China must cut excess demand and capitalinvestment in the face of budget and foreign exchange deficits
but will press ahead with wide-ranging economic reforms in
1987, Premier Zhao Ziyang told parliament.
    Zhao told the annual meeting of the National People's
Congress that while China cooled its overheated economy, cut
its trade deficit and raised national living standards in 1986,
serious imbalances remain.
    Zhao said total social demand exceeds total supply, and
demand for consumer goods, especially from state firms, is too
high. "(They) squander public funds to a serious extent ... (and
issue) excessive wage and bonus increases," he said.
    Failure to cut this excess will "result in reduced
accumulation of funds...And serve to corrupt social morality,"
Zhao said. He said there was a contradiction between low per
capita incomes and excessively high consumer demand.
    China needs to accumulate enormous funds for construction
in its initial stage of socialist modernisation and consumption
must match the available resources, he said.
    Zhao said there was a deficit in state finances in 1986
because of the sharp fall in world oil prices, the rising cost
of foreign exchange earnings through exports, reduced income
from customs duties and unreasonably heavy spending.
    Local authorities, departments and firms have been able to
retain more revenue since economic reforms in 1979. "(They)
unjustifiably developed processing industries and
non-productive construction," Zhao said.
    He said that unless effective measures are taken to curb
this practice, financial and credit deficits are likely to
increase in the next few years.
    Zhao said that if such deficits become excessive and last
too long, they will cause the over-issue of money, which in
turn will cause "disturbing inflation, a precipitous rise in
commodity prices and chaos in economic life."
    Another serious problem is that too many new construction
projects have been launched. Fixed asset investment outside the
state plan is over-extended and the pattern of such investment
is highly irrational, he said.
    Investment in energy, transport, telecommunications and raw
and semi-finished materials industries is inadequate and
investment in non-productive projects is too large, he said.
     Zhao said some departments and local authorities have
failed to take prompt and effective measures to correct this
investment imbalance, despite instructions to do so from the
State Council earlier this year.
     He said China's per capita output of grain and other farm
and sideline products is still very low and production of
grain, forestry, animal husbandry and fisheries rests on a
rather weak foundation.
     China's countryside is still in the development stage and
there is vast potential to be tapped through deep reforms, he
said, but did not elaborate.
    Zhao said the main task for reform in 1987 is to breathe
life into China's large and medium sized state firms, which
still do not have "a satisfactory combination of
responsibilities, powers and benefits."
    "We have yet to create conditions for giving the enterprises
full managerial authority and full responsibility for their own
profits and losses," he said.
    Currently, the firms are not responding rationally to
market changes and doing all the state requires of them, he
said. Their potential is not being fully tapped, he added.
    Zhao said that in 1987, China will speed up the reform of
its financial system, diversify credit services, encourage
competition among different financial institutions and promote
insurance services.
    He said the system of bank interest rates must be reformed,
with differential and floating rates being applied for
different periods of time.
    China must, under proper guidance, develop markets for the
circulation of funds in major cities and exploit the role of
financial markets in pooling and regulating funds, he added.
    Zhao said China must also expand the market for capital
goods such as rolled steel, coal, cement and timber. The lack
of such a market is the main reason why large state firms have
"yet to be fully invigorated," he said.
    He also promised a continuation of the labour contract
system under which all firms hire workers for a fixed period
and pay them according to their own methods, subject only to
state-set ceilings for wages and bonuses.
 REUTER
