Capitalism Seeps Into An Old Port...

Two years ago, socialist mismanagement finally caught up with Qingdao Canning & Foodstuff Co., which had been nationalized after the communist takeover in 1949. The company found it difficult to pay its 1,600 workers after racking up $30 million in losses in four years.

So Qingdao officials made a move that until recently was taboo in China: They sold a 60% stake to Hong Kong's Andes Enterprises Ltd., a major distributor of processed seafood. The improvement has been dramatic. Output of the plant's main product--frozen fish--tripled, to $20 million. That was after shaking up management, hiking pay by 60%, and shrinking the product line, which had included everything from dried beef and fruit jams to ice cream. And Andes is providing jobs for 1,500 contract workers in addition to 600 full-time staff.

Privatization is still a dirty word in China. Beijing's ideologues stubbornly cling to state ownership of the means of production. But at the local level, privatization in various guises is proceeding apace--quietly. Qingdao is a picturesque port with a current population of 6.7 million. From 1898 to 1914, it was leased to Imperial Germany, and its tile-roofed stone buildings still evoke Mitteleuropa. The city's reformist officials have recently resorted to a variety of means to dispose of money-losing businesses. In addition to the canning factory, three other city-owned plants have been sold to investors from Germany, South Korea, and Hong Kong. Local entrepreneurs have been allowed to take over everything from downtown stores to cotton mills in an arrangement called "state ownership, private management."

In several cases, the city has sold basket cases outright to local tycoons such as Chen Shouguo, whose 1,500-worker leather-furniture factory makes him the biggest private manufacturer in Shandong Province. Last year, Chen took over a near-bankrupt collective making various electrical components and refitted the factory to process wood for furniture. Already, the plant is profitable.

The preferred method, however, is to sell a controlling stake in a corporate dog to foreign investors. That way, the state can save face by calling it a "joint-venture," in which an overseas partner provides hard currency, modern technology, and access to markets abroad. So far, Qingdao is preparing to sell an additional 20 of its more than 300 city-owned businesses. They range from a 600-worker weaving factory to a major meat processor.

But as the canning factory's experience shows, serious obstacles remain. Even though productivity is up sharply, the plant still isn't breaking even. The reason: Andes must pay 700 retired workers--about as many as are on its full-time staff. Just as vexing is the issue of how to deal with layoffs. Although Andes fired few employees, new owners generally slash workforces by 30%. With no social safety net, Qingdao is willing to tolerate an official jobless rate of no more than 2%, compared with the current 1.5%. So jobs for fired workers must be found at other government units. That dilemma, as much as the party line, means state ownership may dominate industry for decades to come.

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