CHINA EXPECTED TO SHOW BIG 1986 BUDGET DEFICIT
China's Finance Minister Wang Bingqian
will report a 1986 budget deficit of up to nine billion yuan
and prescribe austerity measures for 1987 in a budget speech on
Thursday, foreign bankers and diplomats told Reuters.
    Chinese officials have said the 1986 deficit is "several
billion," after a surplus of 2.82 billion in 1985 which followed
six years of deficits, including a record 17 billion yuan
shortfall in 1979. They have not given an exact figure.
    The officials blamed the deficit on excessive investment in
fixed assets and consumer demand, a drop in efficiency in state
firms, a trade deficit and lower income from import duties.
    "China needs a nationwide campaign to increase production
while cutting expenditure," the official Peking Review said in
an editorial yesterday.
    "China should institute means for the effective control of
the macro-economy and the invigoration of enterprises, larger
ones in particular, by emphasising quality, efficiency and
reduced consumption," it said.
    Only by such measures, the magazine said, "can an overall
supply-demand balance in society be secured and the economy
develop steadily over a long period."
    A Western diplomat said major factors for the deficit,
which he estimated at up to nine billion yuan, were a drop in
efficiency and wage rises in state firms, whose profits and
taxes account for a substantial part of national revenue.
    The State Statistical Bureau (SSB) last month said profits
and taxes of state firms in 1986 fell 0.2 pct from 1985 to
119.3 billion yuan, while production costs were over budget,
losses rose and product quality was unstable.
    The SSB said profits in most state firms fell because of
bad management and rapid changes in external conditions.
    "For some materials, state firms have to compete on the free
market, where prices are up to double those for materials they
buy under fixed quota from the state," the diplomat said.
    "The firms are not subject to proper market discipline,
because they cannot go bankrupt, do not have to repay bank
loans and have to employ workers whether or not they need them.
Under these conditions, they cannot properly adjust to the
economic levers the state is introducing," he said.
    Another diplomat said Wang's major problem is excess demand
in the economy, caused by wage increases well ahead of
industrial growth, and excess growth in capital construction.
    "He must dampen this growth through raising taxes or cutting
government expenditure," he said. "China's economy is inherently
unstable, either in a high or a trough."
    He said Wang will reaffirm themes repeated by leaders since
the start of the year -- thrift, improved efficiency, cutting
investment outside the state plan and reducing consumption to
bring demand and supply into balance.
    "There will be no surprises," the diplomat said.
    The first diplomat said one sign of the thrifty times was
the lack of a banquet during a visit he made to a major Chinese
industrial city.
    "Normally, a foreign guest's visit is a chance for the boys
to feast on Mao Tai (a strong liquor), turtle and sea slugs,
with one banquet given by them and one given in return by me.
But there was none on this visit," he said.
    He added economic reforms will slow this year, in
particular price changes and the issuing of shares, which raise
sensitive issues about ownership and ideology. Bond issues
raise no such dilemmas and will continue, he added.
    A North American banker, who estimated the deficit at about
eight billion yuan, said economic policy has been affected by a
national drive against "bourgeois liberalism," a phrase meaning
Western political ideas.
    "In China the political system dictates economic policy," he
said. "The large deficit gives the conservatives a stick to beat
the reformers and demand more economic austerity.
    "One of China's top economic policy makers told me this week
1987 will be a year of consolidation for his firm, with less
overseas investment, lower imports and new funding to be
sourced internally."
    The banker said he is more comfortable about China's
stability now than two months ago, when the drive was launched
after the resignation of Communist Party chief Hu Yaobang.
    "There is no leftist alternative to the reforms," he said.
"There is no going back to the policy of strict central control.
But the reforms will take years. What you have now is a
confused mix of control and market economies."
 REUTER
