China was caught up last year in a convergence of slower growth, rising unemployment and the bankruptcies of some regional financial institutions. It chose to fight these dangerous trends by sharply expanding infrastructure investment and financial support to deficit-ridden state-owned enterprises long in need of reform.
At the 11-day National People's Congress that ended Monday, Premier Zhu Rongji proposed to do more of the same this year. He reaffirmed the determination to stay the course on the restructuring of ailing SOEs and a shaky financial sector. But priority has clearly shifted to heading off the kind of disastrous downturns accompanied by social deterioration that occurred elsewhere in Asia in 1997-98. In a country where a single percentage point of growth or shrinkage means a difference of 1 million jobs more or less, Mr. Zhu could have found few other options, even if he were a reformer with blind faith in the power of the market to turn China into a competitive, modern economy.
After almost two decades of rapid growth averaging close to 10 percent, the Chinese economy's loss of momentum became apparent last summer. Consumption, exports and inward foreign investment leveled off. As demand slackened, excess capacity, production backlogs and deficits bulged at the SOEs that still constitute the backbone of China's industrial structure despite the increased importance of the private sector. SOEs also take care of a major share of China's social safety net, dispensing pensions for retired employees, among other services. Meanwhile, bad loans accumulated at China's four state banks to the point where they now account for an estimated 25 percent of their total assets.