By Steven Mufson
Washington Post Foreign Service
Saturday, April 25, 1998; Page A14

BEIJING, April 24—China's slowest economic growth rate in six years is providing new fodder for economic analysts who want Beijing to come up with its own New Deal to spur the economy and protect the disadvantaged.

Today the State Statistical Bureau announced that China's annual economic growth rate had slowed to 7.2 percent in the first quarter. It was the lowest growth rate since before the late Chinese leader Deng Xiaoping made his famous trip to China's south in 1992 and spurred a period of extremely rapid growth.

The statistical bureau said inventories in the first quarter climbed to $67.2 billion, up 14.2 percent and equal to about 7 percent of China's annual gross domestic product. Mounting stockpiles of goods, combined with a 1.5 percent drop in the retail price index, helped send industrial profits plunging.

Anxious to prevent social and labor unrest that could result from growing ranks of unemployed workers and civil servants, Hu Angang, an influential economic analyst, has called for a Chinese-style New Deal.

Forecasting a sharp increase in unemployment, the Beijing-based policy analyst appealed for the government to stimulate growth, create jobs, pour money into infrastructure and set up better social security systems.

While rapid by U.S. standards, China's current growth rate is barely fast enough to generate jobs for the tens of millions of Chinese seeking work as they flock to the cities from the countryside and as ailing state-owned enterprises lay off unneeded employees.

"Growth below 5 percent will create a great deal of social unrest," Huang Yukon, chief representative of the World Bank, predicted during a World Economic Forum in Beijing this week.

"The pressure on the government is tremendous," said Frederick Hu, head of Asia economic research for Goldman Sachs & Co. in Hong Kong.

Hu believes that growing unemployment poses the biggest threat to China's economic reform program.

The new estimate of first-quarter growth is less than the 7.5 percent estimate that Premier Zhu Rongji gave earlier this month. It also falls short of the 8 percent growth target Zhu has set for the year and well below last year's rate of 8.8 percent.

Moreover, according to the statistical bureau's chief economist, Qiu Xiaohua, "The deterioration in the efficiency of firms is even worse than we expected."

While most economists don't favor a Roosevelt-style spending program, many people think that Beijing needs to do something to keep the economy from grinding to a halt.

"Is some form of stimulus needed? My answer is yes," Hu said. "Inflation is dead in the water. China must maintain a delicate balance between reform and reflation."

Not everyone agrees. Andy Xie, vice president of Morgan Stanley Asia Ltd., says China should be cautious. "The problem in Asia is that there has been too much investment," Xie said, and too much of that has been wasted.

"Today's Asian crisis tells us that if today's high growth is tomorrow's bad debt, then it's better not to have the growth at all," he said.

As it is, rates of return on private foreign investment in China slid from 8.4 percent in 1993 to 4.7 percent in 1996, Xie said, making it less profitable -- and more hassle -- to invest in China than to put money into a U.S. money-market fund.

"That suggests that China needs massive restructuring, not massive investment," Xie said.

But proponents of an economic stimulus say that China still needs certain kinds of public investment. While Japan, already well equipped, lavishly adds new ports, bridges, roads and rails, China desperately needs better highways, airports and other facilities.

"China is not Japan," said Zhu Xiaohua, chairman of the publicly listed Hong Kong subsidiary of China Everbright, a diversified retail, infrastructure and bank holding company. "China still needs infrastructure."

The slowdown in China's economic growth has added a sense of urgency to China's long-delayed overhaul of money-losing state-owned enterprises that continue to be a drag on the economy.

Next week, the prestigious Qinghua University management school expects to begin a two-month crash course in accounting for recently retired ministers and vice-ministerial-level officials so they can audit some of the country's biggest state-owned enterprises. Senior officials are needed because the chief executives of many big firms hold ministerial rank.

The inspectors will try to obtain true consolidated balance sheets for the firms and determine the central government's capital stake so the firms can be restructured or sold.

"Many people want to separate the government's roles as regulator and owner, but we have to figure out a way to do that," said Chen Xiaoyue, associate dean of Qinghua's school of economics and management.

Laurence Brahm, who runs a Beijing-based consulting firm called Naga, said he visited an iron and steel mill in Anhui Province with 20,000 workers that needed only 2,000. The firm is supporting 15,000 spouses, retirees and children, too. Using technology from the 1960s and 1970s, the plant can't compete with steel mills in South Korea and elsewhere.

Huang, the World Bank representative, notes that between 6 percent and 25 percent of the costs to big state-owned enterprises go to social welfare expenses, in many cases erasing whatever profit margins those enterprises might have.

Even if China stems the tide of red ink, executives and economists say the nation must find new growth areas.

Zhu, the China Everbright head, is sanguine about that. He noted that while old industries such as timber are having massive layoffs, entire new industries are springing up. He cited the pager industry, which didn't exist a few years ago and now employs a million people, including those in manufacturing and sales, operators and other service people.

But building new industries takes time, and this year economic policymakers might have miscalculated what will be needed to sustain the growth pace they want.

"The overwhelming issue is growth," said independent economist Fan Gang, who said policymakers had delayed decisions while awaiting a reshuffling of government positions in March.

Fan said China's growth rate might continue to taper off through late in the year.

"It's too late for a stimulus policy," he said. "Because of the time lag, it may take six months to recover" and achieve the growth targeted for this year.