CHINA: POTENTIAL FOR POLITICAL CRISIS (C NF)

Created: 2/9/1989

OCR scan of the original document, errors are possible

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DIRECTORATE OF INTELLIGENCE

9

China: Potential tor Political Crisis F)

Summary

Although Party Central Secretary Zhao Zlyang remains powerful, his standing has slippedesult of the reversal ot his economic policies at the pany's plenum last September. This memorandum speculates on the circumstances that could lead to his removal, his possible successors, and the broader Implicationshange in leadership. It isorst case scenario, but it Zhao is unsafe toonsensus to deal with current economic problems, and they persist or worsen, we believe Zhao's critics could mafce hjjn the scapegoat tor the reform program's many shortcomings, fl B

If Zhao fell. Deng end other party eiders probably would turn either tomember of their own generation to restore discipline within the party and Chines* society at large, or more likely in ourounger party leader not tainted by corruption and the Ills ot the floundering reform

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WARNINGSOURCES OR METHODS INVOLVED

for Release

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'rilHiving no on. of Zhao's unable lo pursue anything but thetloo, courseXrnf

Zhao: Oown But Nol Out

r, teadership

he adoption ofprnmoia market-orientedwh,le trying to protect

do when hu Yeobeng the way Zhao was able to

eldere auch as Bo Ylbo toritJa. asven willing to save him

dependent on th. backing of Deng anden,'e of' ^

Powerful critics among party

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elnst Hu Vaobeng. we doubt that Oeng would be eble or

CONflOENIkATTriOFORN

COJAtTrJ

China'a Overheated Economy Not Stowing

M^rsfor ways to damper, inflation and slow

rOWt', ,n" isshortages ofMd ov"months

roduction, which WtS UD 17

' ' 9rew "than in November. Beijing

nLM 5interest rate hikes, and

restrictions on exports of scarcel

believe these policies are not likely to cut urban Inflation9

werly 40 'r"nt' W% ht8heM ln

ing has avoided addressing some of the most serious causes or inflation. Concerns about worker unrest In urban areas have led Chinese leaders to boost government subsidies for food and rent. Beijing also continues to make low-interest loans available to state factories and refuses to close enterprises that use raw materials wastefully.

Belling has had only partial success controlling the money supply Interest rates hove been raised twico In th* last live months Out remainthan half the inflation rato. in addition, powerful provincial and municipal leaders often override Beijing's orders to restrict loans and approve their pet construction projectsBJMttt

credit shortages In the countryside forced the government to purchase th*with lOUs instead of cash 1

oi nThe anticipated rollback of credit restrictions would

V Inflation. Evan If

lace and growth In the money supply slows In the second tiowevar. the mfuelon of funds in the first three quarters of keep inflation at about Ita current level for at least the next year.

JAe-'N

CONFI DEMTIAT*NOFORN

Glimpsesrisis

Wothst sny ono of several scenarios could triggerrisis. Zhao couldcapegoat if:

economy deteriorates sharply, wfth soaringat Its highest rat* Inublic confidence in the party.

Popular discontent, already high because of inflation and growing official corruption, sparks widespread student and/or worker unrest that party elders perceivehallenge to lhe pany's authority.

elders. Including Deng, perceive th* reform program to be adrift and slipping intojhojrap of stagflation that has crippled reform In Hungary and Yugosiavlal

e'm m

Even though alt of China's leaders share responsibility, Zhao remains most closely identified with market-oriented and political reforms that lie at the root3 problems. His critics have long had reservations about Zhao's efforts tohe economy and open the politics! system, fearing that these st*ps could undermine the party's authority and by extension threaten their own power end privileges. Jhey would

have Utile difficultyist of charges to Justify his oust

Should there be widespread unrest. Zhao would be especially vulnerable to the charge that under his direction, the party has lost Its ability to maintain social order. Conservative party: leaders, whoigh value on social discipline, are already disturbed by rising crime rates and tha breakdown of conventional mores. Corruption ha* grown rapidly under Zhao's market-oriented reforms, reaching the point where little business can be transacted without resort to bribery, badly tarnishing the party's Image Zhao's ability to combat corruption has elso been hurt by widely believed chsrges thst children sr* among th* more avaricious of the leadership's princelings.

Zhao probably would also be blamed for problems In China's economy. Critics, because of personal grievances as well as policy differences, couldn his advocacyigh-growth, high-Inflation policy to blame Zhao for popular discontent with the reform program and the party's handling of China's modernisation program. Under Zhao, reformer* have dismantled much of the central planning apparatus but have yet to establish strong fiscal and monetary toots to fake its place. Thus, industrial growth8 percent in the fourth Quartor8 and appeared to or accelerating dsspita the Institution of austeritylest September.

CONmENTlAl^flOtfMN

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o in* lesaer.oip so dslicstaly balanced, wa quaatlon whetherill

on keyp.cially in

auch as price raform and political atructural

rtSs SSSS-

my auccessoTs first task would ba to

H. would ba under con.kler.bU,r.

i LTT!0 l.chhunt, direct aoalnw

expect any naw 'IsersH

U'0eiS IIW,SL

w.try to coop, and amp.oy many of Zhao', young. "

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CONRDE^IbliA^OFORN

Up service to economic and political reform experiments would probably continue In suchto reesaure foreignthe primary markst-orlented economic end political reforms would be put onore conservative leadership probably would tighten conventional administrative controls to rein in the economy, abandoning price reform and other radical methods of systemic

change Such controls. In our view, would not solve China's economic problems, though

they might mask themime

We wouldost-Zhao leadership to proclaim its continued support for the open door and strong economic relations with the West. We believe, however, that Cfvna's Investment climate would deteriorate More conservative leaders would probably b* less likely to favor genuine reform of the foreign trade system or other moves needed to make Chlna'a economy compatible wtih the GATT. At the local level, cautious officials would probably place greater restrictions on foreign Invaatment or control of enterprliea out of fear of committing political erroriHJBJBflM

China: Portrait of an Overheated Economy*

Growth in Currency in Circulation

Industrial Output Growth

ao ai 82 83 84 85 88 87 88

tofJitka. Doto6 or* tartJrnoUd. Industrial ^utput growthvaf, rother thon nommoL CONRDEWTlAo^OFORN

Original document.

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