Peking's ducking out of big foreign contracts takes toll on its image

American companies that spent the past few years scrabbling to catch up with the Japanese in doing business with China are no doubt relieved that they were late on the scene.

The Japanese are counting the cost of being, together with the West Germans, leaders of the pack of industrialized countries, securing orders for plant and equipment when China announced its ambitious modernization program back in 1978.

Saburo Okita, Japan's special trade representative, held discussions in Peking last month with Chinese officials in an attempt to sort out the mess caused by the abrupt termination of big Japanese contracts.

Mr. Okita received assurances from Gu Mu, vice-premier in charge of the foreign investment control commission, that compensation would be paid for losses incurred and that no further major project cancellations would be notified.

Japanese officials here remain skeptical, however, about these assurances. They point out that Mr. Gu has offered similar undertakings before which have been followed soon after by further bad news.

The Japanese calculate that $1.5 billion worth of contracts have now been canceled by the Chinese. The cancellations include contracts for the second stage of the giant Baoshan steelworks, on the fringes of Shanghai, and three petrochemical projects.

Some of the biggest names in Japanese business -- Mitsui, Mitsubishi, and Nippon steel -- have been hit by the cancellations. No figure has been set on compensation these companies, and others, may claim, but it could amount to hundreds of millions of dollars.

The only american company apparently affected by the latest round of project cancellations is Wean United of Pittsburgh, which was involved in the construction of the steel rolling mill for the second stage of Baoshan.

As a US trade official here said: "There isn't a lot of exposure for American companies. This may be one of the occasions when it's good not to be ahead."

Several American companies last year felt the cold wind of readjustment. Fluor, the big engineering group, found that after conducting a $10 million feasibility study for a large- scale copper project, it was quietly told the project was being deferred. Bethlehem Steel, which was discussing a steel pelletizing plant, received a similar message.

West German companies have not fared quite as badly as the Japanese, but at least two -- Schlomann Siemag AG and Lurgi -- may well be among those lining up for compensation.

A delegation from Schlomann Siemag, one of the principal contractors for the January to discuss the cancellations. Lurgi, which had contracted to deliver several petrochemical plants, will soon have talks with the Chinese about the cancellations, according to German sources here.

There is intense anger in both Japan and Europe over what is regarded as the arbitrary termination of agreements entered into in good faith, but the Chinese are privately explaining they cannot afford to go ahead with these ambitious projects.

They point to a severe foreign-exchange shortage and ballooning deficit as two of the major factors in the decision to brutally slash capital construction spending.

China last year put through a second and more rigorous readjustment, following on one announced at the beginning of 1979. The effective freeze on new capital works projects is likely to continue into the mid-1980s. In fact, China may not have much money to spend on big projects until its offshore oil program starts paying dividends toward the end of this decade.

Western trade officials here are saying the sudden termination of contracts will affect China's reputation as a reliable trader.

"The Chinese must really have problems if they have to take such measures, because tehy know it must severely damage their reputation," a Western commercial attache said.

The Chinese seem prepared, however, to accept a measure of opprobrium as the price of getting their affairs back in order.

What worries representatives of companies faced with renegotiating contracts or seeking compensation is that Chinese officials appear to have little understanding of the costs these contractors have incurred. One trader said an "education process" was needed to make Chinese bureaucrats understand the costs to companies of contract cancellations.

Western commercial official remain skeptical despite Vice-Premier Gu Mu's assurances after his talks with Mr. Okita.

"There will be some reduction in the scope of China's cooperation with other countries during its economic readjustment, but in the long run, China's external economic cooperation and foreign trade will continue to develop," Mr. Gu said.

"China will not ignore the economic losses inflicted on its trade partners by the canceling of the projects. We will assume appropriate economic responsibility through consultations and in accordance with conventional practice in the world."

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