Public enterprises reform in China:
A report from the Communist Party of India (Marxist)
A five-member Central Committee delegation of the Communist Party of India (Marxist), led by Polit Bureau member Sitaram Yechury, visited China for ten days at the beginning of April, at the invitation of the Communist Party of China (CPC). The visit was both intensive and extensive. After three days of intensive discussions with the leadership of the CPC in Beijing, the delegation went on a week-long tour to interior China to study the actual living conditions of the people, and how the problems arising out of the speedy developmental process are being tackled at the grassroots level. The delegation visited the provinces of Xian (the ancient capital of China) and Yunnan. In the latter, they visited remote hilly areas and went deep down south to the tri-junction border with Laos and Burma, inhabited by China's minority nationalities. This itinerary was worked out at the request of the CPI(M) team which had expressed a desire to visit interior China rather than the more developed, fashionable and prosperous East Coast littered with huge cities like Shanghai and Guanzhou (Canton) which are easily comparable with Hong Kong. This is an abridged version of the first two (of four) reports by the delegation published in the CPI(M) newspaper People's Democracy. What we saw and experienced in China was a country and a people seized with a singular passion to bring about all round development based on speedy economic growth. This singularity of purpose and determination was seen at all levels — from the Political Bureau down to the local committees. Given that this was happening in a country of 1.3 billion people that has been experiencing phenomenal economic growth during the last two decades, such a massive human and material effort is bound to produce results that will have global implications. During the course of discussions with various leaders, it became clear that over the past couple of years, China has overcome enormous difficulties and achieved new advances while maintaining political and social stability with a relatively high economic growth. China has achieved significant diplomatic victories as well and is bracing itself to re-unite Macao during the 50th anniversary of its socialist revolution in 1999. Domestically, China had to overcome two very serious problems in the last year: the impact of the South East Asian financial crisis, and the severest floods this century. Response to financial crisis The impact of the financial crisis, they informed us, is not yet over. Foreign trade, which had been growing at an annual rate of 16 percent, last year grew by only 0.4 percent. China had targetted an eight percent growth in its GDP. Of this, two percent was to come from foreign trade. The sharp drop in the growth rate of foreign trade was a severe setback. The unprecedented floods, on the other hand, caused damage worth more than 200 billion yuan (approximately US$25 billion). Despite this, China achieved a growth rate of 7.8 per cent during the year. Real per capita income grew by 4.3 per cent in rural and 5.8 percent in urban areas. How did they manage this? The main lever by which China faced these two formidable challenges was a massive increase in state spending that stimulated internal domestic demand. During the year, more than 100 billion yuan (US$12.5 billion) were spent by the public exchequer on building infrastructural facilities. This timely and effective state intervention helped China to avoid going the way the South East Asian countries went, which would have caused tremendous chaos in a country of China's size. While the decision not to make its currency convertible helped to insulate China from the financial crisis, China refused to devalue its currency despite this being the obvious choice to bolster exports and thereby improve the growth of foreign trade. They, instead, took a series of measures to encourage exports through a variety of subsidies. It is interesting to note that whenever we, in India, argue that it is necessary for the government to undertake large public expenditures in order to overcome industrial recession and at the same time generate employment, we are told by Indian liberalisers that this will push up the fiscal deficit and, hence, would be counter-productive. On the contrary, despite such huge public expenditures, both retail and consumer prices in China grew at a lower rate than in the previous year. The Chinese said the problem is not the building up of a domestic debt but how such funds are spent. If they are spent productively and not wastefully, it need not give rise to inflation. As regards foreign debt, a question we often confront in India, the Chinese explained that in no single year has the outstanding foreign debt been more than the country's foreign exchange reserves. This, they claimed, is the key to ensuring that the country does not get indebted. In any uncertain international political situation, if creditor countries mount pressure for the return of loans, China can well do so using its forex reserves. It can use these reserves because, unlike India, it does not need them to finance imports. Over the last two decades, China has always had a trade surplus. That means its export earnings are more than sufficient to finance its import requirements. Floods We were most impressed