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China's State Companies Collapsing

As their free-market rivals gain, desperate firms create 'begging armies' to chase down debts

ZHANG ZHULI sat puffy-eyed inside the offices of a chemical plant in Yichang, Hubei Province, begging officials to repay the debt owed her company.The Chinese nurse had traveled more than 1,000 miles from her post at the Shenyang Gas Compressor Factory to collect the debt, only to find her tears ignored. Desperate, she staged a hunger strike and finally recouped $11,000. China's state-owned factories are so entangled in debt that many have formed permanent "begging-for-repayment armies" of 40, 50, or more staff members. The groups are roaming the country using bribes, flattery, seduction, and other antics to extract payments, according to official press reports. Some factories have resorted to more drastic methods: Kidnappings, abductions, and torture cases linked to debt collection have risen dramatically here in China's northeastern province of Liaoning, police say. Still, many debtors deny they owe a cent. "Whoever is honest will lose out," the current saying goes. "This is extremely abnormal. Actually, the problem of begging for repayment shouldn't exist," says Zheng Ping, the harried director of the Shenyang compressor factory. He has a dunning team of 40 workers, ranging from nurses to Communist Party cadres. Adding to the absurdity, many of China's antiquated state-run firms are borrowing to churn out unmarketable goods, to finance overambitious expansions they cannot afford, or just to keep workers on the job.

Goods gather dust "They don't make what people want, and they make too much of what people don't want," says Song Zhenying, a bank economist in Shenyang. By September, $43 billion worth of products were stockpiled in warehouses collecting dust, according to official figures. The result is a vast "chain of debt" estimated at $30 billion to $50 billion that has the state sector in a virtual stranglehold. The problem illustrates how a decade after Chinese leader Deng Xiaoping lifted a ban on private enterprise, China's huge but ossified state factories are crumbling before the competition of millions of smaller, market-driven firms. In recent years, private and collective businesses have filled China's markets with an unprecedented variety and abundance of goods, ending chronic shortages and breaking the monopolies of state-owned firms. As a result, nearly 40 percent of state enterprises are operating in the red. Burdened with bloated work forces, 1950s-vintage Soviet machinery, and rigid government quotas and controls, they are no match for their nimble competitors. "How can they [state-run firms] survive in a market economy that is growing bigger and bigger? They have no vigor!" says a Beijing economist. "When the market shifts, they fall apart." The decline of state enterprises is the focus of a pivotal debate between China's conservative and reform-minded leaders: whether to continue propping up the ailing firms or gradually wean them from government support, letting the worst go bankrupt. Communist Party reformers argue that if Beijing continues pouring its limited financial resources into what Chinese newspapers call the "black hole" of debt-ridden state firms, the whole economy will suffer. This fall, reformers represented by Vice Premier Zhu Rongji lobbied for implementing the controversial 1988 Enterprise Law, which guarantees more autonomy for state firms. Mr. Zhu also revived bankruptcy experiments. In October, the State Council demanded that every province close down 10 state enterprises, by cutting off electricity, loans, and raw materials if necessary. More than 30 firms producing "unmarketable" goods in Liaoning and other provinces have been ordered to close. "First, we should intensify enterprise reform ... pushing enterprises to the market," Liaoning Vice Governor Wen Shizhen told a meeting Oct. 23. He called for granting "full authority" to factory directors. Yet Party conservatives oppose reforms that would relax Beijing's grip over state-run firms or weaken the "pillars" of China's socialist system. They say Beijing must guarantee funds and supplies for state factories to keep tens of millions of urban workers on the job. "The development of these enterprises is of great significance in ... consolidating the socialist system of the people's democratic dictatorship" and ensuring "stability," Liaoning party secretary Quan Shuren said last month. So far, the leadership dispute has prevented the emergence of any effective strategy for dealing with the state sector. Meanwhile, the government is spending a third of its annual budget to keep money-losing state firms afloat.

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Northeast fares worst The decline of state-owned factories is particularly glaring in Liaoning Province, home to one of the country's largest concentrations of heavy industry. From his office window, factory director Zheng looks out on the haze-enshrouded smokestacks and monotonous concrete buildings of Shenyang, the provincial capital. Below, in a sprawling compound resembling a small city, Zheng's 6,000 employees live and work. The factory's "iron rice bowl" welfare system provides workers with housing, a hospital, stores, and schools. But Zheng has a nagging problem: "The output is high but we don't sell much," he admits. In Liaoning, 60 percent of enterprises are loosing money as stockpiles of unsold goods mount, the state-run press says. In a campaign to unravel debts, the Beijing government in September injected $6.4 billion into defaulting firms. Teams of high-level officials across China supervised debt collection. Factory chiefs were summoned to meetings and required to make on-the-spot repayments. Promotion for officials was linked to their success in clearing debts. Yet the reliance on cash handouts and bureaucratic mandates without fundamental market-oriented reforms is unlikely to eradicate the debts or invigorate state firms, economists say. A similar injection of cash last year had little impact, because new debts grew faster than old ones were cleared. As of last September, the debts totaled $50 billion. On Nov. 1 the government announced that $20 billion has been cleared, but it refused to divulge the new total.

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