China's long march to market 'reforms'


By Liang Guosheng

Amid the rumours of a cover-up of Deng Xiaoping's death, larger foreign investors are becoming increasingly frustrated and concerned by the stop-start nature of the "market reforms" which have become a feature of "market socialism with Chinese characteristics". At the centre of the program of "market reforms" is the "problem" of the State-Owned Enterprises (SOEs).

While Coca-Cola is expanding production and blitzing Beijing buses with advertisements, in more and more of the capital's domestic soft drink factories production is slowing or has ceased, equipment is lying idle, and both management and workers are demoralised.

Not all components of the larger SOEs are going broke because of competition from giants with newer technologies and the money to lavish on slicker advertising campaigns. But many "sideline" factories within the larger SOEs, such as those producing soft drinks, are now bleeding badly.

A few of the largest and best situated SOEs, such as the Capital Iron and Steel Enterprise, have attempted to keep pace with new technology and up-market consumer demands in establishing their sideline factories. Capital numbers amongst its more profitable sidelines both a satellite dish factory and a fashion garments factory.

Traditionally, it has been able to keep pace with market reforms through maintaining high-level contacts with those at the "centre" of party/government circles, which has allowed it, among other advantages, excellent lines of credit. Workers there earn about RMB 1500 (A$238) per month, making them probably the highest paid in the country. By comparison, the average annual pension in China is currently about RMB 530.

For vast numbers of other SOEs, however, the story is the opposite. Within China's post-revolutionary completely state-owned and operated system, it became the norm that the children of workers in an SOE would, having reached employable age, also be employed by the same SOE. The SOEs, in effect, were expected to provide guaranteed employment for the following generation of workers as well as all the health and retirement benefits for its existing employees.

Faced with the problem of how to employ these younger generations, many SOEs established sideline factories, the products of which often bore little or no relationship to the "main" product of the SOE — for example, soft drink factories.


Nowadays, in the drive to rationalise production and make the SOEs independent of state subsidies, these sideline factories in particular are being driven to the wall, and in turn making the SOEs bleed more heavily. In the quest for foreign investment capital, the managerial layers of the SOEs know perfectly well that foreign corporations are interested in signing joint ventures only with the still (often highly) profitable "core" of the larger SOEs, and not in helping pay the costs involved in maintaining the SOEs' sideline factories.

Many of the longer-established SOEs, especially those without good guanxi (relationship) with the central authorities, find it very difficult to compete with "younger" factories in China's rapidly growing domestic private sector. The reasons for this include the fact that more recently established factories, which employ younger labour, do not have the added costs of paying for their ex-workers' pensions. Without such overheads, the newer "collective" sector and/or privately owned factories can lower production costs and sell their products more cheaply within a market dominated by those who have been quick off the mark to "enrich themselves", according to Deng Xiaoping's early 1980s exhortation.

From January to the end of March, there were 3104 officially recorded labour disputes, a rise of two-thirds compared with the same period last year. Inflation has officially hit around 26%, and the removal of many price controls has allowed commodities such as grain and chemical fertilisers to rise in price by 50% compared with earlier this year. Publicly disclosed cases of corruption have risen by 81% compared with last year.

China's leadership has temporarily drawn in the reins on its much discussed plans to force many of the country's remaining 140,000 state enterprises to xia hai ("set out to sea" or "take the plunge") into the market economy. Arguments for closing down "unprofitable" state enterprises are based on recent figures which show that many state factories are, at this time, a "burden" on the national economy. Some figures show that two-thirds of these state factories made no profits during 1993.

However, the massive number of lay-offs involved — some are saying as many as 30 million workers — is probably far too risky for even this government to initiate in the short term. China's cities have already, during recent years, experienced a flood of up to 80 million job-hunting peasants.

Many of the more aggressive foreign investors, who had been looking forward to 1994 being the year of the demise of the state-owned enterprise in China, look like they will have to sit on their hopes for a little longer. The less sanguine investors, of course, put the situation down to the unavoidable delays involved in supporting a strategy of "peaceful evolution", whereby they hope to see the regime fall through the incremental introduction of capitalism.

Shades of grey

Given the political differences between the main slower-pace and faster-pace market reform factions within the party/state leadership, it is a period ripe for the floating of various shades of economic alternatives. One of the shadiest of these, a discussion paper titled "Towards State Owned, Privately Operated", recently appeared in Qiu Suo (Search, a magazine published by the Hunan Province Social Sciences Institute).

