China cautious as it considers life after Deng

It is commonplace for exotic species to embark on a collective frenzy, normally during mating season. Yet there is an equally exotic species for whom the ritual is less frequent: die-hard China investors sent into a frenzy of activity by the Chinese government's latest Five- Year plan.

The ninth five-year plan, released earlier this month, provoked the usual deluge of comment and analysis from China watchers based in Hong Kong, the main source of foreign capital for the stirring giant north of the border.

What is strange about all this is that China's Five-Year Plans give so little guide to what will happen in the coming half decade. Instead they provide an insight into those aspects of economic development over the past five years that have been endorsed as official policy by the decision-makers in Peking.

At the best of times the Chinese leadership has shown itself to have little idea how to initiate economic reform. Mao Tse-tung's Great Leap Forward, announced in the Second Five-Year plan, led to widespread famine, the crippling of Chinese industry and years of damage to the nation's agricultural sector.

The genius of Deng Xiaoping, the ailing patriarch, was to provide space for market forces to lead the way in initiating reform, allowing the state to adopt those that succeeded and denounce those that did not.

The most profound elements of economic and fiscal reform have not been initiated in the Five-Year Plans. For example, China's open-door policy was only officially endorsed in the Seventh Five-Year Plan, spanning1986 to 1990. By that time all the major innovations - special economic zones, relaxed controls on foreign investment and export-led economic growth - were already well underway.

Seen in this light, the current Five Year-Plan reflects a more cautious mood among the leadership. Some Hong Kong-based foreign investors were disappointed. They were looking for indications of concrete reforms, such as an opening up of the financial sector and allowing foreign investment in key growth industries such as telecommunications.

Instead, the plan emitted a stream of generalities, most importantly the pledge to give "national treatment" to foreign companies. This presumably means they would be on a level playing field with Chinese companies. In reality, financial incentives and importation rights often leave foreign companies at a distinct advantage. Problems arise when things go wrong, as they did in the case of James Peng, a naturalised Australian, who established one of China's first joint-venture companies and was recently sentenced to 18 years for embezzlement. Foreign investors worry that Chinese partners will be favoured when there is conflict between the partners.The implications of "national treatment" go much further, in allowing foreign joint-venture companies to compete freely in China's domestic market.

But foreign investors are also concerned over the high rate of inflation. Here the plan offers few suggestions, other than curbing new capital investment. Last Friday the State Statistical Bureau announced that year-on-year inflation was down to just over 11 per cent. This figure will be read with interest in the faster-growing coastal regions, where the real level of inflation may be as high as 20 per cent.

There are signs that inflation is being tackled, although the main weapon chosen is the credit squeeze, which is being more or less faithfully administered by the state-controlled banks. This is bad news for the corporations listed on the Hong Kong stock exchange, which have blamed the squeeze for recent poor interim results.

While credit is getting tighter, the policymakers in Peking have given the official nod of approval for the retrogressive step of not allowing state companies to go bankrupt.

The idea had been to make them more competitive by insisting that they rely on their own resources. This produced wails of anguish from around the country, where competition was creating real hardship. So this plan endorses a policy that has been evident over the past year, effectively allowing the state to bail out ailing state corporations.

By any standard, the Ninth Five-Year Plan is unimaginative, mirroring the caution that grips the Chinese leadership as it contemplates life without Deng. But as history has shown, this does not mean significant changes will not take place in the next five years - some of which the Tenth Five-Year Plan may well endorse.