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China Plans Merging State Factories Into Conglomerates

CHINA'S conservative leaders plan to merge large state-run factories into some 100 conglomerates in a veiled effort to revive central economic controls, say diplomats and Chinese sources. The plan to consolidate the biggest and most debilitating sector in the economy has met resistance from reformers who want market forces, not bureaucrats, to guide the economy, these sources say.

Under the plan, weak factories would ostensibly be invigorated by strong ones in the same conglomerate, says Qiu Jingji, an economist at the Chinese Academy of Social Sciences.

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The initiative is seen as the newest effort by orthodox socialists to regain powers that were delegated to provincial and city officials during the decade of economic reform, 1979-89.

In an intense row last fall with regional leaders, Beijing failed to recapture controls over taxation that it granted to the regions during the 1980s. Denied the power of the purse, Beijing is now trying to go a step further and strengthen control over the companies that generate tax revenues.

Critics of the plan say it is just a cosmetic change with little chance of jazzing up laggard factories. They say it shows that Beijing, in its obsession with maintaining social order, is shying from the potentially destabilizing market-oriented reforms that would bring efficiency.

The plan will be announced at the annual session of the rubber-stamp parliament beginning March 25, according to official newspapers. Still, state economic planners are only now drawing up a pilot project for the conglomerate program and many details are vague.

The plan is clearly aimed at shaking up state-run industries: About one-third of such factories are running at a loss. Last year the state had to bail out the factories with $5.4 billion.

Beijing has rejected the most sure-fire way to promote efficiency - decontrolling prices - for fear that the sudden shock and uncertainty of rising commodity prices would upend the economy and stir social discontent.

Instead, the leadership plans by creating conglomerates to merely alter the bureaucratic grip on torpid state factories. If China's 1,630 conglomerates of collective and state companies now operating are a guide, the plan to promote efficiency by merging factories is likely to have mixed results at best, say the diplomats and Chinese sources. Some 90 percent of the conglomerates were spinoffs of national or regional bureaucracies and have little autonomy, says Mr. Qiu.

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THE Tianjin Li Da Corporation is typical of the many conglomerates. The chairman of Li Da traded his title as a deputy director of the Tianjin trade commission for the top post at the conglomerate in 1980. Acting with colleagues in the trade commission, Mr. Ge has cobbled together more than 80 profitable and wasteful firms involved in trade, shrimp farming, shoemaking, and other largely state-owned businesses. He acknowledges that major decisions must be cleared with city hall.

Efforts to reform state enterprises by melding them into autonomous conglomerates are frequently torpedoed by bureaucrats guarding power, Qiu says.

Qiu drew up a plan in 1987 for building an enterprise group based on private shareholding and centered around a motorcycle factory in Chongqing. Although the scheme was approved by economic planners in Beijing, it was scuttled by officials in the Ministry of Machine-Building and Electronics Industry who clung to their prerogatives, he says.

"It's typical in these cases that the mother-in-law [controlling ministry] is unwilling to give up the leadership over her factories," says Qiu.

Many conglomerates were initiated by city or provincial bureaucrats who promote their parochial interests by buying local resources or selling to neighboring companies at a discount. Such enterprise groups reinforce the protectionism of regional, "warlord economies."

Bound together by fiat rather than shared interests, companies in many conglomerates resist orders by the core directors. Also, efficient factories tend to resent demands of their sluggard partners and refuse to invest in common projects, Qiu says. Beijing hopes to bind conglomerate members together with cross-shareholding.

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