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China Economy in 1993China's Fix for Runaway Economy Is Falling ShortBy PATRICK E. TYLER,Published: October 3, 1993BEIJING, 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 MessIf 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 LoansOne 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 BlindThe 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 InvestmentIn 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 MarketHis 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 OrderedThis 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 BoomBy NICHOLAS D. KRISTOF,Published: February 14, 1993WENZHOU, 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 ConsequencesHis 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 BoomAlmost 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 DisappearsIn 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 MiracleOther 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 ConnectedBy SHERYL WuDUNN,Published: May 8, 1993HAIKOU, 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 CrucialCommunist 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 SaleOf 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 RequiredThe 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 InvolvedStories 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 GivenInvestors 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 WorseA 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 RetreatIn 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 LimitsBy NICHOLAS D. KRISTOF,Published: July 23, 1993BEIJING, 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 JumpedThe 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 TermIn 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 $100As 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 OffThe 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.'sOne 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 RisksMr. 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 ComeOn 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 RolePublished: December 30, 1993BEIJING, 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 ExpectedToday'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 ConvertibilityBut 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 FutureBy NICHOLAS D. KRISTOF;Published: September 6, 1993Ever 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 ParadiseThe 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 ProdsBut 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 BoomThe 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 SecretsThe 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 NationThere 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 ImprovementEven 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 SPECULATIONBy NICHOLAS D. KRISTOF,Published: August 15, 1993BEIJING, 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 UmbrellaIn 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 FundsBy Carole GouldPublished: June 13, 1993SPURRED 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 BloomBy LOUIS UCHITELLEPublished: November 11, 1993After 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 BehindBy SHERYL WuDUNNPublished: May 23, 1993GUIYANG, 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 RicherGuizhou 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 PlaceBy STEVEN GREENHOUSE,Published: May 20, 1993WASHINGTON, 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 AidThe 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 BuyIn 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 CarSome 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 EconomyBy NICHOLAS D. KRISTOF,Published: July 15, 1993BEIJING, 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 1994China to Act on FactoriesPublished: October 20, 1994BEIJING, 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 ChinaBy JOSHUA MILLSPublished: February 4, 1994The 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 GrowthThe 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 CorruptionBy PATRICK E. TYLER,Published: May 25, 1994WUHAN, 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 SinsMr. 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 ProfitThe 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 BurdenBy PATRICK E. TYLER,Published: June 29, 1994BEIJING, 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 MillionIn 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 DownturnIn 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 HotelsFarmers 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 MoneyTheir 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 DeathAt 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 NextPolicemen 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 TimeBy PATRICK E. TYLERPublished: January 2, 1994BEIJING—?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 ing 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 StatisticsPublished: August 18, 1994BEIJING, 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 RepercussionsAlthough 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 FearedThe 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 AdaptBy PATRICK E. TYLER,Published: December 11, 1994MIANYANG, 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 1995An Innocent on the Shanghai ExchangeBy SETH FAISONPublished: April 23, 1995SHANGHAI—?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 ScandalBy SETH FAISONPublished: September 22, 1995SHANGHAI, 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 GraftBy SETH FAISONPublished: August 10, 1995BEIJING, 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 StallsBy PATRICK E. TYLERPublished: June 18, 1995SHENYANG, 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 StakeMany 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 PoliciesMr. 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 MaoHere 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 ResistanceBefore 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 RescueSocial 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 SaysBy SETH FAISONPublished: July 20, 1995BEIJING, 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 InflationBy PATRICK E. TYLERPublished: March 6, 1995BEIJING, 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 InvestingAPPublished: January 2, 1995BEIJING, 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 199616 Foreign Law Firms Cleared To Open Offices in ChinaBy SETH FAISONPublished: June 27, 1996Correction AppendedBEIJING, 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 ChinaBy SETH FAISONPublished: December 11, 1996SHANGHAI, 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 ChinaBy PATRICK E. TYLERPublished: July 11, 1996ZHONGSHAN, 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 InflationBy SETH FAISONPublished: November 14, 1996SHANGHAI, 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 AgenciesBy SETH FAISONPublished: January 17, 1996SHANGHAI, 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 WorryBy PATRICK E. TYLERPublished: June 25, 1996BEIJING—?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 BooksOne 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 ParentsLi 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 HereBy Ian BurumaPublished: February 18, 1996It 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 OffBy SETH FAISONPublished: January 2, 1996SHANGHAI—?