China reinvents itself: new capitalists line up to lure US firms

FORMER Secretary of State Cyrus Vance described in some detail last week an extraordinary event in the Chinese port city of Dalian. Neophyte Chinese capitalists - regional, local, and individual plant managers - lined up outside rooms assigned to officials of many of America's Fortune 500 companies. They waited their turns to present specific projects for American company investment or joint ventures. The proposed enterprises ranged from firms producing shoes, cans, hydraulic hoses, and off-road tires to quartz-glass computer screens, genetically engineered medicines, and animal-feed fortifiers. In the end, no contracts were signed; but 45 letters of intent to explore deals were.

The on-again-off-again saga of whether corporate America will risk plunging into the ''market of a billion'' seems to be cautiously on again. And ''cautiously'' doesn't necessarily mean slowly. It should be remembered that the official Peking go-ahead for semi-capitalist reform in all these urban industries was given on Oct. 20, only a few days before the Vance party flew to China. And the Chinese businessmen who showed up to talk deals in Shanghai and Dalian had ''done their homework,'' one participant from an American conglomerate told me.

Mr. Vance and more than 90 top US businessmen from 27 companies had toured industrial China for two weeks. The exploratory party included executives from Allied, General Electric, IBM, the Bechtel Group, International Harvester, and a diversified mix of other manufacturers and investment bankers. (Among the latter: First Boston, Salomon Brothers, Shearson Lehman/American Express.)

In Peking, many of them witnessed a scene just as dramatic in its way as the lines of Chinese managers waiting to make proposals in Dalian. It came at the end of a 90-minute meeting with Premier Zhao Ziyang. The leader, who had previously startled Washington and New York with his well-cut Western suits, once again found a striking symbol to emphasize the permanence of the Chinese shift to a freer-market economy. He himself posed the question so many Westerners ask: Will the reforms last? And then answered it. The policy would not change after his mentor, Deng Xiaoping, left the scene, he said. Nor would it change after he himself and Communist Party Secretary Hu Yaobang were gone.

One of the American industrialists present said he noticed members of Premier Zhao's staff smiling as if they were enjoying a political joke. He interpreted this to mean that all were very confident of their ground: Zhao, in talking about his boss's passing and his own to make a point; the other officials, in being able to smile casually at such a reference.

Vance told me he thought a majority of the executives in his group had come away impressed with the determination of the Chinese to convert the world's largest communist state from Stalinist central control to competitive free enterprise in most consumer industries. Many in the group had been skeptical before making the trip.

None of this necessarily means an immediate great leap forward in US-China trade. Christopher Phillips, president of the National Council for US-China Trade, points out that there are still many obstacles to completing contracts and building new plants. But American business delegations are arriving in Peking at the rate of about one a day.

Several of the negotiators who have just returned with the Vance party point out that they left their Chinese hosts with a long list of questions to be answered before contracts are likely to be signed: Who governs labor disputes? Can capital be repatriated to the United States? Is there sufficient patent law protection? Can rising prices from remaining government-owned raw materials industries be passed along to consumers? Who does market surveys?

One officer of a well-known conglomerate noted how quickly the Chinese promised to get answers, or to write into contracts points not yet covered by law. ''China is reinventing itself,'' he argued, ''It doesn't have a model to work from. But it's in a hurry.''

That's where American legal experts, such as Harvard's Jerome Cohen and Vance's own corporate law firm, come in. China is designing its economic system with a lot of Western advice - a system increasingly free-market but with enough state-owned heavy industry to provide a cover of continued allegiance to socialism.

By now it is commonplace to list pitfalls ahead: Inflation, as subsidies for housing, transport, and food are lifted. Unemployment, as industries are allowed to fail in a competitive economy. Bureaucratic backlash, as officials lose power , productivity is demanded, or segments of the population become envious of rich workers or entrepreneurs.

In a working lunch of Chinese and Soviet scholars at Harvard's Russian Research Center last week, there was lively debate about whether these economic pitfalls would slow or undo the Deng Xiaoping free-market revolution.

In the end, I found myself inclined to agree with Dwight Perkins, China specialist and director of the Institute for International Development, who pointed out the degree to which each previous phase of the literally unprecedented Chinese de-communization had succeeded despite skepticism. The earliest phase, increased trade, started in 1977, faltered from excess in 1978, but then settled down to something like 20 percent a year trade growth over the next six years.

The second phase came in the now much-heralded free-enterprise rural market system. It resulted in a doubling of the average peasant income. It raised farm production - in sharp contrast to the centrally controlled agriculture failures in the Soviet Union. And it created enough pockets of new wealth to encourage some true venture capital enterprises in the countryside.

In broadest terms, my reading of the Deng revolution is the following:

The tough, pragmatic leader learned by contrasting the failure of Mao Tse-tung's Great Leaps Forward with the success of neighboring Japan's real leap forward as both rose from the ashes of World War II. Deng had been bounced from power three times and came back. So he was fearless (and shrewd) in planning both the broad outlines of ''modernization'' (read: importing Western methods) and a firm political succession to younger disciples.

As a native of the rural province of Sichuan, Deng knew that it would be wise to start economic reform in the agricultural countryside. There were two reasons for this: (1) Farms could be more simply converted than factories to a supply-demand market system with incentives for high production; (2) rising farm income would blunt old rural suspicions that the sharp dealers of the coastal industrial area (Shanghai, etc.) were putting one over on them. (It might be noted that the trial of the ''gang of four'' in 1980 was a kind of national soap opera in which the villainous conspirators helping Madame Mao were mostly Shanghainese.)

The dreaded Cultural Revolution (1966-76), which touched nearly every Chinese life, gave the Deng team widespread national support for taking a bold new tack away from Maoism. Lack of such a galvanized public may be one of the factors holding Moscow back from embarking more boldly on reforms of the Hungarian or Chinese type.

The big question today is whether a large enough portion of the population still sees a promise of personal gain from the reforms - and is still driven by grim memories of the Cultural Revolution. That combination of promise and dread memory will have to be strong enough to sustain tens of millions of workers as China goes through what even Deng and Zhao admit will be a difficult period of experimentation.

That may be the main reason local managers are in such a hurry to answer Western businessmen's questions, write contracts, and get on with one of the most remarkable shifts in world history.

An interesting vote of confidence in the Deng program may have been made last week - in a veiled fashion - by the Soviet Politburo's Andrei Gromyko. Moscow floated some hints to Tokyo that Mr. Gromyko would be interested in making a visit to Prime Minister Nakasone. After a period of cold relations, there seemed to be two prime reasons for such a trial balloon: (1) The Kremlin realized once more that it needs Japanese investment to develop Siberia. (2) Such development has become more urgent as a counterbalance to China's economic success.