to learn how China tackled the unprecedented floods. Apart from a direct economic loss of over US$25 billion, many mines and industrial enterprises had had to be closed down. But, due to a massive mobilisation program under the leadership of the CPC and the People's Liberation Army, they succeeded in battling the floods and minimising losses. Despite such a major calamity, the harvest was generally good. Amazingly, grain output did not fall; they estimate a growth rate of around four percent now. In fact, very high priority has been accorded agricultural development with an emphasis on urgent modernisation. Unless this is done, they apprehend dangers to the people's livelihood and social stability. The task of feeding such a huge population with a cultivated area less than that in India, is indeed stupendous. Public enterprises One of the most important aspects of modern China, which attracted our attention most, are the steps the Chinese Government is taking to reform its state owned enterprises (SOEs) on its way to economic restructuring. Comrade Ma Wenpu, Vice-Minister in the International Department of the CPC Central Committee, in reply to a query by Sitaram Yechury, emphatically said the SOEs still constitute the main base of the Chinese economy. Nearly 80 per cent of total industrial production is still in the public sector. He ruled out any possibilities of this sector's weakening. In his address to the National People's Congress in March 1998, Comrade Li Peng said: "The reform of state owned enterprises is the principal task of the ongoing economic restructuring. "We should be able to extricate most of the large and medium-sized state- owned enterprises operating at a loss from their predicament through reform, reorganisation, upgrading and improved management within about three years. "And then we strive to establish the initial stage of a modern enterprise system in the bulk of large and medium-sized state-owned key enterprises by the end of this century. "In important industries and key fields, we should encourage the setting up of large enterprise groups in order to increase their competitiveness in both domestic and foreign markets. "We should accelerate the reorganisation and readjustment of state owned enterprises, declare bankrupt according to the relevant regulations enterprises which have been operating at a loss for a long period of time and for which there is no hope of ending such a situation, and resolutely shut down a number of enterprises whose products are unmarketable and which are finding it difficult to survive." However, in the process of restructuring these enterprises, the problem being faced is that of workers being laid-off. Around five to six million workers are laid-off every year. But at the same time, six to seven million new jobs are created every year. However, they informed us that due to population growth and additions to the labour force every year, around five million workers remain to be re- employed. This they anticipate solving this in the next couple of years. A laid-off worker is protected by the state as he receives a minimum amount of money required to sustain normal life. This amount varies from place to place with the local authorities determining the level, according to the local cost of living, housing availability, etc. Hence, it is not like the case in India where a retrenched worker finds himself on the streets. In China, whenever a person is employed, the employer is obliged by law to take an insurance policy against the employee's prospect of unemployment. The employer pays the premium. If he chooses to fire the worker, then the worker receives the insurance amount as compensation. We learned that laid-off workers are paid for three years and if they do not find a job during that period, they are asked to register their names in the employment department of the government where they are retrained for new kinds of skills which may help them get re-employment. This problem of re-employment is very acute, particularly in those areas where the number of SOEs is high. In India, in the name of reform, the main aim of the central government is to dismantle the public sector. But in China a gradual process of reform is being undertaken through downsizing, cutting of overhead expenditures, diversification and modernisation with the application of the latest developments in science and technology. The entire policy direction in regard to the SOEs is to strengthen them, to make them more competitive, efficient and economically viable so that they can withstand competition from foreign multinationals, both in the domestic and international spheres. In certain sectors they have also gone in for joint ventures with some of the giant multinationals but nowhere, according to Comrade Ji Peng, deputy director in the CPC foreign affairs department, is the share of the private sector more than 49 per cent. Case of a big company To have an on the spot study, we were taken to an aero-engine manufacturing company at Xi'an, capital city of Shaanxi province, on April 3. This factory was established in 1958 with the purpose of manufacturing aero- engines for the military. It is a huge state-owned enterprise with its own township. In 1979 they started reforming it. As a result the factory started producing major product components for top foreign aero-engine manufacturing companies. Not