The article puts forward a "rescue plan" for all state-owned enterprises. The anonymous author notes that currently the party/government is experimenting with stock-based restructuring, and applauds this as a basic direction in the "reform" of SOEs. However, stock-based restructuring, it is argued, does not address the methods by which such enterprises operate.

In essence, the author argues for the conferring of the state's physical property rights upon managers, who will hold 10% of private stock and full responsibility and free rein in operating the enterprise. It would be similar to the "household responsibility system", which has operated in rural areas since 1983, whereby use of land was contracted out to individual households. "Under normal circumstances", the author continues, this allocation will remain unchanged "for 30 to 50 years", and for a specified period, property rights may be inherited.

It's very possible that the author of the Qiu Suo article is simply refashioning an idea which has been around since before Premier Zhao Ziyang was pushed from power (Zhao succeeded Hu Yaobang as Deng's appointed premier and heir apparent, only to be blamed for the student-worker movement which culminated in the Tiananmen Square massacre in June 1989).

Under Zhao, a contract management system for state-owned enterprises was trialled in which, if managers were able to ensure that the SOEs' profits rose above that agreed to in their contracts with the state, they could basically keep the excess profits. This system was ultimately viewed as a signal failure. Some of the "contract managers" attempted to increase production without taking into account the potential resistance of their workers. Rumours of certain managers meeting untimely deaths at the hands of blue-collared unknowns do not seem too far-fetched.

In an interesting aside, the author of the Qiu Suo article argues that it is now a time for being somewhat more up front in terms of calling things by their "real" names; the term "privately operated" gets to the point "more explicitly" and directly than the term "run by the people".

The author's effort to calm the nerves of proponents of continued state ownership of SOEs is also interesting. The Chinese have a saying, "Wealth is not a part of you: you don't bring it into the world when you're born, and you can't take it with you when you die". Gosh, life can be made simple!

More than a great theme for a Paul Kelly song, the author explains that this means: "Private property has significance to its holder only to the extent that it is actually spent. The unspent portion is in essence the wealth of society; it is merely being administered and managed by its private holder." There is no reason, the author stresses, for Chinese to become angry as soon as the topic of private property is broached. Private ownership and socialism, "can be mutually compatible ... as long as we have a healthy socialist legal system".

Of course, it wouldn't take a terrible cynic to respond that to date China's socialist system has not exactly been renowned either for its health or its stress on legality. Meanwhile, even the supporters of "peaceful evolution" privately admit that the government still has a long way to tread before its newer welfare initiatives for sacked workers and others constituting the new layers of unemployed will even begin to take root.

Essentially the state-owned, privately operated system proposed is simply another foot in the door to outright privatisation of the still large number of surviving state enterprises. The writer's entire emphasis is upon using this proposed managerial system as a means to "force enterprise managers to care for and protect state property with the same fervour as if it were their own". On the one hand, such a comment reveals a lot about how the writer views prevailing managerial attitudes within state enterprises. On the other, the implication is that existing and/or new managers should be spanked all the way to the bank.

Taken by itself, such an article might be viewed as merely another in a fairly recent bundle of discussion papers on the future of the state sector emanating from individual academics or one or other of the country's "think-tanks". Yet in other ways it is merely a more honest summation of what many Chinese believe to be "the writing on the wall" for SOEs, which are being forced into increasingly hard times and situations as a result of Deng's "economic miracle".

Cadres who favour slower economic reform, such as those supporting elder statesman and party factional leader Chen Yun, may, within the party, continue to organise politically against the faster-pacers, but it appears they have a long way to catch up before they begin to offset popular support for Deng's pace in the extension of market reforms.

What many Chinese on the ground worry about even more than current inflation levels is a post-Deng scenario characterised by an overheated economy and increased social disorder, which might allow the re-emergence of the more classical Stalinist central planners as the dominant faction. A main fear is that the latter would need to launch a massive political campaign (with all the outwardly expanding political "pay back" and other revenge scenarios of previous such campaigns) to slow the pace at which the market reforms are currently being entrenched and expanded.

Might such an internecine war between the party factions be publicly expressed as an anti-corruption campaign?

Anti-corruption campaigns

In a period of high inflation, decreasing central government control over the provincial leaderships and growing social problems such as unemployment and crime, the question of rampant official corruption is increasingly important. Many prominent members of the leadership feel obliged to line up and (hypocritically) propagandise against corrupt practices.

