Chinese Growth ‘Spiral’ Could Result in Clampdown : Intelligence: CIA report warns that nation’s high inflation could lead to political unrest similar to 1989.

WASHINGTON —  The Central Intelligence Agency warned Friday that China’s rapid growth is threatening to “spiral out of control” and may require a clampdown, mirroring the economic pattern of the year leading up to the country’s 1989 political tumult.

In its annual report on the Chinese economy, the CIA said inflation is at a four-year high, with the cost of living increasing by nearly 20% a year in urban areas. This is occurring, the intelligence agency said, at a time when China is “approaching a political watershed” because of the poor health of the elder generation of Chinese revolutionaries, such as its paramount leader, Deng Xiaoping.

“Throughout the past year, authorities have . . . been faced with sporadic local demonstrations in both urban and rural areas, which are a constant reminder of the potential for inflation (and) corruption . . . to spark wider protests,” the CIA reported. “Even reformist leaders realize that their own political futures could be jeopardized by social unrest if economic overheating is not checked.”

While noting some of the economic similarities to China’s 1988-1989 period, the CIA did not go so far as to predict a repetition of that era’s massive political upheavals--in which crowds of hundreds of thousands engaged in anti-government protests in and around Beijing’s Tian An Men Square. After weeks of hesitation, the regime brutally suppressed those demonstrations.

Martin Petersen, director of the CIA’s Office of East Asian Analysis, told the congressional Joint Economic Committee on Friday that there have been reports in recent months of rural unrest in at least 13 of China’s 30 provinces and that some urban factory workers have staged strikes over wages or working conditions.

But, Petersen went on, “Beijing has, since Tian An Men (the 1989 demonstrations), concentrated on upgrading its internal security capabilities and has not hesitated to use its security forces in dealing with public disturbances.”

The CIA said its figures show that China’s economy has been growing at an annual rate of 13% since the beginning of 1992, boosting living standards and creating many new job opportunities. One factor in the rapid growth was $11 billion in new foreign investment committed last year, the overwhelming share of it from Asian companies based in Hong Kong, Taiwan and Japan.

But the report said China’s economy is now in danger of seriously overheating, creating problems such as inflation, strains in the transportation and energy sectors and a surge in demand for imported consumer goods.

The Chinese government already has imposed new austerity measures over the last few months in an attempt to cool down the economy. But the CIA said that it is unsure that these measures will be effective in curbing inflation.

“China’s economy . . . is now more diverse and less subject to direct central control,” the intelligence report said. “Furthermore, local officials have become adept at sidestepping orders from Beijing that run counter to their interests.”

If Beijing authorities do succeed in imposing a full-scale economic retrenchment program on the nation, the CIA said, their clampdown could have other harmful consequences. For example, restrictions on loans would slow the creation of new jobs in dynamic, market-oriented industries and thus hamper China’s efforts to cut back on overstaffing at state and government enterprises.

Although the CIA said that China faces serious short-term problems, it offered some more optimistic long-term prospects. “China enjoys strong prospects for further growth,” the report said. “Indeed, vast areas of the country are still at early stages of development.”

Addressing a troublesome issue in relations between Washington and Beijing, the CIA told Congress that China will have a record surplus of more than $23 billion in trade with the United States this year. That would represent a surprising increase of 30% over the surplus of $18 billion in 1992--which Congress said was unacceptable.

“The trade deficit with China is soaring out of sight,” Sen. Jeff Bingaman (D-N.M.) said at Friday’s hearing. “If China won’t change its (trade) policies, then we need to change ours.”

The steadily mounting trade surplus with the United States is particularly striking because China is now running a slight trade deficit with the world as a whole. And Lee Zinser, the CIA’s division chief for China analysis, said China “still hasn’t reached anywhere near its export potential.”

CIA officials said that, if trends continue, China’s trade surplus with the United States could eventually surpass that of Japan. For many years, Japan has had the largest trade surplus with the United States of any nation, about $50 billion last year.

“China has gained U.S. market share in part because manufacturers in Hong Kong, Taiwan and other rapidly developing Asian nations are shifting their labor-intensive, export-oriented industries to China, which drives up the U.S. trade deficit with China while deficits with these other Asian nations stabilize or even decline,” the CIA said.