reflecting the domestic demand
that is strongly accelerating and improving in various economies in Asia,''
Mr. Trichet, acting as spokesman for the meeting, said. He added that
China's growth would help to hasten a global economic recovery.

But Mr. Tao and other analysts have warned that the rapid pace of
investment is likely to undermine the economy eventually by bloating the
country's production capacity.

''Money has been flowing around so fast that we are eventually looking at an
investment fiasco,'' Mr. Tao said. ''Huge amounts of capacity will come
online in about five years, prompting a deflationary situation.''

Despite its fevered growth, China still has one of the lowest rates of inflation
in Asia. Consumer prices rose just 1.1 percent in September from a year
earlier.