WHEN the head of the World Bank mission in China was reported to have painted a pessimistic picture of Chinese growth prospects at a briefing of diplomats in the Irish Embassy in Beijing - flying in the face of glowing World Bank accounts of a booming Chinese economy - bankers and financial institutions around the world sat up and took notice.
Yesterday however the World Bank official, Mr Pieter Bottelier, denied to The Irish Times that he had presented a gloomy forecast of China's economic future. He said there was no new World Bank report saying China's economic growth rate had "fallen dramatically", as reported by the Hong Kong newspaper, the Sunday Morning Post.
Irish Ambassador Mr Joe Hayes, who invited the World Bank mission chief to brief the 15 European ambassadors, said he had written to the newspaper to say that Mr Bottelier had in fact "provided a balanced and very positive account of China's economic reforms and macroeconomic reforms and prospects".
According to one western diplomat, the news story sparked a flurry of apprehension among world financial institutions and investors and at World Bank headquarters in Washington. There were fears that it could affect the Shanghai stock exchange.
A diplomat at a western embassy said that Mr Bottelier's briefing "did point to fairly serious problems".
Mr Bottelier said that to characterise his briefing as a prediction of gloom was a gross exaggeration and imbalanced". He had in his presentation pointed to "certain risks" but the Chinese themselves had highlighted problems.
"The thrust of what I said was that China for the first time has succeeded in managing an overheated economy and not killing growth momentum," he said. "Doing that is not very easy. China has kept credit tight. Many enterprises still had automatic access to state credit three to four years ago and that is not true today.
"This is putting a lot of adjustment pressure on the system. This is not a negative comment. The Chinese are putting a lot at stake on monetary stability."
The reaction to the newspaper report highlights concerns about some negative aspects of the economic reforms in China, particularly growing unemployment.
There is growing speculation among western diplomats and officials in international financial institutions that unemployment has risen dramatically, and in some cities is as high as 20 per cent.
Mr Bottelier said: "The gloomy side is that people are now looking for work." It was difficult to calculate exact unemployment figures, he said. "There is a rise in urban unemployment in north east cities. If it's 5 per cent or 10 per cent, we don't know. Bye law, state enterprises can't lay people off until they are closed. Workers get some kind of stipend for staying at home This is a substitute social security system, and nobody has a statistical grip on that issue."
The World Bank, which has a high profile mission in Beijing, issues a report every year on the Chinese economy. In its last assessment, in May, it anticipated lower unemployment rates. "Slower growth in industry contributed to a small rise in the urban unemployment rate from 2.6 per cent in 1994 to 2.9 per cent in 1995," it said, adding, "In some cities the unemployment rate is above 10 per cent."
One diplomat spoke of a phenomenon which is causing concern to the Chinese leadership - that of penniless workers drifting back from the cities to the countryside because of lack of employment, as production sites lay off workers because of lack of investment funds and big state concerns go bankrupt.
"With no welfare system to look after them there are fears of social instability," the diplomat said. "There are those in the leadership who want to press ahead with reforms and those who want to retain political control at all costs."
The World Bank report in May noted approvingly that measures to cool down the economy were "managed more skilfully than in previous stabilisation episodes". It said: "China's success in 1995 in bringing inflation under control without disrupting growth is a marked departure from previous economic cycles. This performance reflects consensus at the highest levels to combat inflation, growing sophistication in macroeconoinic management and increased resilience in the economy."
Mr Bottelier said he "gave an oral briefing to what was a closed meeting on what our perspective was. I think I gave a fairly balanced presentation. Look at Chinese history. They have stop go cycles responding to overheating by putting the brakes on everything." This time "they had acted very cleverly and brought the growth rate down from 12 to 14 per cent in the first half of 1993 to well under 10 per cent while preserving a significant growth momentum. You can also put emphasis on growth rate being lower but it is an accomplishment."
The Hong Kong newspaper quoted the World Bank mission chief as saying that the growth rate in China had fallen from 9.5 per cent in the first half of the year to 7 per cent, and that growing unemployment was causing political problems.
The reaction to the report reflects apprehension in some quarters about whether China will have a soft or hard landing as it tries to deflate its economy. There were queries from western investment banks, particularly in America, about the World Bank's allegedly downbeat predictions, and fears that the Shanghai stock exchange could be affected, according to one diplomat.
Mr Hayes said he invited Mr Bottelier to brief the ambassadors as he is "one of most impressive commentators on China". The impression that there was a new World Bank report which was at odds with official Chinese growth figures caused bankers around the world to wonder if the World Bank was "rewriting its assessment", he said. However, no such report was distributed at the meeting and the World Bank had assured him that no such report existed.
In his letter to the Sunday Morning Post, the Irish Ambassador said: "Mr Bottelier provided a balanced and very positive account of China's economic reforms and macroeconomic reforms and prospects. He did refer, as did others, to problems in the financial sector and to issues of rising unemployment in some areas but these remarks would not support the conclusions that a dramatic reduction in China's growth rate has occurred."
