Chinese go for going broke. National parliament poised to approve bankruptcy law to punish debt-ridden companies

By , Staff writer of The Christian Science Monitor

Factory heads in this gritty industrial town can run from Han Yaoxian - but they can't hide. The stout, middle-aged man in a navy blue Mao suit personifies China's most dreaded new economic experiment: bankruptcy.

``One might say that when factory directors see me they feel some mental pressure,'' chuckles Mr. Han, vice-director of Shenyang's Bankruptcy Affairs Office. ``That is, I am not a very nice image. You couldn't say I'm welcomed.''

Bankruptcy, long viewed by Communist Party ideologues as a bane exclusive to the capitalist world, is now hailed by China's pragmatic leadership as a necessary sanction for debt-ridden companies in an increasingly market-oriented economy.

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Until recently, Chinese industry has operated like an appendage to the gigantic state bureaucracy. Under a Soviet-style economy, factories produced according to strict quotas. Many stagnated, propped up by massive government subsidies.

In a bid to raise efficiency and productivity, Chinese leaders in 1984 began to deemphasize central planning. In its place, Peking promoted regulations based on a mix of spending and budgetary policy and market forces - euphemistically described as ``socialism with Chinese characteristics.''

Yet as these reforms spurred greater competition, they aggravated the losses of unprofitable, state-coddled firms. For example, more than 13 percent of China's 38,700 key state-owned industrial firms posted losses in 1987, according to official statistics. State enterprises consumed subsidies totaling nearly 15 percent of last year's government spending.

To lighten this budgetary burden, Chinese leaders drafted a national bankruptcy law. The law provides protection from creditors, preferential tax treatment, and low-interest loans to financially strapped companies for up to two years. After that, if they fail to recover, they will be declared bankrupt.

The law will come into force automatically this summer if, as expected, China's parliament passes related legislation at a session opening Friday.

Chinese officials stress that the law is intended to goad the nation's thousands of indebted companies toward recovery rather than see them liquidated. Widespread factory closings, they reason, could spark unrest among China's 132 million industrial workers.

Yet, deprived of state handouts, an enterprise's survival will depend on how aggressively its management promotes new worker-incentive plans and tailors production to an increasingly competitive, changing domestic market.

``In the midst of competition, the survival of the fittest is inevitable,'' reads the opening clause of bankruptcy regulations.

The law is already undergoing trial in Shenyang, the capital of China's northeastern Liaoning Province. A coal-streaked industrial city with a history of blue-collar activism, Shenyang is an appropriate setting for such a Darwinian drama. The city captured nationwide attention when it initiated China's first post-revolutionary bankruptcy experiments in 1985.

Stunning workers and management, Han's Bankruptcy Affairs Office slapped warnings on three indebted plants. ``Psychologically, the workers proved rather frail when confronted with the idea. Some are strongly averse to it,'' said Han, a former engineer who helped draft Shenyang's bankruptcy regulations.

Two of the firms recovered last year. But the third, the Shenyang tractor-parts factory, became China's first urban enterprise to go bankrupt in nearly four decades of communist rule.

Last March, four more Shenyang firms received bankruptcy warnings - nicknamed huang pai, or ``yellow card,'' after the yellow penalty sign flashed by soccer referees.

Communist Party Secretary Li Zemin told the Monitor that 40 other companies are ``on the brink of bankruptcy'' and may be given the ``yellow card'' soon.

If a firm company to repay 20 percent of its debts within two years after the warning, Han will shut it down.

One of those racing against Han's clock is Shenyang's No. 18 radio factory. Burdened with poor management, 1960s equipment, a 2.2 million yuan ($601,000) debt, and four times as many workers as needed, the tiny plant had epitomized the plight of many Chinese firms. Some workers showed up at the factory only once a month to collect their paychecks.

``The factory ate from the `iron rice bowl' of the state, and the workers ate from the `iron rice bowl' of the factory,'' said Luan Yezhu, who volunteered to try to save the firm from bankruptcy. ``No one cared whether the factory lost money.''

Soon after becoming director last July 1, Mr. Luan gave the factory's 310 workers new marching orders.

``I told them that if they didn't work, they wouldn't get paid, and if the enterprise went bankrupt, they would be unemployed,'' said Luan, a former radio technician.

Next, Luan did away with fixed income, introducing a plan to spur productivity by linking the workers' wages directly to the quality and quantity of their output. Under the plan, workers who complete all their assigned tasks receive 70 percent of their monthly wage or 49 yuan ($13). If they work harder, they earn more. But if they do a poor job, ``they don't earn one cent, even if they come to work every day,'' said Luan. Not everyone liked the idea.

``Some workers quarreled with me, they said, `What good is socialism?' I told them that socialism doesn't mean everyone can eat without working ... First you have to work, then you can build up a fortune,'' Luan said with a laugh.

The director also began to launch new products. Promising payment with a percentage of sales, Luan obtained designs for four marketable electronic inventions, tapping sources as diverse as universities and Army research units. Three are already under production.

Further aided by tax exemption and low-interest loans authorized by Shenyang's bankruptcy code, the plant stopped losing money nine months after Luan's arrival. In January and February this year, it earned a small profit of 2,000 yuan ($540). Although this gain is piddling compared with the 760,000 yuan ($205,000), or 20 percent of the factory's debt, which must be repaid by next March, Luan believes the company is headed for recovery.

``There are still a lot of difficulties. But I think we can meet the targets,'' said Luan, whose Chinese given name means ``pillar of industry.''

If he fails, however, Luan and his employees will be out of work. The factory's assets will be publicly auctioned. If authorities charge Luan with responsibility for the bankruptcy, he could be fined or jailed.

Notorious in Shenyang for his controversial work, Han says some factory directors openly attack his judgments. Others try to exert ``back door'' pressure on him through his friends and higher-ranking officials.

``This is natural,'' Han says. ``If a leader calls on me [to complain], I report my findings. Usually, when things are clarified, he supports my work.''

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