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 19979.5% Growth In China Stuns Experts AgainBy SETH FAISONPublished: July 23, 1997BEIJING, 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 RoadBy PATRICK E. TYLERPublished: February 20, 1997Like 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 PresenceMr. 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 HistoryIn 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 TiananmenIn 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 postsMr. 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 FactoriesDeng 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 ChinaAfter 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 RevolutionVictory 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 SetbacksWith 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 PeaceMr. 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 ChangeOf 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 ConservativesBut 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 1998CLINTON IN CHINA: THE ECONOMY; China Tells U.S. It Won't Devalue CurrencyBy MARK LANDLERPublished: June 27, 1998BEIJING, 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 ChaosBy SETH FAISONPublished: January 5, 1998FACEBOOKTWITTERGOOGLE+EMAILSHARE HYPERLINK "; PRINTREPRINTSSHANGHAI—?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 OverhaulBy SETH FAISONPublished: January 17, 1998BEIJING, 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 1999OUTLOOK 1999: INTERNATIONAL -- CHINA; China Thrives, but Critical Year Lies AheadBy SETH FAISONPublished: January 4, 1999SHANGHAI—?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. ReformBy ERIK ECKHOLMPublished: October 1, 1999BEIJING, 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 DepositsPublished: March 10, 1999BEIJING, 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. SEELYEPublished: April 8, 1999WASHINGTON, 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 CompaniesBy ERIK ECKHOLMPublished: September 23, 1999BEIJING, 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 bined 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 IndustriesBy ERIK ECKHOLMPublished: March 6, 1999BEIJING, 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 FactoriesBy SETH FAISONPublished: August 19, 1999BEIJING, 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 ernment 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 ChinaBy ELISABETH ROSENTHALPublished: March 15, 1999BEIJING, 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 WeekBy SETH FAISONPublished: January 13, 1999SHANGHAI, 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 WorkersBy ERIK ECKHOLMPublished: November 18, 1999BEIJING, 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 ChinaBy MARK LANDLERPublished: February 4, 1999HONG 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 ReformsBy ELISABETH ROSENTHALPublished: March 5, 1999BEIJING, 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 CurrencyBy SETH FAISONPublished: June 4, 1999SHANGHAI, 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 GirlsBy ELISABETH ROSENTHALPublished: November 1, 1999LIJIAGOU, 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 HummingBy SETH FAISONPublished: April 3, 1999SHANGHAI—?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 2004In China, Troubling Signs Of an Overheating EconomyBy HYPERLINK "; \o "More Articles by KEITH BRADSHER" KEITH BRADSHERAPRIL 14, 2004More 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. HYPERLINK "; China's Economy Continues to Race AheadBy HYPERLINK "; \o "More Articles by KEITH BRADSHER" KEITH BRADSHERMAY 14, 2004China'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 EconomyBy BLOOMBERG NEWSSEPT. 3, 2004BEIJING, 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 RulesBy HYPERLINK "; \o "More Articles by KEITH BRADSHER" KEITH BRADSHERSEPT. 23, 2004HONG 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 BanksBy? HYPERLINK "; \o "More Articles by KEITH BRADSHER" KEITH BRADSHERJAN. 7, 2004China 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 IndustryBy? HYPERLINK "; \o "More Articles by KEITH BRADSHER" KEITH BRADSHERMARCH 16, 2004Eager 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 2008China Unveils Sweeping Plan for EconomyBy? HYPERLINK "; \o "More Articles by DAVID BARBOZA" DAVID BARBOZANOV. 9, 2008SHANGHAI —? HYPERLINK "; \o "More news and information about China." 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? HYPERLINK "; \o "More articles about the credit crisis." 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 S?o 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, China’s 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 China’s economy by ensuring that the country remains a source of growth.China’s 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.China’s 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 China’s 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 country’s 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. “That’s 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 country’s 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 China’s suffering with the global economy.“The government is sending a signal saying: ‘We’re 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 ChinaBEIJING (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.China’s 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 EconomyBy? HYPERLINK "; \o "More Articles by KEITH BRADSHER" KEITH BRADSHEROCT. 19, 2008HONG 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.China’s 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 ernment 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 China’s 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? HYPERLINK "; \o "More articles about the credit crisis." 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 China’s 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 China’s 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 country’s 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? HYPERLINK "; \o "More articles about food prices and supply." 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 Council’s 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, China’s 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 SlumpBy? HYPERLINK "; \o "More Articles by JIM YARDLEY" JIM YARDLEY?and? HYPERLINK "; \o "More Articles by KEITH BRADSHER" KEITH BRADSHEROCT. 22, 2008BEIJING — For three decades,? HYPERLINK "; \o "More news and information about China." China?has fueled its remarkable economic rise by becoming the world’s 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? HYPERLINK "; \o "More articles about the credit crisis." financial crisisfrom derailing the country’s 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 China’s top priority is protecting its own economy. Chinese leaders say the domestic financial system is largely insulated from the global crisis — China’s 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 country’s 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 China’s 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 country’s export hub. Slightly more than half the country’s 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 China’s 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 China’s competitive advantage as a manufacturing exporter.Today, improvements are needed in railroads and the electrical power grid. But China’s 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.