Can Jiang Reform China's State Owned Industries?

`Grasp The Big, Release The Small'

Chinese state enterprises produce items no one wants. And managers rarely suffer the consequences. But across the country, that's about to change. Cities such as Shanghai and Guangzhou are key testing grounds for what is shaping up as one of the Chinese leadership's biggest assaults yet on the problems of the woebegone state sector. Overall losses last year increased by 38%. So since the February death of Deng Xiaoping, President Jiang Zemin has made state-enterprise reform a top priority as he bids to consolidate his power (table).

Jiang's campaign is likely to fall far short of mass privatization, a step that might make economic sense but would spell political suicide. For example, the latest reforms will leave the 1,000 largest state enterprises under Beijing's control. That said, cities are experimenting with ways to shake up management, close the biggest money-losers, retrain laid-off workers, and reduce the social-welfare burdens carried by government companies. In many cases, small factories are being sold to foreigners. "The central government is clearly aware that the problem cannot be bypassed," says Weijian Shan, a managing director of J.P. Morgan (Hong Kong) Ltd.

The government, after years of dragging its feet, is willing to take all this action because the Chinese economy is increasingly stable, many analysts believe. In 1994, the economy overheated as inflation skyrocketed to 21%. But last year, the consumer price index rose a modest 8.3%, and it is likely to rise 7% for the next two years, predicts Salomon Brothers Inc. economist Kevin Chan. That's largely the result of tight credit controls that have been in place for three years, forcing discipline on state companies. If Beijing can sustain healthy but stable growth, absorbing laid-off workers will be easier.

SINK OR SWIM. Another reason may lie in politics. With Deng gone, there is pressure on Jiang to distinguish himself as the new top leader. There is widespread agreement on the need to change the state-owned economy. And with a key National Party Congress coming up this fall, says a Beijing economist, "this is Jiang's chance."

A pillar of Jiang's plan is to let small and midize state companies sink or swim, while focusing on turning around the largest enterprises involved in everything from textiles to heavy machinery and metallurgy. As Jiang says: "Grasp the big, release the small." Sichuan province hopes to privatize all small and midsize enterprises owned by county governments by next year. Beijing is budgeting $3.7 billion to write off bad debts of companies that are taken over or go bankrupt.

Many local governments also are looking at new ways to provide for worker welfare. Rather than have companies pay medical, retirement, and housing expenses as they occur, they are being urged to contribute to provident funds managed by cities. In Guangzhou, for example, officials are using these funds to provide mortgages to enable citizens to buy their apartments from employers. Some cities are tapping provident funds to set up health-care, pension, and savings programs.

The leadership also is trying out management reforms. Shanghai is setting up a "human resource center" that will monitor the performance of senior executives at local state enterprises. Talented managers will get training and help in landing new jobs if they want to move to other enterprises, while the center will keep tabs on poor managers and may even recommend their ouster.

Many of the boldest reforms are advancing in the south, where state enterprises aren't as dominant. The real test will come in the industrial north, China's Rust Belt. The other concern is the scale of the effort. Sectors such as telecommunications, high-tech electronics, and banking are likely to remain firmly under state control for many years. As a result, many analysts believe real reform will be elusive. While few expect Jiang to evolve into a free-market purist, his changes are bound to make the economy less dependent on state enterprises. It may not be the ideal plan. But in China as elsewhere, politics is the art of the possible.

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