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To: Mark Fleming who wrote (38493)	8/22/1999 11:57:00 PM
From: Jon Koplik	Respond to of 152472

Off topic - more China / deflation stuff. (Yet another article to dredge up next time someone engages you in one of those "Everyone knows there's inflation / Asia is recovering / commodity prices have bottomed / ... " discussions). ********************************************* August 22, 1999 Chinese Take On Deflation Crisis Filed at 11:52 a.m. EDT By The Associated Press BEIJING (AP) -- Big screen color TVs sell for $150. Washing machines go for $100. Men's and women's shirts are $2.50. Prices have never been lower at Beijing's Landao Department Store. And that's the problem. China is struggling to transform state-run factories into competitive industries but its markets remain glutted with consumer goods. Producers already deeply in debt are bankrupting each other with fierce price wars instead of adjusting to market demand. Fearing that the deflationary debt spiral will worsen unemployment and ignite social unrest, the government announced a ban last week on investment in production of a wide array of consumer goods. Meanwhile, President Jiang Zemin is visiting one factory after another, exhorting all to do their best to reinvigorate state enterprises. ``The good performance of state enterprises is not only a major economic issue ... but also a major political issue affecting the fate of the socialist system,' Jiang said in a recent speech during a trip to the industrial northeast. His campaign to reboot the economy seems, however, to be making little headway in weaning state industries from their reliance on state subsidies and protection. ``They have gotten to the point where the easy stuff has been done and they are running into economic, political, financial and social constraints,' said Ken Courtis, regional economist for Deutsche Bank Capital Markets (Asia). Prices in the saturated consumer market have been falling since October 1997. Regulators imposed minimum prices for TV sets and some other items, but instead of cutting production, state factories churned out even more. As prices drop, losses are mounting, driving manufacturers ever deeper into debt. Many products may be the cheapest ever, after adjusting for inflation, but consumers aren't buying. With factories laying off workers by the millions each year, people worried about losing their jobs are stashing their money away. In addition, the Asian economic crisis and slower world growth have cut Chinese exports and reduced foreign investment. Massive public works spending, repeated interest rate cuts and other tinkering haven't spurred consumer buying. Now the government spending boom is waning. Despite the sense of crisis, President Jiang and other leaders seem to lack the political will to starve inefficient state enterprises and nurture the fast-growing private sector. Instead, they are resorting to a mishmash of government mandates that may help alleviate the symptoms of China's industrial malaise but are unlikely to cure it. Production of television tubes was suspended for two to three weeks in early summer. Investment in factories to produce TV sets, air conditioners, refrigerators, plastic bags, bicycles, microwave ovens, candy, salt, apple juice, liquor and other items will halt Sept. 1. To counter a real estate glut, officials will withhold permits for new luxury apartments, hotels and office buildings. The government announced recently it will raise pay for civil servants by 30 percent to 40 percent, apparently in hopes of discouraging corruption and encouraging more consumer spending. To compel the thrifty to spend more, it reportedly plans to tax the interest on savings. Yet, while the economy sags, government bureaucrats and state-enterprise managers are tied up with a Maoist-style political campaign intended to purge those judged to be corrupt or disloyal. Officials say they have lost weeks of work time to Jiang's ``three stresses' campaign, which is emphasizing theoretical study, political consciousness and ``healthy' trends. Another campaign, against the banned Falun Gong meditation sect, also has eaten up valuable time. Courtis, the Deutsche Bank economist, says that little will change as long as leaders fail to enforce a wholesale overhaul of industrial management and to create financial markets to channel credit to the economy's most dynamic sectors. ``Money is going only to those who know how to destroy capital. They can keep pulling all the levers, but until that basic mechanism changes, the economy won't recover,' he said. Copyright 1999 The New York Times Company