China ready for world's ultimate privatisation

China is set to close the book on socialist economic dogma today by abandoning state ownership of industry as the sacred doctrine of government policy. President Jiang Zemin will this morning open the 15th Communist Party Congress with a speech paving the way for what could turn into the world's biggest and most ambitious privatisation programme. There is just one proviso - no one is allowed to call it that.

Mr Jiang will give the green light for most state-owned factories to turn themselves into shareholding or limited liability companies, or find other ways to survive in the market economy. The implications are real; last year almost half China's state-owned enterprises were in the red, but in the brave new world of Chinese corporatisation, loss-making factories will no longer automatically be bailed out by the state, a decision which puts millions of jobs on the line.

Before the first years of the next century, China now plans to sell off, merge, lease out, or close down more than 300,000 state-owned enterprises. Many of these will be turned into shareholding companies, with shares owned by employees, the public, foreign companies or state units. Often the state will retain a majority holding. Successful companies will then try to list their shares on China's popular stock exchanges. Around 3,000 of the large and medium-sized state-owned enterprises - those in strategic, defence, and transport sectors - will remain in state hands.

Socialist political sensitivities are still very tender on the question of state ownership, and hence the denial of the dreaded "p" word. The official China Daily yesterday insisted no one should be "simple-minded" enough to equate the modern corporate system and the shareholding system with privatisation. It is all a matter of reinterpretation; China's new definition of "public ownership" would probably cover many companies on the London Stock Exchange.

In some parts of the country, this reform process has been under way for several years and thousands of smaller enterprises have already been hived off. Party congresses, which take place only once every five years, are often a forum for ideological catch-up. The breakthrough today will be to bring the orthodox political jargon into line with reality. Stick- in-the-mud old-fashioned cadres who still hanker after the securities of a centrally planned economy will be ordered to get on with reform.

The Chinese government remains very scared about what state enterprise reform might mean for millions of surplus workers. But, after years of pilot schemes and half-hearted efforts, it now accepts the urgent need to tackle the drain on the economy. The World Bank recently warned that failure to address enterprise reform could "corrode the very foundations and credibility of China's entire economic regime".

Nearly two decades of economic reform has seen the rise of the private and collective sector in China. This has left state-owned industry's share of gross domestic product at only 30 per cent, but the dire financial situation of many enterprises means that the state sector is soaking up a disproportionate 75 per cent of domestic credit. The money has been disappearing into a seemingly bottomless hole.

Mr Jiang's speech will lay down the broad principles for future state enterprise reform, but the detail will take much longer to unfold. The financial challenges are immense. The so-called "triangular debts" between state enterprises have reached pounds 80bn, and further bad debts are on the books of China's banks. For the officials in charge, it will be like trying to unscramble a rotten omelette.

Leading article, page 15

Unemployment may destroy reforms

Unemployment is the biggest political risk facing the Chinese government as it attempts to sort out loss-making state factories.

There are 110 million state employees in China, of whom 46 million are urban industry workers. Over-manning is such that probably one-third of these factory workers are not needed, and will no longer be wanted by managers who know their factories must sink or swim. Add to this a bureaucracy bloated by millions of surplus cadres, and China's job crunch is clear. None of these figures include the officially estimated 175 million unemployed rural workers, many of whom migrate to the cities and grab any menial jobs going.

Optimists nevertheless argue that now is the best time for China to reform the state sector. Inflation is low and economic growth is high, so the hope is that a buoyant economy will mop up these workers. Cities such as Shanghai have set up job retraining centres, in one case encouraging laid-off middle-aged female staff to work as private cleaning ladies for the growing middle class. The Chinese entrepreneurial tradition encourages the more capable individuals to "xia hai" (leap into the sea of business) as street traders or running food stalls.

Pessimists say there are just too many people who need to find proper jobs, and that many big loss-makers are in remote areas where alternative work is not available. The government is very worried, because disgruntled workers are increasingly letting their feelings be known. The past two years have seen a growing number of strikes and riots by people who have lost their jobs or have not received salaries. In Sichuan province earlier this year, 20,000 unpaid textile workers staged a demonstration in Nanchong, one of the largest displays of anger so far.