Shenzhen, China: freewheeling trade and social ills. Experiment in freer economy tests patience of some leaders

``Out of nowhere,'' the old gentleman murmured, staring through the train window as the rice paddies of the Pearl River Delta sped by. ``They built Shenzhen out of nowhere.'' The retired Army officer knew what he was talking about. He grew up in those paddy fields, in the very county where China's frontier city of Shenzhen has sprung up haphazardly, in the past seven years.

The high-rise city he spoke about -- with its new industries and shops and a population of 600,000 -- took in more than 3 million visitors last year. It is just across the border from Hong Kong. China's master strategist Deng Xiaoping has called it a ``new phenomenon of socialism.''

But the traveler who reminisced about life in the once-sleepy villages of Bao An County gave a bittersweet commentary. He is disturbed by the social trends he sees emerging from the economic experiment in his native area -- problems of consumerism, profiteering, smuggling, gambling, and disrespect for the Communist Party. He said he supposes they are inseparable from economic progress.

``No one can deny the great accomplishments of the past six years,'' he said, referring to the turnabout in China's economy under Mr. Deng, ``but the negative side worries me.''

Just the appearance of the passengers in the train from Guangzhou (Canton) signaled that Shenzhen is different from much of the rest of China. Mostly the passengers were single young men, businessmen and workers, who are attracted by the region's more open life style and high pay (more than three times that offered elsewhere in China). Their restlessness and Hong Kong fashions hinted they were bound for a cultural and economic buffer zone between socialism and capitalism.

But the life style these youth are pursuing -- seeking their fortunes and scarce consumer goods -- has brought frustration to Chinese leaders. This summer they have gone public with their concerns.

In June, Bo Yibo, a senior Communist Party official, rebuked the zone's officials for its ``rampant economic crimes'' as well as for their ``mistakes in management.'' Then Deng Xiaoping himself, who had enthusiastically endorsed the economic zones experiment 18 months ago, conceded in an offhand remark to visitors that Shenzhen's success had yet to be proved.

``We hope it will succeed. But if it fails, we can draw lessons from it,'' he said a few weeks ago.

The controversy over Shenzhen concerns both its economic performance and the openness of its society. Along with the three other special economic zones of Zhuhai, Shantou, and Xiamen, which were all officially opened in 1980, it was intended to be a base area for foreign investment in high technology.

Its exports of consumer goods were supposed to earn foreign exchange and carve out a place for China in international markets, while its industries were to be prototypes of modern economic production for the rest of the country.

Instead, Shenzhen's infant economy has been flourishing on retail trade and tourism. Foreign investment, mainly from Chinese sources in neighboring Hong Kong, has taken advantage of relatively cheap labor for simple assembly operations. More than two-thirds of the products are sold inside China.

Until recently the Chinese government seemed pleased with the zone's investment statistics. By the end of 1984, it had attracted almost 500 manufacturing operations and $580 million of foreign investment. Officials say that $2 billion to $3 billion has been promised in signed contracts since the zone was officially opened in 1980.

But the optimistic assessments of Shenzhen have become tempered by a late awareness that it takes time to win investor confidence, train managers and workers, and build the infrastructure needed by sophisticated industries. In the meantime, party officials have pointed to many undesirable social and economic consequences of tolerating a slightly freewheeling society inside their socialist system. In the latest blot on Shenzhen's social record, last month public security authorities closed down a gamblin g casino -- China's first since communist rule was established in 1949.

Shenzhen officials have gone on the defensive in the face of the criticism and uncertain support they are receiving from Peking. Mayor Liang Xiang recently affirmed the ``success of the experiment,'' pointing out that industrial production in the first half of 1985 reached 1.3 billion yuan ($460 million) or doubling the amount over the same period last year.

In an interview earlier this summer, He Guang Fu of the Shenzhen Economic Zone Development Company also defended the pace of development, especially against the charge that Shenzhen had failed to attract advanced technologies.

``At the beginning, most enterprises are assembly operations. But as we improve facilities and increase the efficiency of our work, this will change. It is already changing,'' asserted Mr. He, who is in charge of contract negotiations for the development agency.

Despite the controversy, Shenzhen is one symbol of Deng's attempts to change China. It may never be a prototype of economic development for the country as a whole; it is too isolated and exceptional for that. But it is a useful laboratory experiment.

The Communist Party's theoretical journal, Red Flag, opened its first bureau there this month with the expressed purpose of studying the border town's economic and social trends and drawing lessons for the party.

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