only that, it has also diversified its production. At present it is also producing different kinds of metals, electrical goods and machineries like gas turbines, gas expanders, petrochemical equipment, power generating units, metallurgical spare parts, precision castings, etc. These are all technology intensive products. They have succeeded in gaining an excellent reputation in the market and are exporting them. More than ten of these products have been granted state awards for scientific innovation, and provincial and ministerial prizes and the coveted title of "Famous Brand Products". In the last few years the company has also set up several joint ventures with Rolls Royce (UK), Pratt and Whitney Aircraft (USA), BTI (Israel) and Nordex (Germany). The Xi'an Aero-Engine (XAE) group now has five holding companies and five equity participation companies besides its parent body. It is now a conglomerate modelled on a parent-subsidiary system with XAE as the parent company. Earlier the total workforce was around 18,000, but now it is closer to 16,000, for 2,000 workers were laid off during the reform period. The company is now solely concentrating on production. All the social sector jobs like running schools for workers' children, housing, water supply, electricity, maintenance of quarters for the workers, etc, have been separated from the company and made independent. There is a separate township with ten schools, one hospital, etc. Expenses incurred on these are now being met jointly by the company, the provincial government and the users. Minimum annual salary of an unskilled worker is 19,000 yuan (US$2,375); the maximum is three times that. The company has made a profit for the last ten straight years. Part of the profit is paid to the central and provincial governments as taxes and the rest is utilised for further expansion of the factory. Regarding party structure, there are 6,000 party members in the factory including those who have already retired. The party secretary of the factory committee is also a vice-president on the company's board of directors. He is also an engineer and an employee of the company. There is only one trade union, with every worker a member. The Secretary of the trade union is also a member of the board of directors. The main function of the trade union and the Party is to look after the smooth running of the factory, to fulfill its target and make it profitable. It appeared from a meeting with the party secretary and other officers of the factory that they are serious and very much concerned about the development of the company and also confident about its future prospects. They whole-heartedly support the reform measures taken by the government on the basis of the decision of the CPC Central Committee. Tackling disparities Another problem being faced by China is the regional economic imbalance between the prosperous East Coast and the rest of China. They explained to us that conscious efforts were being made to overcome this through greater financial allocations for major projects in backward areas and by encouraging private investment. The developed areas are to assist the backward areas through economic linkages, i.e. by encouraging the establishment of auxiliary units in backward areas, and other similar means. Another major problem China is facing is the growing disparities in the income levels of its people. But, through conscious state intervention, they are seeking to provide benefits to those at the lower end. Rectifying past mistakes According to the Chinese leaders, in the past they had committed the mistake of trying to bypass the concrete conditions. China, according to Ma Wenpu, is still a backward country and will have to go a long way even to achieve a moderate stage of development. Their experience showed that a highly centralised command method did not help in rapidly developing the economy. That is why the CPC decided to give a definite role to the market and other forms of ownership in the primary stage of a socialist economy while upholding the country's socialist orientation. Hence their decision to develop the productive forces through the socialist market economy and to demonstrate the superiority of socialism through a growth in economic productivity. Recently the CPC has amended its constitution to incorporate the words "socialist market economy". They also came to the conclusion that there is a need to amend the constitution in order to allow the development of other forms of property like private property, collective or cooperative property, while public ownership will still be predominant. This, they said, was necessary to stimulate private capital initiative. In answer to an obvious question whether this would permit the growth of a capitalist class, they answered that under the leadership of the CPC, with its commitment to maintain and strengthen socialism in China, they are confident that they can preserve China's socialist character and not allow such forms of property to dominate. With the differentiation in incomes and standards of living growing, the danger that such differentiation will lay the basis for a possible class differentiation is a cause for worry. The Chinese leadership, however, is confident that while tackling the ill- effects of the reform process, they will also preserve and strengthen the socialist character of the People's Republic of China.