“China’s infrastructure is excellent — compare it to India,” said Xu Xiaonian, an economics professor at the China Europe International Business School in Shanghai. “It’s getting harder for the government to find ways to spend money productively. It’s 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 China’s own interest. “They can’t 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 isn’t 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 country’s 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 China’s 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 country’s HYPERLINK "; \o "More articles about sovereign wealth funds." sovereign 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 doesn’t 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 DollarBy DAVID BARBOZAPublished: April 11, 2008China'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 BubbleBy? HYPERLINK "; \o "More Articles by MARK LANDLER" MARK LANDLERDEC. 25, 2008“Usually it’s the rich country lending to the poor. This time, it’s the poor country lending to the rich.”—?Niall FergusonWASHINGTON — 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,? HYPERLINK "; \o "More articles about Ben S. Bernanke" 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,? HYPERLINK "; \o "More news and information about China." 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 world’s 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 Fed’s 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 China’s heavy lending to this country was risky because Chinese leaders could decide to withdraw money at a moment’s notice, creating a panicky run on? HYPERLINK "; \o "More articles about the American dollar." 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 couldn’t do anything about it.”But Mr. Bernanke’s 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 DanceThe 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 America’s economic might. Action took the form of a 1985 agreement known as the Plaza Accord. The world’s 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 Japan’s 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? HYPERLINK "; \o "More articles about the credit crisis." 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. “There’s 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, China’s 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 PartnerBeing 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, China’s 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 everyone’s attention: the White House and China,” Mr. Graham recalled.At the People’s 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 country’s 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 bank’s 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: China’s 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 you’ve 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.“We’re 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 Won’t Let GoFor 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. China’s 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 America’s public debt.The Treasury is conducting more auctions than ever to finance its HYPERLINK "; \o "More articles about the credit crisis bailout plan." $700 billion bailout?of the banks. Still more will be needed to pay for the incoming Obama administration’s? HYPERLINK "; \o "More articles about economic stimulus." 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 don’t 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 2012Options Open on EconomyBy?ESWAR S. PRASADSEPT. 10, 2012 HYPERLINK "; \o "More news and information about China." China’s 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 economy’s 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 China’s coattails during a difficult period in the world economy. Thus, China’s 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 China’s 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 year’s 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. China’s 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,? HYPERLINK "; \o "More articles about the Yuan." the renminbi, has appreciated in value against the currencies of China’s 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 China’s 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 renminbi’s 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 China’s 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 country’s 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 EconomyBy? HYPERLINK "; \o "More Articles by ANDREW JACOBS" ANDREW JACOBSSEPT. 26, 2012BEIJING — 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? HYPERLINK "; \o "More news and information about China." China’s vaunted export manufacturing juggernaut HYPERLINK "; \o "Times article" loses 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.China’s 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 China’s 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, China’s 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? HYPERLINK "; \o "More articles about Wen Jiabao." 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, China’s 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? HYPERLINK "; \o "Times article" 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? HYPERLINK "; \o "More articles about Xi Jinping." Xi Jinping, the man expected to be China’s 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 China’s 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. Li’s 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 world’s 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? HYPERLINK "; \o "Times article" 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, People’s Daily, the party’s 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. Xi’an, home of the famed terra cotta warriors, plans to invest tens of billions of dollars on nine new subway lines. In Guizhou, one of China’s 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 haven’t 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 people’s money for investment, but when they can’t 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 can’t change the way they do things,” he said. “Given that the whole system is oriented toward bolstering the careers of officialdom, I just don’t see things changing any time soon.”China Economy in 2003CHINA IN SPACE: THE OUTLOOK; Milestone for China: Dragon Has LandedBy JOSEPH KAHNPublished: October 16, 2003BEIJING, 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 EconomyBy KEITH BRADSHERPublished: September 21, 2003HONG 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 EconomyBy KEITH BRADSHERPublished: April 28, 2003GUANGZHOU, 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 DebtBy KEITH BRADSHERPublished: September 4, 2003GUANGZHOU, 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 ConcernBy THOMAS CRAMPTONPublished: November 11, 2003HONG 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. ................
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