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China's Economy Slows but Remains Under Control

Having acted as the rock of stability throughout the Asian financial crisis,


is now seeing the impact of the turmoil on its own economy, with growth slowing and many production and consumption indicators moving into a downward trend.

In fact, it's not just the Asian crisis that's pulling growth down -- it's more that the reorganization of the bankrupt and inefficient state industrial sector is beginning to bite. And as such, it's not as scary as it could otherwise be. This is a period of pain that has been planned and expected and delayed, but can be delayed no more.

The latest figures show economic growth in the first quarter slowed to 7.2%, against an official target of 8% for the year and 8.8% last year. The

Asian Development Bank

is predicting the final number for the year will be 7.0%.

The Chinese state banks, with huge amounts of nonperforming loans on their books, are becoming more prudent in their lending to the state enterprises, and people in and around these companies are cutting back on their spending out of a very real fear of losing their jobs.

But for all the signs of slowdown, there are still sectors that are doing fine.

China chalked up a $10.64 billion trade surplus in the first quarter and actual foreign investment in the period was up 9.7%.

For what it's worth: Quality imported-furniture shops in Beijing are doing good business, and in Shanghai, Australian steaks fried on stones at your table and costing a minimum of $25 each are the latest rage. The gulf between the rich and the poor in China is growing. You could argue it's all part of growing up and being capitalist.

Which brings us to the idea of private enterprise as the savior of China, now no longer so far-fetched a concept.


Chinese Communist Party

has preferred to use foreign investment as the engine of economic restructuring over the past decade and has been reluctant up to now to actively assist and promote the growth of home-grown private enterprise. There is only one reason -- the rise of powerful private entrepreneurs has disturbing implications in terms of the party's monopoly on political power.

But foreign investment inflows are plateauing, economic growth is slowing and the state enterprise problem is looking depressingly tenacious. China is anyway far too big to be remade by foreign money alone. So the day of the local Chinese entrepreneur is getting closer. The number of private businessmen in the ranks of the delegates to the

National People's Congress

session last month was very obvious.

But the Chinese economic slowdown is calculated, and everyone, even the workers being thrown out of jobs, know there is no choice but to restructure the economy. No one expected it would be an easy ride, either.

The question is: What is the risk of the Chinese downturn getting out of control? Minor, say the experts. The apocalyptic scenario for China was ever the easiest to conceive of, but the Chinese authorities have huge levers at their disposal to manage the situation.

Take Shanghai real estate for example. The city has experienced a massive building boom in recent years, and despite an economy growing at more than 10% a year, there is now massive oversupply of both office and residential space.

A bubble waiting to burst? Unlikely. Most of the capital for these buildings came from two sources -- state bank loans to state enterprises that are under no pressure to repay, and Oriental tycoons like Robert Kwok and Li Ka-shing whose pockets are deep enough to wait out the downturn. Property prices in Shanghai are instead seen as continuing to decline gradually over the next year or more.

Meanwhile, the layoffs from bankrupt state factories continue. One can imagine the pleas and pressure from provincial officials hoping to slow down the process, but China's premier

Zhu Rongji

is famous for his steadfastness.

And he has the figures to back him up -- losses of Chinese industrial enterprises were up 21.7% to 35.6 billion yuan in the first two months of this year from the same period last year, while profits plunged 82.8%. Not pretty figures.

What seems inconceivable is any backtracking away from the path of reform, and the impending visit to China by

President Clinton

will only help to push the Chinese faster along the road to socioeconomic "normalcy."

The Clinton visit is immensely significant for China in all sorts of ways. First, it gives the Chinese communist leadership enhanced credibility in the eyes of its people -- it's a bit like a blessing from God. Remember that Clinton is the first president to visit China since the Tiananman troubles of 1989.

Second, having the leader of the (free) world in China will have a deep impact on the psyche of ordinary Chinese people. They will be aware of it as with no other political or diplomatic event of the past few years, except for the death of

Deng Xiaoping

. Its impact will tend to encourage greater openness and questioning from within China, which is exactly what Clinton should be looking to do: use indirect means to effect change from within.

The most powerful engine for change in China is internal and gradual.

Anton Graham, our Hong Kong-based correspondent, provides commentary weekly for His column normally appears on Wednesdays. He welcomes your