Socialism vs. privatization: China's battle lines clear

June 20, 1993|By Robert Benjamin | Robert Benjamin,Beijing Bureau

Beijing -- The Avenue of Everlasting Peace, the broad boulevard bisecting this city, terminates in the west at three square miles of steel mills and blast furnaces that serve as the headquarters of the Capital Iron & Steel Corp.

The geography is apt: Whether socialism can enjoy a peaceful future in China is likely to depend on what happens at this sooty industrial complex and at thousands of other large state-owned industries struggling to follow its example.

Shougang, as the steel company is known, represents the "socialist" part of China's recent moves to forge a "socialist market economy."

China's headlong race toward private enterprise and capitalist-style markets has drawn a lot of attention lately, but Chinese leaders remain wedded to the socialist principle of state ownership for their largest and most important industries. And among these often-ailing giants, Shougang is offered by China as a rare success story, a showcase of socialism's enduring strengths.

Shougang, one of China's largest companies, claims to be the nation's most profitable. It makes everything from industrial controls to exercise bikes, is building Beijing's largest hotel-office complex, and plans by 2000 to be the world's third-largest steel producer. Following a recent buying spree in Hong Kong and overseas, Shougang also is the first Chinese industrial concern aiming to become what its officers call a "first-class transnational company."

"We think socialism can survive, and here we're making it work," boasts Pan Huayuan, a Shougang vice president.

But Shougang's achievements may be deceiving. High-level political connections have given the company many advantages, including the right to conduct foreign trade on its own. Many of its products are not yet competitive in international markets. Moreover, many Chinese and foreign economists believe that the company represents a wrongheaded idea about how to salvage China's state industries.

"There's no way to know if Shougang is succeeding because of its policies or its unique advantages," says E. C. Hwa, a World Bank economist here.

For China, this question is far from academic. More than 100 million urban workers rely on large state firms for jobs, as well as cradle-to-grave welfare benefits. Shougang, for example, provides its workers with virtually free housing, hospitals, colleges and even food from its own farms -- plus salaries three to six times higher than China's average per capita income.

But at least two-thirds of all state firms are losing money, and a quarter to half of all their workers are essentially unneeded. The money-losers survive on subsidies and loans that are draining government coffers and the state banking system. This has produced sharply rising inflation, which soon could force Chinese leaders to slam the brakes on the nation's rapid economic expansion.

If the current boom ends suddenly -- as many predict -- state industries will be hardest hit, and political upheavals could follow. The onset of the last economic retrenchment here in 1988 helped foster the 1989 Tiananmen Square protests. The next downturn could pose a similar test for the Communist Party, which has staked its legitimacy on social stability and a rising living standard.

Signs of labor unrest -- reports of illegal strikes and attacks on managers -- already are rising. There are even hints of worker dissatisfaction at Shougang: A group of retired female workers from the firm boldly protested last winter outside Zhongnanhai, the Communist Party headquarters, over unpaid pensions.

Meanwhile, China's state press is riddled with discourses on how to restructure state industries. One widely accepted idea: assigning idle workers to new affiliates in the underdeveloped service sector. Instead of breaking industrial workers' "iron rice bowls" -- their lifetime jobs -- such a move would make them cooks or taxi drivers, for example.

But this suggestion is overwhelmed by the sheer size of the problem, which involves tens of millions of workers. State coal mines, for example, plan to lay off 400,000 workers within three years. And one steel company in the Yangtze River valley town of Wuhan plans to drop 80,000 of its 120,000 workers.

Many Chinese and foreign economists believe the restructuring must go much deeper, right down to the question of ownership. They say the only way to salvage these giants is to sell them to shareholders, creating new pressures for better management -- even if most shares are held by workers and state banks.

Experiments with stock

Some Chinese state industries have been parceled out to shareholders, leased to entrepreneurs and allowed to go bankrupt in experiments that chip away at China's socialist underpinnings. Senior government officials said this month that they are drafting policies to entice foreign contractors to run state firms.

But most state companies still follow Shougang in trying to perfect something known as the "contract responsibility system."

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