Peking tots up the cost of its boom

CHINA'S over-enthusiastic provinces and government departments, increasingly out of Peking's control, have caused 'great financial difficulties' in their attempts to jump on the economic reform bandwagon, the Finance Minister said yesterday.

Together with the costs of propping up loss-making industries, this led to 'an acute contradiction between the supply and demands of funds', Liu Zhongli said in a sombre address to the National People's Congress.

China's economy is booming, particularly in coastal provinces, but the investment costs of modernisation, together with inadequate controls over expenditure, will cause another large budget deficit this year. In 1992, when the economy grew by a hefty 12.8 per cent, the gap between total state revenues and expenditure was 23.75bn yuan ( pounds 2.97bn) and, even with wide-ranging attempts to improve the situation, is forecast to stay at 20.5bn yuan this year.

More than the size of the deficit, Mr Liu's statement highlighted the diverging paths of the country's two economies, the new market-oriented business world and the remnants of the old state- planned economy. From the finance ministry's point of view, it is still having to pick up the bill for bailing out the latter, without getting the full benefits or keeping control of the former.

Mr Liu's biggest criticism was directed at 'certain departments and localities (that) did too many things and launched too many projects' without taking into consideration whether they would make money.

Some counties put themselves in such financial straits that they could not meet their payroll, he said. Some areas, in their rush to attract investment, 'overstepped their authority to reduce or exempt taxes', so that central government missed out on much-needed tax revenues from successful ventures.

The underlying message of much of the Finance Minister's speech was that, while China's economic reforms have been seized on by much of the population, the checks and controls for such rapid growth have not materialised. Tax and accounting rules are urgently needed, as illustrated by one of Mr Liu's comments about the trial reform 'to separate taxes from profits, pay taxes before making payments on loans, and divide profits after paying taxes'. In government and administration, Mr Liu said, there were serious cases of 'extravagance and waste' and that anyone guilty of such errors should be 'dealt with severely'.

But there were also problems where government departments aggressively set up new market-oriented sideline businesses on the back of civil-service units. There was a sharp warning to keep the new businesses separate from the units. '(The unit) should not turn such an entity into a 'private mint' for its own benefit.'

Restructuring big state enterprises remains the greatest challenge and on this there was some improvement, as overall losses were reduced by 4.2 per cent. A tougher approach is now to be adopted in regard to the hopeless cases, and Mr Liu said the government would 'resolutely stop subsidising those enterprises that have no prospect of making a profit'.

Not every department is having to cut back, however, as the budget revealed a 12.4 per cent increase in defence spending to 42.5bn yuan. This does not include the army's business ventures, and the total 1993 budget is estimated by analysts to be up to two and a half times the announced figure. Investment in agriculture is to be increased by nearly 10 per cent, in an attempt to stem the drift from the land by peasants.

(Photograph omitted)