China's state firms try form of capitalism

January 04, 1994|By Robert Benjamin | Robert Benjamin,Beijing Bureau

BEIJING -- The Wangfujing Department Store, for decades a dreary dispensary of low-quality goods at state-controlled prices, now sports a totally new look.

The dowdy retailer on Beijing's premier shopping street shut down for two months to transform itself with bright lighting, shiny marble, gold filigree and expensive foreign products, from Japanese electronics to French cosmetics.

But the changes at the venerable store run even deeper.

The department store paid for its renovation with cash raised in a stock sale that changed it from a state-run entity to something resembling a capitalist corporation owned by shareholders.

The Wangfujing store is among about 150 state companies in Beijing that have tried to become more efficient by switching to share holding, most just last year. Across China, at least hundreds of other firms intend to take the step this year.

The move to share holding has long been urged by Western economists as a way to breathe new life into China's moribund state enterprises.

Now it has become the clarion call of reform-minded Chinese economists, as China attempts this year to dramatically step up its already feverish transition from a command economy to one driven by market forces.

The move involves launching the most sweeping set of economic reforms in the 15 years that China has been trying to free itself from the shackles of socialist collectivism.

Even under the most optimistic scenarios, these new reforms could take more than a decade to carry out fully. But 1994 is viewed as a critical turning point.

"Reform in China has now entered the most difficult, most challenging and most hopeful period," writes Wu Jinglian, a highly placed economist nicknamed "market Wu" for his aggressive advocacy of free markets. "It is of vital importance to have a good start in 1994."

The reforms put China firmly in uncharted waters.

"No other nation has succeeded in what China now is trying to do," says a Beijing-based Western economist. "There's no end to the pitfalls ahead. But the economic chaos in the former Soviet Union shows by comparison how remarkably successful China has been to date."

'Big bang' approach

China's success so far results partly from having proceeded relatively slowly. Now, however, reform is forging ahead quickly on many fronts at once in a "big bang" approach.

The latest reforms -- to China's corporate, tax, banking, foreign trade, price control and currency systems -- boil down to working out the details of senior leader Deng Xiaoping's seemingly contradictory notion of a "socialist market economy."

In essence, this means free markets and a modern financial system under the unquestioned rule of China's Communist Party. Singapore's profitable neo-authoritarianism is the best model, but few believe mammoth China's development can neatly follow that of the city-state.

The reforms may be the ailing, 89-year-old Mr. Deng's last hurrah, his final effort to ensure that his liberalization of the Chinese economy cannot be undone after his death.

Political reform is not on the agenda. Indeed, the reforms are aimed first at strengthening the fiscal strength of the central government and ultimately at ensuring the party remains in power.

But for many Chinese, some of the party's essential flaws have been graphically revealed by the corruption, fraud and crime that have risen sharply along with the reform surge.

Moreover, urban-rural tensions are growing as China's 800 million peasants fall behind their urban cousins. Tens of millions of unemployed farmers float around the country in search of work. Beggars, often rural women with toddlers, have returned to cities' streets.

Nonetheless, China's leaders appear committed to moving ahead rapidly with the reforms.

On New Year's Day, they took the critical step of scrapping the nation's controlled-rate foreign exchange system for one in which the exchange rate will partially respond to market forces, a move toward having a convertible currency in a few years.

This involved a painful devaluation of China's currency by 33 percent. But it will aid foreign investors, some exporters and China's bid to enter the world trade regime, the General Agreement on Tariffs and Trade.

And it marks another way in which China -- which drew pledges of $100 billion in foreign investment last year -- is becoming

inextricably bound with the rest of the world.

Red-hot growth

Such sudden shocks are possible here now in large part because of the Chinese economy's red-hot growth, running at 13 percent last year. The currency devaluation, however, risks fueling inflation, long the best index of the potential for mass discontent and disorder here.

Despite aggressive efforts last year by Vice-Premier Zhu Ronji to cool down the more speculative excesses of China's rip-roaring economy, the annual inflation rate in major Chinese cities has crept back to more than 25 percent.

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