Vice-Premier Zhu Rongji is an exacting taskmaster. The intense, technocratic boss of all China's economic affairs has scant patience for error. During an interview in Beijing's Purple Light Pavilion, an ornate meeting hall built during the days of the emperors, this drafter of China's boldest reform package in a decade reels off one economic statistic after another without notes. He also repeatedly interrupts his interpreter to make sure she has given his exact meaning--and nothing less. "Banking," he says, when she mistranslates a word as "financial." Meanwhile, nine aides sit nearby, scribbling notes.
Zhu's leadership is now being put to the supreme test. Appointed governor of the nation's central bank last summer, he has been showered with admiration from the international business community for his vision of China's economic future. But at home, his abrasive style has left enemies--and more than a few who hope he'll fail. Now, with his job on the line, Zhu is pushing ahead with a revolutionary agenda to forge a modern, market-oriented economy. In an exclusive, two-hour talk with BUSINESS WEEK, Zhu laid out in detail his three-pronged plan to federalize the nation's unwieldy banking and tax systems and also overhaul state industry. The blueprint, he says, is "comprehensive, extensive, in-depth, and unprecedented." It is also fraught with peril.
OLD WARLORDS. For his plan to succeed, Zhu has to find a way to harness China's economy, which in 1993 grew at a dizzying pace of 13%--for the second straight year. Inflation is on the rise, with prices in the largest cities climbing more than 20% annually. Subsidies to money-losing state enterprises, relics of the Stalinist economy, are bleeding the center dry. And decentralization has created a crisis between Beijing and the provinces. In the midst of an economic boom, Beijing's revenues are falling, as provincial leaders grab an ever expanding share of taxes for themselves and help local companies evade Beijing's collectors.
As he launches his plan this month, the 66-year-old Zhu must stare down history. China has almost always functioned as a sprawling empire with strong regional warlords. The new accommodation between the provinces and the central government will give Beijing more power over the economy.
While Zhu struggles at home, pressures are mounting overseas as relations with the U.S. heat up over human rights and trade. In a draft of its annual human-rights report, the State Dept. blasted China for lack of progress, endangering renewal of its most-favored-nation trade (MFN) status. Making matters worse, while Beijing had an overall deficit of $12 billion in 1993, its surplus with the U.S. is $23 billion and growing. That puts it second to Japan in the size of its imbalance with Washington.
High-ranking officials on both sides of the Pacific are scrambling to stem the damage. Treasury Secretary Lloyd M. Bentsen met with senior Chinese officials on Jan. 19, while Secretary of State Warren M. Christopher plans to talk with Chinese Foreign Minister Qian Qichen in Paris on Jan. 24. Beijing's leaders are suddenly taking a more conciliatory tone. Instead of insisting that human rights is none of Washington's business, Zhu says that "we are certain to see more progress." If China takes steps needed this year, the Clinton Administration may separate human rights and trade in the future.
Zhu's task is far trickier than Deng Xiaoping's 15 years ago. Deng set the process in motion by freeing up peasants and entrepreneurs and by welcoming foreign investment. Zhu is going a step further by reforming key institutions. He wants to set commercial banks free, spin off state enterprises to professional management, and create a U.S.-style tax system. The goal is to have a market economy running smoothly by 1999. "It's an enormously daunting task," says Richard Mounce, vice-president of Chase Manhattan Bank in Hong Kong.
NO WAY BACK. As far-reaching as his economic reforms are, Zhu has steered clear of political reform. While chaos has crippled Russia, Chinese leaders say they have allowed economic liberalization but maintained strong political control. Over the past 15 years, China has encouraged entrepreneurial growth and foreign investment while gradually freeing prices and creating a strong currency. With the resulting growth, Beijing's technocrats are able to tackle the wrenching issues of remaking companies and financial institutions and of consolidating control over a vast empire.
What if the challenge proves too great? China would remain stuck in boom-bust cycles that would grow even more dangerous over time. That would hurt the foreign investors, both Western and Asian, who have been pouring in billions. But perhaps the biggest losers would be the Communists. With Marxism discredited, economic growth may be the only way for the party to preserve its power. "The leadership knows there is no way for it to go back," says a prominent Chinese economist. "If it does, it collapses."
Even so, many of Zhu's proposals will test the party's control, as workers and peasants are exposed to the harsh realities of the market. Although many laid-off workers are finding jobs in the thriving private sector, some grumble about losing their "iron rice bowls"--lifetime employment. One 38-year-old mother, let go after 12 years at Shanghai's state-run China Record Factory, fumes: "I thought the factory had an obligation to take care of me. The managers sit in their Mercedes-Benzes, and we are hardly getting a thing."
Communist Party hacks are worried about losing their clout, too. Some local leaders see their power threatened by Zhu's plans to rein in the provinces. So politically, Zhu could be on shaky ground. Lacking ties with the military and the security apparatus, he doesn't have a strong power base to fall back on during hard times. "He is the most vulnerable of the central leaders," says a Western diplomat in Beijing.
And Zhu knows firsthand how uncertain life can be. Born in 1928 in Hunan province, he was educated as an engineer, but during the Cultural Revolution of the 1960s, he was forced to work as a peasant. After his rehabilitation in the late 1970s, he climbed through the ranks and in 1989 became mayor of Shanghai, where he was a favorite of Western executives. Deng handpicked Zhu for service in Beijing in 1991.
Since then, he has worked on his blueprint for radical reform. Zhu's ambitious program got off to a rocky start in late December. Farmers hoarded grain in anticipation of higher prices, causing panic buying. Other Chinese grew edgy when the government announced on Dec. 29 its intention to unify China's dual exchange rates by Jan. 1. That prompted people holding currency traded at the official rate to snap up gold and jewelry, for fear of seeing their money devalued 50% overnight. Others bought big-ticket items when they heard that China would slap on a new value-added tax.
