In Major Shift, China Will Sell State Industries

By Seth Faison, The New York Times, 12 September 1997

BEIJING -- China's leaders have agreed to sell off the bulk of the nation's big state-owned industries, and will disclose their plans at the opening on Friday of a Communist Party congress that is expected to set the nation's political and economic agenda for the post-Deng era.

A central theme of the 15th Party Congress, government officials and economists say, will be endorsing a ground-breaking shift from socialist-style state ownership to a system of share-holding. More than 10,000 of China's 13,000 large and medium-sized state enterprises are likely to be sold, though many issues -- like who the buyers will be -- remain unclear.

Elder party members have objected that China may be dissolving the last solid pillar of its socialist system, but President Jiang Zemin has apparently convinced decision-makers that they can no longer afford the burden of inefficient and money-losing industries, no matter the risks.

Still ruled by a party that calls itself communist, however, Jiang's allies are relying on semantical gymnastics to justify the move. Avoiding the word privatization, they instead insist that when ordinary people buy shares of stock it is a form of public ownership.

By whatever name, Chinese leaders are essentially abandoning what has been a central principle of Communist rule since the revolution here nearly 50 years ago: that the state would retain its position as the dominant owner of industry.

What is socialism? asked Dong Fureng, a senior economist advising government leaders on how to make the shift to share-holding. It means seeking social equality, not that the state has to keep a majority stake in every industry.

The long-term effect of changing such a critical system of ownership, perhaps lying beyond the political calculus of leaders now consumed by short-term crises, seems destined to move China's economy toward an even more capitalist and free market system, one where the Communist Party may have difficulty preserving the role it has Thursday.

For now, however, the party dominates politics in this country, and the congress, with more than 2,000 delegates, is the most important political gathering here since the last party congress five years ago. With the main policy issue already decided, the principal drama at the weeklong congress is expected to lie in changes in the top leadership.

Since China's leaders still select themselves and make important decisions in secret, with little accountability to public opinion, high-level politics resemble a continuous campaign of infighting and ever-shifting alliances among the 19 members of the Politburo, particularly among the top three: Jiang, Prime Minister Li Peng and the legislative chief, Qiao Shi.

A party congress is generally stage-managed to display an aura of unity to the public, while the senior leaders are actually involved in intense power struggles backstage, sometimes yielding important decisions only at the last minute.

One of the most-watched issues at this year's congress is what jobs await Jiang's top colleagues and rivals, Li and Qiao, both of whom are expected to relinquish their current positions. Just a day before the congress opens, the answers remain uncertain.

Like all capital cities, Beijing thrives on rumors and intrigue. But the center of power here is so well concealed by secretive tradition, and insulated by loyal aides, that outsiders rarely learn much about inside politics until well after the fact, if then.

It is clear, however, that the 15th Party Congress -- coming six months after the death of Deng Xiaoping -- is well timed to showcase Jiang as the leader likely to dominate the near future. A move to enshrine Deng Xiaoping theory in China's constitution alongside Mao Zedong Thought appears to be an effort to line Jiang up as a leader on a par with Mao and Deng.

Although economic reality is helping force Jiang's hand on state enterprises, the political timetable of the party congress may have spurred him to act sooner than he would otherwise. Jiang needs to show he can be bold and is not just a follower of Deng, and reforming state ownership is the issue he has grasped.

Shifting ownership is a tremendously complex legal and organizational challenge, several economists said, with a serious danger that state assets will disappear into the pockets of factory managers during the transition. Industrial managers, traditionally an important constituency in China, are likely either to become corporate executives, or to get left out of the new system altogether if they cannot adjust.

Many officials argue that despite the planned changes, the state may remain the main owner in China for some time, since in many cases the shift to a share-holding system will transfer ownership to shares controlled by a specific government-run organization or company.

Since the plans have not yet been announced in detail, it is unclear exactly what role the state will play. Yet a vast sale of state assets will sharply reduce central control over large enterprises.

At greatest risk may be tens of millions of urban workers whose jobs are at stake. Yet leaders seem to think their best hope is to brave layoffs, which are inevitable, at a time when the overall economy is growing fast and some labor can be absorbed by non-state companies that are expanding.

After all, China's recent economic history has confounded most experts, domestic and foreign.

Not long ago, it was inconceivable that ordinary people in China would be able to buy and sell shares of stock freely, or have access to almost any consumer goods on the world market. Or that such choice would be accompanied by a significant loosening of government control over daily life, like choosing a job or where to live.

Perhaps the greatest paradox in China Thursday is the way its enormous economic and social change over the past decade has seen virtually no corresponding alteration of the political structure, which is still dominated by Communist Party officials.

There is no real point in talking about political reform at this point, said a Chinese political scientist in Beijing. Leaders will not change the system themselves; they will only respond to demands from society. So ownership reform is very meaningful in that it gives ordinary people a voice.

In recent years, though the private sector of China's economy has grown fast while the state sector atrophied, leaders seemed stymied about what to do with state industries, which have always been described as the unshakable core of China's economic system. Before launching any bold initiatives, it seemed, leaders were waiting for Deng's death, which came this year on Feb. 19.

Jiang broached the topic of ownership reform in May in a speech at the Central Committee's Party School, winning consensus from other leaders over the summer.

On Sept. 2, the New China News Agency carried an authoritative report specifying that more than 10,000 of the nation's 13,000 large and medium-sized enterprises would be encouraged to switch to various forms of public ownership.

The financial dilemma of the state sector continues to be the outstanding problem of the Chinese economy, the news agency said. But hope returned when Chinese President Jiang Zemin called for a powerful change in economic reform.

The same dispatch was accompanied by a spirited rejection of any suggestion that Jiang might be endorsing privatization, which has always been a bad word in Communist China's political lexicon.

The share-holding system has nothing to do with privatization, said Wang Jiaqiu, vice president of the Party School, the news agency reported. The system only provides a method to achieve public ownership and will bring no change to the present economic structure where public ownership is in the leading position.

Stressing public ownership, while selling state industry, recalls other Chinese slogans like a socialist market economy or socialism with Chinese characteristics, each of them justifying a capitalist economic necessity by invoking socialist ideology.

A key role in Jiang's efforts to push through approval of a share-holding system will be played by the man most likely to carry it out: Deputy Prime Minister Zhu Rongji, a rising star who is widely expected to become prime minister next year.

Sometimes called China's Gorbachev by Westerners who see him as a no-nonsense manager and visionary, Zhu is said to hate the name, worrying that it makes him vulnerable to accusations that his leadership might lead to the undermining of the party.

A former mayor and party chief of Shanghai, where he battled an entrenched bureaucracy and launched a stunning economic transformation, Zhu moved to Beijing in 1993 to take the seemingly impossible task of bringing order to China's economy. Inflation had surged to 24 percent and raised fears that it would provoke unrest among China's low-paid factory workers.

Zhu dismissed the head of China's central bank, assuming the job himself and instituting a strict credit policy that was deeply unpopular with factory heads, who were used to getting whatever subsidies and loans they needed. To virtually everyone's surprise, Zhu stuck to his position, and inflation fell to 2 percent in this year's second quarter, without hampering China's overall economic growth rate.

Now Zhu has pledged that he will attack state-owned enterprises with the same vigor to achieve their reform within three years.

The key problem in China's industry is that ownership is unclear, said He Yang, a former official who now runs his own investment company. People say 'the state,' but who is that? The central government? A certain ministry? A local government? Everyone wants to exert authority, and take profit, but no one wants to take responsibility when there are losses.