A capitalist showcase for China? Chinese face hurdles wooing funds for island ventures

At midnight, as moonlight gleams off the tops of palm trees, a dark factory suddenly blazes with light, and its workers leap from their dormitory beds. The lamps instill an urgency in the employees of the Haikou Electronic Industry Co. They declare that the factory has electricity: the workers can work.

The resolve of laborers to make products that run on electricity despite a chronic electricity shortage is more than irony. A 40 percent power shortfall is a dire problem for Hainan island.

The island faces many such fundamental obstacles on the eve of its assignment as the proving ground for China's boldest venture yet in economic reform.

The tropical island must pull itself out of backwardness using unskilled laborers, insufficient railways, shallow harbors, short airport runways, and just 12,000 telephones. Its network of roads, although well-paved, appears to double as an island-wide barnyard, handling more chickens than cars.

Nevertheless, Peking aims to invigorate Hainan with massive public works projects and reforms aimed at luring foreign investors with the loosest business restrictions ever adopted in communist China. It plans to grant the island greater autonomy when China's nominal legislature, the National People's Congress, upgrades Hainan to provincial status this month.

Chinese leaders hope that Hainan's minerals, oil, natural gas, agriculture, and tourism prospects will make it a sort of South China Sea Charybdis, sucking in foreign investors and their hard currencies.

A prosperous Hainan would offer Peking significant propaganda value in its effort to assimilate parts of China outside its control. By displaying a booming Hainan as a showcase, Peking could assure Hong Kong and Taiwan that it can reconcile an efficient, semicapitalistic enclave with communism.

Pragmatic island officials appointed by Peking have said the formula for Hainan's economic miracle will include more freedom to sell products to the mainland, the right to sell leases on land ranging up to 50 years and beyond, and the elimination of duties on goods needed for manufacturing.

The leaders have said that when Hainan is elevated to provincial status it will retain all the profits from state enterprises instead of handing such earnings to Guangdong Province, its current administrator. Hainan banks will receive state funds directly from Peking instead of competing with Guangdong banks, and officials will be able to approve investment projects valued at up to $30 million, six times the size of ventures they may endorse today.

But Peking leaders know that the lack of adequate transport, electricity, and communications could discourage most overseas investors despite Hainan's unrestrained economic climate. Consequently, they have announced a colossal plan to construct power stations, a deep-water port, another trans-island road, telecommunications links, a railway, and a new airport.

Peking has not specified the cost or the source of funding for this grandiose scheme. But it will have to spend far more than the $1.29 billion it has funneled toward capital projects on Hainan since 1983, according to an unclassified US Embassy report on Hainan issued last month.

``Peking will be looking long and hard for foreign investment, foreign loans, and foreign vendors who can sell their wares at concessional terms. For this they will look first to Hong Kong,'' said the Embassy report.

Ji Shaoxiang, a leading Chinese government representative in Hong Kong who has advised Hainan officials, agrees that the British colony is the most promising source of funds. ``With the support of Hong Kong companies the development will be very fast. Many companies in Hong Kong have shown great enthusiasm for the island, and I'm quite optimistic,'' he said.

However, James McGregor, director of the Hong Kong General Chamber of Commerce, said that most companies in the free port would sooner invest in the adjoining area of Shenzhen or in China's three other ``special economic zones.''

``Frankly, Hainan is an undeveloped area relatively speaking, it is some considerable distance from Hong Kong and there are many other areas which for Hong Kong investors would be much more attractive right down the coast of China, areas that have had a long, long association with foreign countries,'' Mr. McGregor said.

``So unless very considerable, substantial long-term financial incentives are provided for investors in Hainan, I would say that Hainan would not be a particularly attractive proposition,'' he said.

Potential investors confront a long record of economic mismanagement on Hainan. For more than 30 years Peking bureaucrats have administered most of Hainan's industry and agriculture, cultivating as much inefficiency as in mainland areas under the command economy, Western diplomats said.

Also, Hainan officials have gained notoriety for corruption. In one of post-revolution China's most infamous cases of profiteering, party officials from 1983 until 1985 imported 89,000 cars and trucks, nearly 3 million color television sets and other electronic gear, and resold the goods to the mainland for exorbitant profits.

Businesses that could run independently of the island's unskilled labor and primitive public works will probably find Hainan most alluring. Blue Shrimp Farms Inc. of Newport Beach, Calif., plans to invest $500,000 in a joint venture to cultivate shrimp in a self-sufficient farm on northwestern Hainan. The company plans to generate its own power, regulate the feeding and water quality by computer, and fly the crustaceans live in dry ice to Japan at $20 a kilogram (2.2 pounds).

``We will be completely self-contained. We will not be involved with local labor much, we will produce our own electricity, and we will bring in our own equipment,'' said George Chan, director of the farm.

Tourism also offers a promising area of investment for what Hainan boosters call the ``Hawaii of the Orient.'' Peking has targeted wild beaches around the southern port of Sanya for resort development.

But most observers agree that under communist leadership Hainan will probably not spring soon into the prosperity of Hong Kong and Taiwan. A Western diplomat said on condition of anonymity, ``Much too much of high hopes has been said about the island,and I'm afraid it will be a dud for a long time - it won't come bursting out in all its glory as you'd believe from all the noise.''