Undaunted, Zhu is pushing ahead. His plan involves three structural changes:
--CORPORATE REFORM: China's state enterprises still account for about half of the economy and employ the vast majority of urban workers. Nearly two-thirds of such businesses don't make money--and 37% are big losers. The state spends billions each year bailing them out. But the government can't cut loose millions of workers who depend on their jobs not only for work but also for health care, education, and pensions.
A new corporate law, to be effective on July 1, is the first legislation aimed at whipping these industries into shape. The goal: to get the party out of business management. These dinosaurs will be merged, sold, or turned into joint-stock companies, with shareholders selecting the board of directors. "The idea is to make them responsible for their own management and operations," says Wu Jie, one of Zhu's advisers.
For a pilot program this year, the state will choose 100 companies. To make them competitive, the government will change factory leaders, redo organizational structure, and provide new technology and equipment. The government will spend $5.5 billion on renovating rust-belt plants next year. "If, despite all these measures, they still operate in the red, then we'll have to enforce the bankruptcy law adopted in 1989," Wu says.
With an eye to the day when big companies fail, the government is experimenting with a new safety net. This year, there will be various experiments to test unemployment insurance, pensions, and workers' compensation.
On top of that, the technocrats are steadily reducing the number of ministries in Beijing. Powerful corporations run by experienced managers rather than bureaucrats will take their place. And the pace of privatization will increase. Fifteen of the strongest state enterprises will follow the example of the "Gang of Nine," companies that floated shares on the Hong Kong exchange last year. Among the new listings: two major airlines, a railroad company, and several power plants.
--TAX REFORM: Perhaps Zhu's toughest battle was to win the provinces' approval for his new revenue plan. Aides say he traveled throughout the country to underscore the need for the richer provinces to share the wealth. Last year, the financial revenues of local governments jumped 20%, while the central government suffered a deficit.
China is establishing two separate tax bureaus in localities across the country. Existing bureaus in the provinces will be converted into central government ones, while provincial authorities will open new bureaus of their own. Before the year 2000, the state hopes to be pulling in 58% to 60% of all revenues, as opposed to the 38% it gets now.
Actually collecting the taxes, though, may be the real challenge. Local leaders have found many ways of keeping money out of Beijing's hands. In one popular scheme, provincial leaders allow local companies to underreport income, thereby sheltering them from central government tax rolls. Later, the companies make "contributions" to local governments. "When the provinces need the money, they call it in," says Fan Gang, an economist at the Chinese Academy of Social Sciences in Beijing. "But it never shows up on the books."
But many experts remain optimistic. "We believe [reform] will work, though it won't be effective from Day One," says Meocre Li, managing partner of Arthur Andersen & Co. in Hong Kong.
Other problems loom. This year, Beijing will meet the provinces head-on over the wild growth in infrastructure projects. With good reason: There is massive overlapping. Almost every coastal region wants to build a major port. "It's a little bit out of control," says Gao Lianbin, director of the northeastern city of Dalian's port authority.
--BANKING REFORM: The People's Bank of China is a relic: It still doles out loans for projects whenever the government sees fit. In early 1993, banks went on a lending spree, providing billions in cheap funds to property speculators and causing a liquidity crisis. Last summer, Zhu stepped in, forcing the banks to call all loans by the end of the year. The picture for this year is healthier: Banks must increase their reserves from 5% last year to 13% this year.
SQUEEZED. The breakthrough will come this spring. That's when China's rubber-stamp parliament, the National People's Congress, is due to approve wide-ranging laws regulating the central bank, commercial banks, and money markets. The goal of the reform is to create a central bank that can control money supply. The country's major specialized banks will be converted into true commercial banks that lend money based on risk assessments. Three new banks will handle loans for big government projects. "These laws will pave the way to create a basic legal framework for the future banking system," says People's Bank Deputy Governor Chen Yuan.
But the transition will be slow. To prevent state enterprises from going bankrupt, commercial banks will be forced to continue extending them credit. But small business borrowers aren't so fortunate. They get harshly squeezed by the banks. So to help them, the government wants to let mutual funds and financial institutions lend to this most dynamic sector.
For Chinese and foreigners alike, the changes are sometimes baffling. Zhu insists December's panic buying was caused by poor communications. As a result, he intends to launch a TV and radio blitz before further reforms. Foreign investors are scrambling to keep up. After returning from a 10-day trip to the U.S. over Christmas, Dudley Schleier, general manager of Pfizer China, a pharmaceutical joint venture in Dalian, was suddenly confronted by a currency devaluation, new VAT, new customs duties, and increased tax rates for expatriates. "The biggest challenge I face is change," he says.
The months ahead will test whether wide-scale reform can be managed by any technocrat--even one as savvy as Zhu. As long as he enjoys the support of the ailing Deng, his position is relatively secure. And after Deng's death, Zhu and his reformers may continue to have party backing. Even conservative leaders such as Premier Li Peng know that controlling industry the Stalinist way won't provide prosperity. Moving toward Zhu's goal of a modern economy will. So Beijing's formula is to keep a firm grip on politics, but ease up on economics.
Of course, most Chinese citizens had no say in these policies. Despite the new jobs being created in the private sector, workers and peasants may resist giving up the safety and benefits of the old system. Chinese who do prosper may not be satisfied without democratic reforms.
Zhu's gamble is that economic progress will salve the tensions on the surface of Chinese society. Many hardships lie ahead. But after more than four decades of Communist rule, Zhu's vision offers China's 1.2 billion people a fighting chance for more prosperity than they have ever seen.