Two Roads to Rural Development

PRIVATE ownership dominates the rural economy in this formerly backward town in Zhejiang Province.

Situated on China's southern coast, Wenzhou was denied significant government investment for 30 years after 1949 because it was considered the "front-line" of a potential war zone between the communist mainland and nationalist Taiwan. Mountains and inadequate roads increased Wenzhou's isolation.

When reforms began in 1979, local officials decided the only way to muster capital for development was to condone private enterprise. Thousands of peasant households pooled funds to set up tiny workshops making handicrafts, clothes, and shoes.

In 1982, for example, Wenzhou peasant Lin Weisen and his brother began collecting scraps from local textile factories for reprocessing. Mr. Lin's wife sewed the scraps into children's clothing, which they sold at urban department stores. Cheap but similar in quality to other goods on the market, the clothing sales took off. Today, the brothers and their father run the Senliren Knitwear Factory with fixed assets of $450,000 and annual sales of $1.4 million.

Dynamic, flexible, and highly autonomous, Lin's factory and other private rural ventures in Wenzhou have captured markets across China. Together, they employ a 100,000-strong "army of salesmen" known for their aggressive deal-making from Beijing to Lhasa, capital of Tibet.

But while Wenzhou's private rural enterprises are free from the bureaucratic controls that impede collectives such as those in neighboring Jiangsu Province, they are also far more vulnerable to political discrimination.

"Private entrepreneurs have a lot of worries," says Yu Shunsheng, secretary of the Wenzhou Association of Private Workers. "Is Wenzhou socialist or capitalist? There is still a debate on this" among Chinese leaders, Mr. Yu says. "Actually, the private firms are capitalist."

Chinese conservatives have imposed harsh measures to limit the scope of the private sector. Private firms confront restrictions in using land, opening bank accounts, and obtaining loans, for which they must pay higher interest. They are not allowed to engage in the trade of key raw materials or display goods at annual trade shows for state-run purchasing firms.

To skirt these obstacles, many private companies in Wenzhou find it easier to pose as collectives. "We are actually private, but we `hang up the collective sign,' " says Lin. "This way it is easier to sign contracts and do business outside [Wenzhou]."

The most popular way for Wenzhou's private firms to enjoy collective status is by registering as "shareholding cooperative enterprises."

The shareholding firms first appeared as the spontaneous creation of Wenzhou peasants in 1983. Today, more than 21,000 of the firms operate in Wenzhou, making up at least one-third of the city's industrial output, and more than half the output of its rural enterprises.

The shareholding companies are formally designated as collectives but remain essentially private. They offer a promising option for Chinese rural enterprises seeking to escape the dilemma of economic efficiency versus political security.

Under this new form, investors - usually two or three members of a peasant family - hold shares in proportion to their original investment. After-tax profits are divided according to a set ratio: 50 percent for expanding production, 25 percent for dividends, 10 percent for workers' welfare, and 15 percent for a "public fund."

This arrangement allows private entrepreneurs to gain all the benefits of collective status, while avoiding many of its costs.

On one hand, the designation of a "public fund" provides private firms with the ideological justification needed to register as collectives. Actually, the "public" assets remain for use within the enterprise, but cannot in theory be distributed to shareholders.

On the other hand, the shareholding system clarifies the property rights of investors, improving accountability and inhibiting local officials from demanding random levies from the rural firms, a common practice in many parts of China.

"The peasants like this system because everyone knows exactly how much they have. The interests are clearly defined," says Song Wenguang, director of Wenzhou's Economic Reform Commission.

Wenzhou's reform-minded leaders actively support the shift of privately owned firms to collective status as a convenient way to protect the city's fastest-growing economic sector from ongoing attacks by Beijing's orthodox Marxists.

For example, Wenzhou can tell Beijing that private business accounts for only a third of the city's industrial output. In reality, the figure is double that, because another 36 percent of industrial production comes from private firms operating under the guise of shareholding cooperatives.

Moreover, the shareholding system has increased Wenzhou's ability to regulate the private firms and curb their rampant tax evasion, says Cai Houzhi, director of Wenzhou's representative office in Beijing.

As a result, Wenzhou and all of Zhejiang Province are working to further popularize the shareholding model. In February 1990, the Ministry of Agriculture sanctioned the idea and urged other provinces to follow Wenzhou's example.