Deadbeat industies put China's economy in the red 'Debt chain' chokes growth, threatens system's survival

November 25, 1991|By Robert Benjamin | Robert Benjamin,Beijing Bureau of The Sun

SHANGHAI -- Glowing reports in the state-run press this month say that the No. 5 Steel Plant here is a model of China's economic reforms. It also is a deadbeat in a long chain of deadbeats.

By the end of last summer, according to official reports then, the state-owned enterprise owed $94 million -- debts that it could not begin to repay because it, in turn, was owed $126 million by its equally insolvent customers.

The "debt chain," as the problem has been labeled here, is but one symptom of the deep ills afflicting large state-owned industries that are the backbone of Chinese socialism.

If Communist versions of centrally-planned economies are an anachronism, China's mammoth, inefficient and inflexible state-owned companies are dinosaurs. And their failing health may bring down the whole system.

The Chinese government relies on the largest 11,000 of these firms for one-third of all urban jobs, more than half the nation's industrial output and 60 percent of its profits and taxes. They are both production units and social welfare systems, providing housing and other rationed benefits to millions of Chinese workers.

But officials admit that almost 40 percent of these companies are losing money, and foreign analysts believe that two-thirds actually are running in the red.

Since 1988, when the government launched a nationwide austerity campaign, officials have been keeping these firms afloat, their workers paid and their production lines rolling with massive subsidies.

Potential social unrest from unemployment -- a particular fear of the Chinese Communist Party following the 1989 crackdown on the Tiananmen Square protests -- has been bought off for the time being.

But China's national budget deficit has been growing at a record rate due to the increasingly draining subsidies. Stockpiles of products, from steel to Chinese carpets, are still mounting. State companies' aggregate debts have soared to $45 billion, a staggering figure considering that China's total annual government budget is only $65 billion.

Authorities first tried to grapple with the problem with a typical bit of socialist sloganeering, declaring 1991 the "Year of Quality, Variety and Efficiency."

Then they launched a debt-clearing campaign, pumping in even more state loans to untie the financial logjam. With that no longer affordable, they have been forced to face what had been previously unthinkable here: pushing a few of the companies into bankruptcy.

The stakes involved in this effort strike at the heart of the future of Chinese socialism.

Pressed to define its brand of communism in a world rapidly rejecting that ideology, China's leadership has redoubled its emphasis on state-owned companies as the key to building what is often referred to here as "socialism with Chinese characteristics." In the process, resuscitating the dying behemoths has become a national, ideological litmus test.

"If we want to convince the society that socialism is good, the most fundamental thing is to make material things and use our wisdom to prove that state-run . . . enterprises are dynamic," Guo Shuyan, governor of central China's Hubei Province, recently told a Hong Kong newspaper.

Following a high-echelon conference in September, Chinese leaders declared their solution: give state-owned firms more autonomy. Moves have begun to free them from state production quotas and price controls and allow them to manage their own affairs, including firing workers.

But more autonomy means less central government control. Closing money-losing companies risks dreaded unemployment. Freeing prices may lead to inflation, even more feared by most Chinese. Breaking workers' lifelong tenure -- their "iron rice bowl" -- translates to less political loyalty.

And initiating shareholding schemes to raise capital, as has been increasingly suggested, results in less public ownership.

So these efforts raise a fundamental dilemma for China's leaders. If they fail, China may financially bleed to death. If they succeed, what can China point to as essentially socialist about its economy, other than empty slogans?

The answer already is increasingly little. In 1978, state-owned industries accounted for more than 80 percent of China's industrial output; now it's less than 60 percent.

Rural collectives (often essentially private companies in disguise), private enterprises and foreign-funded firms now rack 70 percent of the growth in China's economy. As state industries are closed and workers are left to find their own ways, this figure can only grow.

Shanghai, China's largest city and long its industrial powerhouse, is in the forefront of both the problem and the attempted solutions. Former Mayor Zhu Rongji, now a vice-premier and perhaps soon to rise to the party's Politburo, has been put in charge of the rescue effort. "The whole country must look to Shanghai," he recently declared.

So sensitive are the issues that the city's economic officials recently refused to meet with several foreign reporters. A visit to the No. 5 Steel Plant also was denied, and that was followed by a flurry of propaganda describing how the factory's 23,000 workers have been scurrying around in an effort to cure its problems.

But permission was granted to tour Shanghai's No. 1 TV Factory, where 3,700 workers turn out "Jinxing" TVs, a top Chinese brand. There, Hu Song Qin, a company vice-director, boasted of success through boldly responding to market demands rather than state plans.

But after an hour of this sort of obligatory crowing, Mr. Hu eventually acknowledged that the No. 1 TV Factory, like thousands of other Chinese state enterprises, is sinking in red ink: Its customers owe it so much money that it is three months behind in paying its own bills.

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