Chinese state firms

[Louis N Proyect <lnp3@xxxxxxxxxxxx>]

October 5, 1997

Free-Market Plunge Is Rattling China's
Businesses

By SETH FAISON

SHANGHAI, China -- Lu Yaqin cheerfully admits that, for a chairwoman of
the board, she does not know much about business.

Ms. Lu's position, running a company newly freed from government
ownership, right in the heart of China's largest city, might seem an
enviable spot for finding on-the-ground opportunity in the world's
fastest-growing economy.

But Ms. Lu, like so many managers in China who came of age under
central planning, has more experience following Communist Party
instructions than making business decisions. At her cramped,
back-alley factory, where 159 workers make industrial sewing
machines, she seems a bit perplexed in her search for new sources of
income.

"The leadership is encouraging us to explore new solutions," said Ms.
Lu, a portly woman of 49, whose company has retained its
communist-era name, Shanghai No. 2 Textile Machinery Factory. "I
thought maybe we should start a laundry delivery service. What do you
think?"

The vast majority of China's 300,000 state-run enterprises, like Ms.
Lu's factory, are small, inefficient and now, under pressure to reform,
grasping at almost anything for a way to stay alive. The business climate
has become treacherously unstable, and many leaders like Ms. Lu are
party operatives with little experience or understanding of business.

At the Communist Party Congress last month in Beijing, the party
approved a plan to shift the ownership of all but 3,000 or so
enterprises away from the state, through mergers, public sale of shares
or transferring control to a company's management and workers. The
state press has hailed the move as a crucial step forward in China's
economic reform.

The idea, in essence, is to shed the state's burden of money-losing
businesses. While dismantling the last pillar of China's communist
economy, leaders say they must stop paying huge subsidies to lagging
enterprises that cannot compete with newer, nonstate companies that
are fueling China's locomotivelike rate of economic growth.

The reality, as seen at a factory like Ms. Lu's, is a mishmash of good
intentions, murky finances, political deal-making and "Chinese
characteristics," as politicians here call phenomena they cannot easily
explain. The outcome, though still up in the air, appears likely to be a
messy mixture of state and private control.

Chinese officials hope that over the long run, releasing state companies
into the free market will force a natural selection of viable businesses.

"We must have a system where the strong survive and the weak fail,"
said Wang Zhongyu, minister of the state Economic and Trade
Commission, during the party congress. "That is the lesson of the
market economy."

The grave risk is that unrest will erupt among workers, since more than
100 million jobs are at stake in the state-owned businesses that will be
up for sale. Workers at many companies are suddenly finding
themselves obliged to buy shares if they want to keep their jobs, and
once government support disappears they could be left with nothing if
their factories collapse.

An even greater concern, dramatized in small but ominous worker
protests across the country in recent months, is the danger of corrupt
factory managers who fail to pay workers and, taking advantage of the
disorder as ownership is shifting, abscond with a company's assets.

For any enterprise, especially one in transition, choosing leaders is
clearly a critical issue. Theoretically, adopting a shareholding system
means giving shareholders the right to select a company's directors.

The reality may not be so simple. In Ms. Lu's factory, for instance, the
same four leaders who ran the factory before it shifted from state
ownership to a shareholding system last year were "elected" again at a
first meeting of shareholders, with a new fifth member added.

"It was unanimous," Ms. Lu said proudly. "It feels much better to be
chosen by everyone than appointed by one or two people up above."

Ms. Lu has been the factory's Communist Party secretary since 1973,
when fanatical leftists were in charge and the main requirement for the
job, as Ms. Lu remembers it, was organizing and chanting political
slogans of the Cultural Revolution. She became the factory's general
manager in 1989.

Mirroring the kind of elections held at various levels of Chinese
government, voting at enterprises like Ms. Lu's may sometimes offer a
few genuine choices, but only within parameters that the relevant
authorities have set. Ms. Lu inadvertently revealed as much when she
described the process at her factory.

"When we were preparing for the election, our leaders got nervous and
asked me, 'Are you sure this is going to be O.K.?"' Ms. Lu said. "I
said, 'Yes, don't worry."'

