China’s Risky Economic Play

China is poised for its most ambitious effort yet to dismantle major parts of its state-run economy. Driven by the dark economic realities engulfing Asia, Beijing appears to have little choice, but nevertheless it runs the risk of upsetting a delicate balance between economic growth and social unrest. The proposed changes would mean massive job losses. But doing nothing could drag China down the Asian whirlpool. A stable China is vital to U.S. interests in the region.

China so far has managed to maintain the value of the yuan, its unconvertible currency, and avoid the worst of the economic shock waves rocking Indonesia, Thailand and other Asian countries. But it has not been totally immune. China’s exports--the engine of its growth--are slipping dramatically in Asia. The challenge for the Beijing regime is to shift economic gears to grow from within and attract investors from the United States and Europe to take the place of hard-hit Asian players.

The National People’s Congress last week gave overwhelming approval to the reforms, reducing the number of central government ministries to 29 from 40. The aim is to convert inefficient state-run industries into market-driven ones. Although the unavoidable result would be a heavy blow to employment, China can no longer afford a politically padded work force.

The Congress also moved to create a modern banking system, one that provides loans on merit, not on the basis of political influence. China has ample foreign reserves and less burdensome short-term borrowing than its Asian neighbors, but its industries and banks have all the earmarks of the mismanagement and corruption that damaged other Asian economies in their traumatic collapse over the past year.

Leading the reform charge will be China’s current economic czar, Zhu Rongji, who is expected to be named premier this week. He succeeds Li Peng, who is stepping down after serving two terms. Zhu, 69, has earned kudos from Western diplomats for his sophistication, urbanity and, most important, managerial toughness as China’s chief market reformer since 1993. He imposed tightfisted policies to choke off speculation in property and stock markets and to bring inflation down to under 1% from 22% four years before.

Zhu is one of the architects of the new plan to pump money into the economy--there are proposals for a public works program--to stimulate domestic demand and offset the disruptions and expected job losses resulting from shuttering insolvent and inefficient state enterprises.

Even in good times, Beijing has to maintain economic growth of least at 8% to create enough jobs for the 6 million Chinese entering the work force each year. The prospect of workers losing their jobs puts additional pressure on the economy and government. Rising unemployment--officially 4% but widely believed to be 8%--would be a great threat to economic realignment and social stability in China.

The problems are formidable and the policy changes dramatic in scope, but if Beijing can manage the restructuring, it should emerge with an economy welcomed by its Asian neighbors, the Western world and, foremost, its people.