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To: Little Joe who wrote (40085)	9/7/1999 5:43:00 AM
From: Alex	Read Replies (2) \| Respond to of 116791

Chinese Deflation Picks Up Stream Oops, the government can't stop it. Fancy that. China's finance minister warned last night that the government might not be able to put a stop to deflation. Xiang Huaicheng's warning comes despite the fact that extra spending to combat 22 months of falling prices has pushed the budget deficit to a record Rmb180bn ($21.7bn) this year - nearly double last year's. Saying he was not "over-optimistic" about Beijing's ability to halt deflation, Mr Xiang said it "might be more difficult to solve than inflation". The extra spending includes Rmb54bn in wage, pension and unemployment benefits announced over the weekend. Government efforts to boost the economy had placed severe strain on government finances, necessitating the issue of a record amount of treasury bonds, Mr Xiang said. But China was resolved to reform its government finances, making the budget more transparent and boosting tax collection. Several measures were planned to reduce the deficit, including the introduction of a new social security tax to fund welfare payments, he said. The planned tax, which economists say may resemble Singapore's Central Provident Fund, will require contributions from both employees and employers, he said. This year's budget outlook, Rmb30bn more than an original target of Rmb150bn, would have been worse had it not been for an unexpected increase in tariff revenues as imports have risen because of a clampdown on smuggling. Overall government tax revenues had risen by 24 per cent in the first seven months, much more than anticipated, and the increase should be 18 per cent for the year as a whole. Still, the higher deficit would necessitate the issue of Rmb401.5bn in treasury bonds, up sharply from an original plan of Rmb341bn and an actual Rmb280bn last year. These figures exclude large special bond issues totalling Rmb60bn this year and Rmb100bn last year to finance urgent infrastructure spending. Mr Xiang sought to deflect concerns among economists that such borrowing was not sustainable since low government revenues of only 12 per cent of gross domestic product made debt hard to service. Total government debt was still only about 10 per cent of GDP, he said. Some Rmb250bn of this year's new bond issues would go to refinance maturing issues rather than add to the net burden. Mr Xiang stressed his "absolute confidence" that the fiscal deficit would not exceed 2 per cent of GDP this year, though he admitted China's accounting methods meant the actual deficit would be higher if calculated on international norms. Pressure on government finances would be reduced by a plan to raise the proportion of government revenues to 20 per cent of GDP within five years. The new social security tax, which will be implemented next year, would help. The Financial Times, September 7, 1999