Many Chinese take such passionate speeches with a grain of salt. Even without the occasional public dismissal of more highly placed officials for too-blatant corruption, it is obvious to most people that, with corruption and the guanxi system (the system of personal relations that governs nearly all levels and aspects of life) so pervasive, the actual situation within the higher levels of the party/state must be deplorable indeed.

Official corruption might be the perfect emotive issue as a weapon against factional opponents (in the lead-up to the Tiananmen massacre, anti-corruption and opposition to high inflation easily figured as the most prominent of the democratisation movement's list of immediate demands, while the slogan Dadao Guandao — Down with Corrupt Officials — was easily one of the most prominent slogans). But the problem for any post-Deng anti-corruption campaign is that it would be a (very sharp) two-edged sword. Every higher level party/state leader would be open to the same accusations that he/she might level against factional opponents.

A broadcast of the official Beijing-based Xinhua newsagency earlier this year claimed that, according to some analysts' estimates, in one unspecified year approximately RMB 40 billion of public funds was spent on wining and dining. The cost of this official "privilege" alone was equivalent to 18% of gross national revenues. While it would be more interesting still to see a breakdown of this figure, it does give some indication of the popularity of the "free lunch" amongst cadres. The same broadcast also quoted an urban folk saying for 1994:
"Cigarettes are your letter of introduction,
A drink glass is your chop ("personal/official seal"),
If you want something done,
Let your chopsticks do the work."

It says a lot about the extent of corruption that the party feels obliged to rail against the problem. Despite the initiation of several highly publicised anti-corruption campaigns in recent years, corruption remains "as fierce as a tiger". After the usual lengthy list of horrid crimes of the "uncovered" corrupt official is revealed, even the most politically innocent of Chinese might be forgiven for asking exactly how such corrupt officials were able to get away with so much for so long. Many Chinese regard such campaigns with wry humour, seeing them as a mixture of rhetoric, hypocrisy, and high farce.

Old man system

According to the traditionally anticommunist Zheng Ming magazine, published in Hong Kong, the Politburo has been quietly moving to bolster the status and influence of some of the oldest veteran cadres who had been at the highest levels of party leadership. Deng's disbanding of the Central Advisory Commission, the official power base for these formally retired cadres, had put even the most influential teetering dangerously on the edge of "real retirement".

Some founding members of the commission continued to enjoy informal political influence through "work offices" granted them by the Politburo. In August 1993 the Politburo apparently discussed the revocation of several of these more prominent veteran cadres' offices.

However on December 6, 1993, the Central Committee of the party, the State Council and the Military Commission of the Central Committee issued a notification to the effect that the offices of some of the older generation party, government and military cadres would be maintained, ensuring that, "although removed from the leadership of the party, government and military", they would still be "able to participate and have a definite promotional and remedial role in making major decisions of the party and state, in establishing policy, in handling military affairs".

Why the turnabout? A main reason might be that a short-term compromise has been reached between the Chen Yun (slower pace) and Deng Xiaoping (faster pace) factions. The veteran cadres are, of course, factional heavyweights in their own right.

During the post-Deng political transition, the current "Li-Jiang" system might need some pretty strong bolstering. "The Li-Jiang" system is named for the current prime minister and the president, Li Peng and Jiang Zemin respectively, neither of whom show evidence of being overly loved and respected by the majority of Chinese people. (Li Peng oversaw the "clearing" of Tiananmen Square of demonstrators on June 4, 1989, while Jiang Zemin, Deng's anointed heir, is no revolutionary combat veteran.)

Whatever the reasons behind these factional moves, it seems that, despite the injection of some younger blood into the party/state system under Deng during the '80s, especially in times of potential crisis, the system of even more unaccountable "old man politics" will keep on, at least for the short term. It's merely become a tad more exclusive.

Even so, many people, even those perhaps critical of the pace of the introduction of Deng's "economic reforms", fear the scenario of another power struggle at the centre. Their are many reasons, but perhaps the key one is surprisingly simple.

The more politically astute of Deng's high-level opponents may likely bide their time until, for many more ordinary Chinese, the pain suffered from Deng's and his factional successors' economic reforms becomes worse (and it will become worse). Only then might they make their grab for political power. Given China's political history over recent decades, the Chinese people could be forgiven for fearing and loathing those behind such cynical power grabs as much as, if not more than, the incumbents.

Boardroom wailing and gnashing of teeth on the part of those more aggressive foreign investors aside, one suspects, at least in the longer term, that those with the most serious reasons for deep frustration and concern will be the millions of workers in China's remaining state-owned enterprises. They certainly look like having a "long march" ahead.

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