Market forces unscramble the Chinese egg: Teresa Poole in Harbin finds boilermakers looking to their welfare as private investors move in

IN CHINA'S half-reformed economy, Wang Zhaoshu might be described as a half-reformed boilerman. As a section chief at the Harbin Boiler Works, where he has worked for 24 years, he earns more than pounds 800 a year, about four times the average urban wage in the province. Mr Wang, 48, is in charge of the 8,000-tonne pressing machine and explains confidently how he was sent to the United States for training. He is proud of the factory's products. He also knows about, and approves of, plans for the Harbin Boiler Works' parent company to float its shares on the Hong Kong stock market this year.

Not all things, however, change quite as quickly. Mr Wang and his family live in a two-roomed apartment provided by the factory for a token monthly rent of about 3p per square metre. His 16-year-old son attends one of the factory schools. As well as free education, the Wangs have always had free health care at the factory's clinics. They would also expect the factory to pay them a pension after they retire. 'I have seen an engineering factory in the US. I think conditions are not as good as here,' said Mr Wang.

The boilerworks does a lot of things that a Western boiler factory might not expect to; by the front entrance, for instance, a row of blackboards advertise China's one- child policy. This is part of the cradle-to-grave structure that state- owned Chinese enterprises are accustomed to providing.

The problem for Yuan Qihong, deputy director of the works, is that Hong Kong investors will not be prepared to pay for schools, health clinics and birth control programmes when they invest in the company. His other difficulty is that the Chinese government, with its increasing budget deficit, does not have enough money to fund them either. After four decades of 'iron rice-bowl' employment and a centrally-planned economy, the question of how to reform the state enterprise system, much of it loss-making, is one of the worst problems for the government's economic planners.

As the Prime Minister, Li Peng, told the annual meeting of the National People's Congress this month, some of China's large and medium-sized enterprises are in 'dire straits'. The government is torn between allowing loss-making factories to face the realities of the new market economy, and knowing that the social consequences would be untenable. Mr Li said state enterprises would be exempt from various government levies to help ease shortages of cash. Funds will also be allocated to deal with bankrupt factories and unemployed workers. But he also warned: 'Basically, state enterprises must rely on their own efforts to extricate themselves from their predicament.'

The Harbin Boiler Works is, in the context of China's state enterprises, a success story. It was set up in the mid-1950s and for nearly 30 years it was subsidised or made losses. Now it is one of the 22 companies in Heilongjiang province earmarked for the Hong Kong stock exchange this year.

Since the Eighties, the company has imported new technology through collaboration with a US company, its annual output has jumped 30-fold in value with no staff increases, the number of products has expanded and now meet international quality standards.

Even here, however, the iron rice-bowl is merely cracked not broken. Mr Yuan has about 9,000 employees working for the boilerworks. Then there are another 2,400 employees including 500 teachers and staff at the seven factory schools, 250 doctors and nurses, and more than 500 administrative staff looking after the buildings and workers. All that costs the company about 32m yuan (pounds 2.7m) a year. There are also 2,600 pensioners who remain the responsibility of the factory; they receive a pension, free medical care and can remain in their factory homes.

All this will have to be reformed before any stock market flotation. This year it is planned to start docking 15 per cent of each worker's salary to be paid into a government-administered pension fund. The workers will also be encouraged to buy their own houses. The schools and clinic will continue, but will be funded out of future share dividends. As part of the package the workers will receive a pay rise. All this is possible because this factory is profitable. The restructuring problems are much worse among the state enterprises which do not make money.

This is where Li Peng's best intentions start breaking down. Part of Heilongjiang's problem is that four-fifths of all industry is still in the state sector, and a quarter of output is controlled by central government quotas and prices, compared with 5 per cent for the country as a whole. Disengaging industries from a planned economy can seem like trying to unscramble an egg.

At the Harbin Boiler Works, there remains the challenge of preparing company accounts to international standards. 'It's difficult. It will take 50 people three months to do this,' laughed Mr Yuan.

The White House is considering imposing selective trade restrictions on China, AFP reports from Washington. Rather than an 'all or nothing' approach on revoking China's Most Favoured Nation trading privileges because of human rights abuses, US officials said, sanctions would be tailored to maximise impact on the government.

(Photograph omitted)