China Economy Called Troubled Despite Reforms : Inflation Rages as Leaders Debate Future, CIA Says

China’s economic reform program, now approaching its 10th anniversary, has lost its sense of goals and direction, and in recent years the income of some Chinese city dwellers has been dropping, the Central Intelligence Agency reported Sunday.

The CIA portrayed the Chinese leadership as divided over the future direction of Chinese Communism. The agency said some leaders aligned with Communist Party General Secretary Zhao Ziyang favor further movement toward a market-oriented economy, while others, such as Premier Li Peng, are seeking to retain a strong role for the central government in managing the economy.

Inflation has become such a serious problem in China that last year, “one-fifth of China’s urban households experienced a decline in their real income,” the CIA said.

The CIA’s conclusions were contained in its annual report to Congress on the situation in China. A similar study on the Soviet Union was released last week.

The intelligence report on China was devoid of optimistic predictions and raised the possibility that the ambitious reform program may not succeed in transforming China in the way that was once envisioned.

“One assessment of the current state of reforms is that China now risks stalling out half way on the road to a market economy,” the CIA said. “Other Chinese deny that the goal of reform is a market economy.” The reform program “has been buffeted both by political controversies and unforeseen economic developments,” the report said.

Sen. William Proxmire (D-Wis.), chairman of the congressional Joint Economic Committee’s subcommittee on national security, said the CIA report shows that “while China continues to make gains, there were also signs (in 1987) of deep-rooted economic difficulties that could put the brakes on economic reform.”

China’s economic reform program dates back to December, 1978, when Deng Xiaoping emerged as the most powerful leader in the Chinese Communist Party. Since then, the leadership has opened the way for farming by individual households, introduced material incentives and sought to decentralize decision making.

The changes at first led to rapid increases in economic growth, particularly in the countryside. But the CIA noted that China’s recent grain harvests have been disappointing, and that last year, China became a net importer of grain for the first time since 1984. China’s overall growth rate last year was 9.4%, larger than 1986 but below the rates in 1984 and 1985.

Retail Prices Up

Reflecting on the past decade, the CIA concluded: “That Chinese workers on the whole have benefited from reform is indisputable.” It said that over the same 10 years, there have been rapid gains in the standard of living, as can be seen from new consumer goods, a housing boom in the countryside and new styles of clothing in the cities.

“However, despite these signs of improvement, urban residents complain about housing shortages, pollution and inadequate services such as an overcrowded transportation system,” the CIA continued. “Moreover, the real income of some urban residents has fallen in recent years, and both urban and rural per capita income remains low by world standards.”

According to China’s own statistics, retail prices went up by 7.3% throughout the nation last year, and some cities had double-digit inflation. The CIA said that food prices accounted for most of this increase.

As part of its reform program, the Chinese government began to lift some price controls and to let the prices of some retail goods and raw materials be determined by market forces. The aim was to eliminate the economic inefficiencies caused by what the CIA called “China’s irrational price structure,” in which the prices set by the state do not reflect the actual costs or value of goods.

‘Will Fall Short’

But the lifting of some price controls and the shortage of desirable consumer goods in China led to the most serious inflation since the fall of Chiang Kai-shek’s Nationalist government in 1949.

The CIA predicted that further price reforms “will proceed slowly in order to minimize economic dislocations among consumers.” However, the agency asserted that without continued price reform, China’s effort to improve the functioning of its enterprises and industry “will fall short.”

In general, the CIA said that both the economic debate in China and the political situation have changed dramatically since 1978, when to be a “reformer” simply meant to be a pragmatist who favored changes in Mao Tse-tung’s doctrinaire policies.

“All Chinese leaders are now reformers in the sense that they are economic pragmatists who favor some degree of expanded scope for market forces in China’s economy,” the CIA said. But it said that “a consensus over the ultimate shape of a reformed China is notably lacking.”

Chinese leaders aligned with Zhao who favor market reforms made gains at the 13th Party Congress last fall, the report said. Nevertheless, it continued, “A number of influential Chinese leaders remain more comfortable with an economy predominantly controlled by administrative fiat rather than by market forces.” It said the result has been a period of “increased caution.”