China Finds Inflation on Loose Again : Economy: The move toward free markets boosted prices, and figures now indicate they may be getting out of hand.

At the Four Star Gold Store on trendy Xidan Avenue, shoppers crowd around the counters to inspect glittering 24-karat chains, rings and pendants. They’re not just oohing and aahing. They’re buying.

“The price of gold will go up,” said Wang Hong, 20, as she helped a friend adjust a newly bought $150 necklace with a heart-shaped charm.

The Chinese these days can’t get enough of gold, the international hedge against inflation. A recent industry survey reported that China surpassed the United States last year to become the world’s largest consumer of the precious metal.

The gold rush is a sign of the economic times in China. An avalanche of statistics indicates inflation is getting out of hand, triggered by an investment binge after senior leader Deng Xiaoping called last year for bolder moves to create free markets.

In April, the cost of living registered the sharpest increase in five years, up 17% from a year ago in 35 major cities. Prices for fuel, construction materials and industrial raw materials rose more, signaling that Chinese consumers will face even higher inflation later this year.

“I think it’s getting extremely serious,” said Ian Perkin, chief economist for the Hong Kong General Chamber of Commerce.

Inflation has bedeviled modern China’s history. It helped topple the Nationalist government and bring the Communists to power in the 1940s, and it fueled the public dissatisfaction that fostered the 1989 pro-democracy movement.

Sustained high inflation could derail Deng’s plans to make state enterprises economically self-sufficient and do away with the last remaining state price subsidies. It also could hurt exports, discourage foreign investment and stir public discontent--the worst fear of China’s authoritarian leaders.

“I think the whole message of Deng Xiaoping’s speech of growing faster at almost any cost is a very misguided one,” said Diane Yowell, director of research for Hong Kong and Shanghai Bank’s China Services.

So far, there have been no reports of bank runs or panic buying, largely because higher household incomes and better supplies of consumer goods have been part of China’s phenomenal economic growth, which reached 12.8% last year.

But recent strikes for higher wages in two Japanese-owned factories in southern China may portend trouble. The situation is also volatile in the countryside, where peasants faced with escalating farm production costs have not received cash for government-contracted crops and have been forced to pay ever higher taxes by local officials.

China’s leaders have played down the economic overheating in an effort to keep the national focus on implementing Deng’s reforms. But April’s inflation figures convinced them the situation could no longer be ignored.

Over the last week, the government has announced a crackdown on unauthorized local development projects, raised the interest rate on treasury bonds and announced the first increase in two years on savings and loan interest rates.

But the loan interest rise was modest, and the official Xinhua News Agency pointedly noted that the government “does not want to apply the brakes on the economy by drastically increasing interest rates.”

Some economists believe the moves will do little to cool the economy. They note that interest rates remain well below inflation and that rising costs of capital may not matter much to state factory managers who can still count on government bailouts.

Chinese officials seem wary of administering much tougher medicine.

The anti-inflation medicine the government administered in 1988-89 put the economy in a three-year slump.