Rural Industry Grinds to a Halt

WANG JIANGUO pulls his leather jacket close against the chill November air and strides past a disabled truck into the yard of his tiny steel-rolling mill. ``Business is bad,'' says the young factory director as he surveys grounds blackened with coal dust and littered with piles of rusted steel belts.

``We've halted production. The workers left after we filled our orders for the year,'' he says, pausing at the doorway of a deserted, red-brick workshop.

Indeed, all is not going smoothly at the Prosperity and Well-Being Steel Rolling Mill, a cluster of one-story workshops at a village outside Beijing.

The mill is a victim of Communist Party austerity policies that have forced China's fastest-growing economic sector - rural industry - to grind to a halt. (National recession, page 8.)

About 1 million rural factories across China have closed since Beijing launched a sweeping retrenchment a year ago, official reports revealed this month.

Hundreds of thousands of other rural enterprises like Mr. Wang's steel mill, have stopped production, merged, or shifted to making other goods.

Closings have heightened discontent among peasants by forcing millions of surplus farmhands back to idle in the fields and eroding rural living standards.

Politically, the slump in rural industry reflects the rise of the party's central-planning advocates using nationwide austerity policies in an attempt to reverse the market-oriented reforms of former party chief Zhao Ziyang.

Mr. Zhao, who was ousted last June, promoted rural industry in the belief that competition from millions of small, creatively run factories operating on the free market could revitalize China's stagnant state-run industries.

In contrast, central planners seek to protect the ossified state-run sector, which they call the ``backbone'' of the economy. Many state factories are chronically in the red. Yet they employ 100 million urban workers, supply welfare services ranging from housing to haircuts, and provide 75 percent of state revenue.

Last fall, Premier Li Peng launched an austerity drive aimed at checking the growth of dynamic private and collective firms - especially rural industries - while restricting their scope to areas that do not compete with the state-run sector.

The government recently banned all new rural firms except those producing goods for state firms, farms, or export.

``We do not agree with Comrade Zhao Ziyang, who inappropriately exaggerated the role of township (rural) enterprises,'' Mr. Li said last month.

Still, the retrenchment, planned to last at least three years, seems to be ``killing the hen to get the eggs'' as a Chinese saying goes - forcing thriving rural industries to shut down while state industry remains sluggish.

Rural factories like Wang's have been one of the greatest success stories of the past decade of economic reform in China. Run by villages, groups of farmers, and peasant families, rural enterprises have risen from 1.5 million when reforms began in 1978 to nearly 19 million at the end of last year.

Making everything from pre-fabricated concrete to textiles and handicrafts, the bustling little firms supplied a quarter of China's total industrial product in 1988, their output value surpassing that of agriculture.

Wealth created by the vibrant manufacturing and service firms has been a major factor in the enrichment of China's 800 million peasants, whose incomes have tripled over the past decade.

By the end of 1988, the enterprises had employed nearly 100 million jobless peasants - one fourth of the rural work force - who had been languishing since the dismantling of ex-Premier Mao Zedong's communes earlier in the decade improved farming efficiency.

Wang's steel-rolling mill, built in 1978, provided work for 120 peasants from what once was the commune of Shibalidian.

As reforms enlivened China's marketplace, the output value of the village-run mill shot up ten-fold to reach about 3 million yuan ($800,000) last year. The village government took a third of the profits, some went to expand the factory, and Wang and the workers divided the rest.

But late last year, retrenchment struck China's countryside.

The government starved millions of rural enterprises' supplies of credit, energy, and raw materials, while channeling the scarce resources to state-run factories. China's agricultural bank slashed its loans to rural enterprises by 13.4 billion yuan ($3.6 billion) from January to September.

``Getting raw materials is tough,'' Wang says. To secure vital supplies, he and other factory directors must use the hou men (back door). Wang's connections have saved the mill from bankruptcy, which officials say could strike a quarter of Beijing's rural enterprises and 10 percent of those nationwide.

But the factory's growth rate, like that of rural industry as a whole, has been roughly halved.

As Wang and other factory heads send millions of peasant workers flooding back to overcrowded farms, unemployment and falling incomes have emerged as perhaps the biggest problems created by the clamp-down on rural industry.

``The most direct consequence may be a decline in the living standards of rural families,'' the official China Daily said recently. Jobs and cash from booming rural factories have provided millions of Chinese peasants with adequate food and clothing for the first time.

Still, China's leaders seem more concerned with protecting state firms than with the livelihood of the peasant masses who brought them to power.