China's economy is in a deep recession that shows no signs of abating and is threatening the country's social stability, the Central Intelligence Agency said yesterday.
Beijing "is grappling with the fallout from overly restrictive austerity policies" that have "caused China's worst economic slump in a decade," the CIA said in its annual report on the Chinese economy, which was released by the congressional Joint Economic Committee.
By the end of last year, nearly two-thirds of urban factories were closed or operating below capacity and more than a million locally run businesses were shut down, the report said. Urban unemployment was at its highest level in a decade, while the "floating population" of itinerant workers was between 60 million and 80 million.
The massacre at Tiananmen Square in June 1989 virtually halted tourism in China, causing the loss of more than $1 billion in earnings, the agency estimated, and put billions of dollars of low-interest loans from the World Bank and similar institutions "on hold."
Citing a "Hong Kong press report," the agency said that in the second half of last year there were more than 600 instances of worker unrest in China, including slowdowns, demonstrations and strikes. Layoffs have "created an embittered and volatile class of unemployed," the agency said.
"Workers are disgruntled because they believe they are bearing the brunt of Beijing's austerity measures," it said. "Many are receiving only about 70 percent of their expected wages and no bonuses, which have traditionally accounted for about one-third of workers' incomes."
While there were some signs of an increase in foreign investment, new investment contracts increased only 8 percent last year after eight years in which the average annual increase was 30 percent, the study said.
The report said some factories, "facing severe cash shortages and overstocked inventories, are struggling to find ways to pay workers; in one extreme case, a . . . factory was forced to put workers on half-time. . . and to pay them in-kind with refrigerators. Some workers have complained that the current belt-tightening is the worst they have experienced since the disastrous Great Leap Forward of the early 1960s."
The report -- and a panel of experts called by the committee to evaluate the Chinese economy -- concluded that the situation is unlikely to improve soon. The country's leadership has no clear plan to break out of a cycle of political disintegration and economic stagnation that are mutually reinforcing.
The Chinese government is drifting, stuck midway between continuing the free market reforms of the early 1980s and the movement back to centralization that began in late 1988 in an effort to combat inflation. The economy is "in cold storage," concluded Sen. Jeff Bingaman (D-N.M.), chairman of the Joint Economic subcommittee on technology and national security.
"China has lost its compass," David L. Denny of the U.S.-China Business Council told the panel. Reform efforts begun by leader Deng Xiaoping have been undermined by recent social turmoil and repression, Denny said, and "there is no new vision, no coherent solutions."
The CIA said the "leadership's focus on maintaining party control" makes prospects for "return in the near term to comprehensive, market-oriented reform dim. Economic policy will probably remain dominated by stopgap measures aimed at ensuring social stability, precluding riskier, longer-term strategies for growth and development.
"While it is unlikely that many senior officials want to return to the command economy and isolationist policies that dominated China before 1979," the report said, "some in the leadership want to place strict limits on the development of the non-state sector and to increase the party's role in enterprise management."
"As China's leaders enter the 1990s, they face a dilemma," the agency concluded. "Their top priorities are to keep a lid on social unrest -- thus maintaining party control -- and to convince foreign bankers, investors and China's trading partners that life has returned to normal. But they probably cannot meet these objectives over the long run without returning to the reforms abandoned in the last several years, which relied on decentralizing decision-making authority."