BEIJING -- In a candid and sober state of the union address this morning, Chinese Premier Zhu Rongji said the government would run a record budget deficit this year to prop up China's slowing economy while it continues to reform failing state-owned businesses.

During his speech, which ran 33 pages, Zhu once again pledged not to devalue the nation's currency and to hammer away at endemic corruption that has contributed to protests across the country.

In a clear reference to the recent crackdown on China's first opposition political party, he also urged the nation to maintain stability in a year of politically sensitive anniversaries, including the 1989 massacre of pro-democracy demonstrators near Tiananmen Square.

"We must take the utmost precautions against sabotage by domestic and foreign hostile forces, and combat them with all our might," Zhu told the nearly 3,000 delegates at the opening of the National People's Congress.

Zhu's tone today was noticeably different from the one he set when he spoke to reporters a year ago, after he was named premier. At that time, the tough-talking technocrat pledged to overhaul 300,000 state-owned businesses within three years and sack 4 million civil servants.

Zhu's ambitions have been thwarted by a slowdown brought on by Asia's depressed economies and by resistance from Chinese bureaucrats. China's leaders have also worried about the pace of reform as the layoffs of millions of state workers have helped spark street demonstrations.

The central government laid off employees last year, but many were shifted to state-owned firms and other jobs where they continued to draw a paycheck. Plans for the rapid liquidation of state firms was halted after concerns intensified over the corrupt practice of stripping away valuable assets.

"Selling them off should not be the main way to reform them," Zhu said today.

China's premier acknowledged that government leaders underestimated the impact of the regional downturn and now must spend huge sums to stave off recession. The regime plans to run a $18 billion deficit this year to build infrastructure projects and spur domestic demand. The sum is 56 percent larger than last year's shortfall, but a tiny fraction of China's gross domestic product and not alarming by global standards.

At turns, Zhu was tough, tender and sensible in a speech largely devoid of the sort of socialist rhetoric that usually surrounds such events. While he spoke of the importance of maintaining public order, he also warned against overzealous crackdowns on protesters.

"Under no circumstances should we intensify them by handling them in an oversimplified or crude way," Zhu said. "Still less should we use dictatorial means against the people."

Zhu warned that the leaders of poorly performing state businesses would receive a yellow warning card the first year they fail to improve the situation and a pink slip the next if they continue to fail. He also told local officials to stop defrauding farmers with invented taxes -- a source of outrage throughout the countryside.

"Arbitrary charges, fund raising, quotas and fines are still a prevalent problem despite repeated attempts to put a stop to such practices, resulting in intolerable burdens on farmers and enterprises in certain areas," he said.

Zhu's speech came a day after he spent 2 1/2 hours in talks with U.S. Trade Representative Charlene Barshefsky on China's efforts to enter the World Trade Organization (WTO).

At a news conference yesterday, Barshefsky said significant differences have yet to be resolved.

"I think the Chinese government has a very serious attitude and has exhibited a strength of purpose," said Barshefsky, who offered few details. "But there are significant gaps that remain."

The Chinese would like to join the WTO, which enforces global trading rules, so that they can enjoy access to export markets without paying high tariffs and protection from unilateral trade sanctions. China wants entry under the status of a developing nation, which would allow it to shield state-controlled industries from foreign competition.

Pub Date: 3/05/99