China Combats Deflation; Calls For Wage Increases

Efficiency reforms to China's state-owned enterprises, until now a priority for Prime Minister Zhu Rongji, are being slowed to ease job losses. Measures are being introduced to boost spending and tackle deflation, which policymakers now identify as the country's biggest economic problem. The slump in purchasing power, caused partly by surging unemployment, is being blamed for a vicious cycle of weak consumer demand, price wars, and the worst deflation since the Communist revolution in 1949. Officials are calling for steep wage increases for civil servants, hospital and school staff, and others on the state payroll. They hope this will curb the decline in retail prices, which fell 3.5% in April compared with the same month last year. To ensure that efficiency does not suffer, industrial machinery is to be upgraded and mergers are being encouraged to head off bankruptcies of weaker companies.

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