Japan and China hunt solution to stalled Shanghai steel mill project

Can the costly Baoshan steel mill be salvaged without poisoning national feelings between China and Japan? Both the Chinese and Japanese governments are anxious to avoid this danger.

Neither side has forgotten that Japan occupied China's northeast (Manchuria) after an undeclared war in 1931 and 1932, or that Japan invaded and occupied further large areas of China during a war that lasted from 1937 to 1945. But when there is a sudden shift of economic policy in China, as has occurred since the introduction of the economic readjustment policy late last year, projects that were the symbolic standard-bearers of the previous policy can be unceremoniously dumped.

when these projects involve foreign partners (Japan and West Germany) as in the xase of Baoshan, complicated negotiations must follow. Unlike the West Germans, who have straightforwardly said they will seek compensation, the Japanese are torn between simple commercial considerations (which would impel them to seek compensation) and the feeling that China can never be "just another country" to them.

Elderly Japanese tourists flooding Peking hotels contain a high proportion of war veterans who return with a mixture of nostalgia and guilt feelings for atrocities committed during the long years of wartime occupation. In Japanese politics, the China lobby is composed of politicians and businessmen, some of whom may feel war guilt, some of whom have a sentimental regard for China as the Greece and Rome and their own civilization, some of whom sense the strategic need to cultivate China as a counterbalance to the overwhelming military power and pressure of the Soviet Union, and some of whom are lured by the enormous potential of the China market. Many of these feelings coexist within the same person.

For all these reasons, when the Chinese announced early this year (after hints late last year) that they would have to cancel several major capital construction projects involving Japanese machinery, equipment, and know-how, including Baoshan, the Japanese reaction was somehow to try to keep at least some of these projects going.

The Chinese responded with a request for more generous payment terms on machinery and equipment already contracted for, plus additional loans to cover local costs of construction. The total Chinese requests for new loans comes to construction costs.

The Japanese have responded that only part of the amount requested can be given in the form of official development loans at concessional 3 percent rates of interest. They have suggested that the Chinese take out $2 billion in loans at commercial interest rates already offered to them by Japanese banks. Since of 8.4 percent, Japanese interest rates are currently much lower than those in the West generally, Tokyo feels that the combination of official and private loans should make an attractive package, with an average interest rate of 6 percent.

So far the Chinese will have none of this, insisting that official loans cover their entire request. Baoshan is affected because, until this problem is settled, even the first stage (on which construction continues, but slowly) cannot be completed.

There seems no early solution to the deadlock. Meanwhile a number of Chinese say privately that they were tricked by the Japanese over Baoshan. They complain that the mill will vastly increase pollution in already polluted Shanghai, that the plan to rely on Australian iron ore is wasteful of foreign exchange, that the mill's site is poor, being on the banks of the Yangtze River with the possiblity that a large sandbar may shift and block river traffic.

To this the Japanese reply that Baoshan is engineered to cause as little pollution as the latest Japanese mills, or nearly zero, that China is already importing 7 million tons of iron ore per year from Australia, that the mill's site was selected by the Chinese themselves and that, while not ideal, it is at least as good and probably better than a number of comparable Japanese sites.

There, for the time being, the matter rests. Baoshan's first stage, the only stage that the Chinese now say they will complete, is expected to be finished at the end of 1982 if Peking and Tokyo agree on loan terms. Without hot and cold rolling mills, Baoshan itself will use only one-third of the 3 million tons to be produced by its single blast furnance.

The rest will have to be sent upriver to Wuhan, which does have hot and cold rolling mills, or sold as billets in Shanghai, replacing part of the 4.9 million tons now being produced in the city by old-fashioned mills using the highly polluting cupola method to make steel from scrap. Even when finished, therefore , Baoshan will be incomplete, a symbol of the unsatisfactory compromises forced on China's major construction projects by a col d awakening from the extravagant dreams of the past.