State Firms Play Catch-Up In Rural China

But streamlining, layoffs, and ending social benefits could provoke political unrest

BEFORE last April, a foreign businessman had trouble even getting near Dong Shuchang's carpet factory, let alone investing in it.

Until then, Longyao, a medium-sized county in China's northeastern Hebei Province, was closed to outsiders because of security concerns and lingering poverty. Mr. Dong plodded along with sluggish orders, constant losses, heavy debts, and a half-empty factory that was expanded five years ago but now runs at one-third capacity.

Suddenly, everything changed. Last spring, the factory manager read in the Communist Party People's Daily that Longyao county was declared open. Then, three months ago, Dong was summoned for an official briefing and told that foreign investors are not only allowed, they're encouraged.

Now Dong, a lifelong communist, aspires to create an international joint venture, he says, if he could only figure out how.

"Once we become a joint venture, the carpet business could be very lucrative," he said, sitting in his five-year-old office building which remains largely empty and shows signs of neglect. "But they haven't told me how to set up this joint venture or through which channels to go."

In a pattern repeated across the byways and backwaters of China, Dong and thousands of other befuddled public-sector managers are scrambling to find foreign support and survive in the passage from socialist planning to market economics.

For China, the race to internationalize and remake its troubled network of state-owned enterprises poses thorny economic questions and holds political and social implications that will affect millions of Chinese.

The bulk of China's 11,000 large and medium-sized enterprises, which generate half of total industrial output and more than 60 percent of industrial taxes and profits, are located outside major cities. Most of these and thousands of smaller factories remain under municipal and county control. Chinese and Western experts say only one-third may be viable in the long-term.

Streamlining, layoffs, and ending cradle-to-grave social benefits could provoke labor and political unrest. Less dramatic are issues of equitable taxation and blurred lines of ownership among various types of state enterprise, establishment of a legal system and accounting procedures, and creation of a regulatory framework.

In the next six months, Western diplomats expect more major economic moves, although it will be "a lengthy, horribly messy process," says one.

"This is a revolution from the bottom up," a Western economist says. "The dilemma of the leadership is how to get these enterprises on a profit-and-loss basis and to decide who gets the profits."

Already, nudging open China's economy has drawn a flood of new foreign investment into China, one of the world's fastest-growing economies. Last week, the Ministry of Foreign Economic Relations and Trade said that the government approved 27,000 new joint ventures valued at $30.6 billion in the first nine months of this year, a jump of more than 50 percent in overseas investment commitments in China over the total amount accumulated in the previous 13 years of reform.

Under recently enacted economic reforms, a Chinese enterprise involved in a joint venture can overhaul its operation by paying lower taxes, enjoy more import freedom and more autonomy from the myriad of government administrators, directly handle its own trading deals, and improve product quality.

"There is a joint-venture craze in China," says John Frisbee of the United States-China Business Council in Beijing. "Right now, everybody wants a joint-venture partner. It's really accelerated lately."

Yet the influx thus far has produced only clusters of small investments averaging about $1 million concentrated in southern coastal areas. Most are involved in low-tech, export-oriented companies, Western observers say.

Ignored are thousands of troubled state-owned enterprises, many of them tucked away in remote corners, awakening from a 40-year nap to find themselves obsolete in China's new economic world.

A visit to the Longyao factory illustrates a few mistakes made under China's planned economy and underscores the magnitude of China's economic restructuring task.

In 1987, with 80 percent of its output going overseas, the Longyao factory launched a major $900,000 expansion, building a new office building, doubling capacity, and purchasing an additional 62 acres of land.

Following the 1989 crackdown on protesters in Tiananmen Square, however, overseas orders went into a tailspin. Stuck with a huge backlog, the operation was forced to liquidate its stockpile below cost.

The ill-fated expansion left Dong with a debt of $2 million to state-run banks, which he cannot service. In 1991, the factory had revenues of $550,000 and a loss of $73,000.

"If the bank insists on being repaid, I will have to close down," said the manager, giving a tour through a production area where a $36,000 wool-spinning machine sat idle. "We're something like a big horse dragging a small cart."

Dong also complains of being at the mercy of the Hebei Trade Department, a government-run provincial trading company that handles all the province's overseas dealings. Trading companies are part of the ponderous planning bureaucracy which mushroomed after the Cultural Revolution and are likely to fade away as reform effort continues and deepens, Western experts predict.

Hebei officials sidetracked a deal with a New York-based Taiwanese businessman who wanted to bring four Longyao workers to the United States to learn more sophisticated carpet design.

At times, Dong sidestepped Hebei by cutting deals with Beijing and Tianjin trading companies. But this cost hefty bribes for trading licenses and landed Dong in trouble with authorities.

Now, controls over export and price are loosening. If Dong could set up a joint venture, he says he could be rid of trade licenses and companies once and for all.

But all the factory has from years of international trade is a few scribbled receipts from the provincial trade department, which has no records of past customers.

"There are few enterprises like this one and few have any channels," says Chen Lixia, an industry official from the Longyao county. The county technically gets 50 percent of the factory profits and collects a 1 percent administrative fee.

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