The Guardian July 14, 1999


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.

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