A few months before the directors were chosen, Ms. Lu held staff
meetings to talk about switching to a shareholding system. The workers
were each asked to put up $500, about triple the average monthly
salary, for a stake in the company.

Such a price is affordable, in part, because the country's savings rate is
so high. Inexpensive housing still allows a typical urban worker to bank
40 percent of a salary, and in addition to China's cultural tradition of
thrift, there are few investment choices better than a savings account.

"I bought because it's a good deal," said a 32-year-old machinist at the
factory, keeping an eye on Ms. Lu, who was present as she spoke.
"Our factory is a good investment."

The shares that this worker bought at Ms. Lu's factory cannot be sold,
except to another employee, and will theoretically rise or fall in value
in line with the company's assets. Only about 700 companies in China have
won permission to trade shares on one of the nation's young stock markets
so far.

Ms. Lu said that her workers had all bought shares voluntarily, and
insisted that the 100 percent participation rate reflected workers'
enthusiasm, not any compulsory policy.

"Everyone had a strong desire for the new system," Ms. Lu said.
"There were no objections. Everyone's thinking was in line with the
leadership."

Ms. Lu became the company's biggest individual shareholder as well,
with a $2,500 purchase of 20,000 shares, or 2.2 percent of the
company. A woman in charge, while uncommon, is not unheard of in
China today.

Unlike many factory managers in China, who take advantage of loose
financial accountability by lavishing themselves with mobile phones,
company cars and fancy watches, Ms. Lu has none of those
accouterments.

Ms. Lu says she even cycles to work each day and has to cook and
clean for her husband and daughter once she gets home.

Understanding the financial operations of the Shanghai No. 2 Textile
Machinery Factory is not easy. The process of buying the factory from
a branch of the Shanghai municipal government, for instance, was
riddled with twists and turns.

Ms. Lu was vague about exactly who had the idea that the managers
and workers would buy the factory, but she said that once the decision
was made, government auditors came and estimated the factory's net
assets at $540,000, which logically would be the price it was sold for.

"But we only have 159 workers, and they could not afford that much,"
said Ms. Lu, explaining that the local government reduced the price to
about $110,000.

Before the factory's sale, it was one of three operations owned by a
parent company, Shanghai General Factory of Textile and Hardware
Works, which is in turn controlled by a larger, state-owned
corporation, Pacific Mechatronic Group.

To complicate matters, most sales of state-owned enterprises reserve a
partial stake for some branch of the national or local government. In
this case, 15 percent of the factory's shares are controlled by Pacific
Mechatronic Group, which technically represents "the state."

"We're like advisers," Zhang Qinghua, a director of Pacific
Mechatronic, said of the company's role at Ms. Lu's factory. "We don't
interfere."

As in many aspects of governing in China, where laws and regulations
often take a back seat to personal relations, the shift from state to
nonstate ownership will often see a general policy give way to
negotiations between local officials and factory managers like Ms. Lu.

In Beijing, senior officials are also worried about a separate danger.

By encouraging a broad shift to shareholding systems as China's official
press has, in order to heap praise on President Jiang Zemin, the
government has also created an atmosphere where shareholding may
be eagerly embraced, even where inappropriate, by local officials
trained to show their enthusiasm for party decisions.

As a result, some officials have warned against seeing shareholding as a
cure-all for every enterprise.

"It is unlikely that state-owned enterprises will immediately increase
their economic efficiency as soon as they introduce the shareholding
system," Hong Hu, deputy minister of the State Commission on
Restructuring the Economy, told Chinese reporters. "There is no single
way to solve all the various problems in China's reform of state
enterprises."

At the Shanghai No. 2 Textile Machinery Factory, Ms. Lu is looking
for more than a single way.

Walking down the narrow alleyway her factory is on, Ms. Lu pointed
to a luxury apartment building that is about to open next door.

"They'll need laundry service," she said, almost conspiratorially, as
though it were a secret idea she did not want anyone else to steal. She
brushed off the suggestion that it was too far outside her core business,
or that her workers had no experience in laundry.

"We don't know if it will succeed, but we have to try," she said.

           Copyright 1997 The New York Times Company