Trouble at a China Match Factory

The Chinese government is trying to prod state enterprises to become more accountable for profits and losses, and less reliant on subsidies

PRIVATIZATION of the state-run match factory Leng Yongli ran for 10 years has been a wrenching ordeal for him.

With the blessings of Wuhan city and Hubei provincial officials, Mr. Leng sold the century-old Wuhan Match Factory to a group of private investors last September for $5 million.

The purchase by Wuhan Dadi Science and Technology Company, a smaller company with interests in real estate development, transport and computer software, bailed out the virtually insolvent factory. The matchmaker was losing more than $3 million annually, had stopped production for 10 months, and could not meet its payroll or service $2 million of debt.

But the takeover cast the 1860 match workers to the whims of China's fledgling marketplace with rocky results, says the former factory manager, now assisting in the transition.

The new owners offered workers the choice of staying on or taking up to $2,000 in a generous severance package. They faced further financial demands from pensioners, temporary employees, injured workers, and the families of victims of industrial accidents at the plant.

About 600 workers living in the plant housing, that Dadi plans to demolish and redevelop, have to find new homes. And disgruntled workers, long used to China's cradle-to-grave welfare system, held a city official hostage over demands for higher living expenses. He was freed after agreeing to mediate with the new owners.

Director held responsible

``All sorts of feelings well up in my heart. I have gone through the joys and sorrows of life in 10 years as factory director,'' Leng says. ``The workers hold that I have ruined the 100-year-old factory, and I am the person to be condemned for ages.''

Across China, the government wrestles with the burden of troubled state enterprises. Although private sellouts such as the match factory and even small bankruptcies are spreading, the decrepit, debt-ridden public industrial sector remains the major obstacle in China's path from central planning to a capitalist-style marketplace, Chinese and Western analysts say.

The backbone of China's economy, the more than 10,000 state-run enterprises employ 109 million people and account for 50 percent of industrial output. Ultimately, the government hopes to wean state companies from heavy subsidies and bank loans and prod them to be accountable for their own profits and losses.

In the meantime, the government burden grows. The output of state enterprises rose only 2.2 percent in the first quarter in 1994 over the same period in 1993. About 60 percent are losing money compared to one-third of the state sector last year.

Heavy debt of state enterprises

Many are closed or only working part time and unable to pay wages because banks had tightened credit to hold down inflation. That sets in motion a series of payment defaults among state enterprises already heavily in debt to each other.

Still, the government opted recently to continue its cash lifeline to the state companies as fears of discontented workers overrode worries that subsidies drain the government and banking system and fuel the inflationary spiral.

In the long run, Chinese and Western economists say there is no fix without bankruptcy and privatization. But failures produce more layoffs. And Chinese communists struggling to maintain a socialist veneer will not consider a system in which the state is not the country's major industrial shareholder.

``The government is in a dilemma. It has to deal with inflation on one hand, and on the other hand, it has to deal with increased deficits of state enterprises. If nothing is done, more workers will bleed,'' says a Chinese economist who advises the government.

``The government is trying to establish a modern corporate system. But this involves the larger issues of ownership and management. And China has a long way to go before it reaches that point,'' he says.

Like other major industrial centers, Wuhan, a dismal, polluted city in central China, has grappled with the problem reluctantly. Out of 7,000 state, private, and collective enterprises, only 28 have been auctioned, allowed to go bankrupt, or merged, city officials say.

Earlier this month, Beijing slapped controls on the sale of assets of state-owned firms without central approval. The measures are aimed at blocking local governments from profiteering on the state firms while the central government runs a mounting deficit to prop them up.

``The old enterprises were born under the centrally planned economy, and now it is difficult for them to make the transition to the market economy,'' says Li Pan, a Wuhan economic official. ``In the future, there will be bankruptcies, but first there must be development of a system to take care of the people who have lost their jobs.''

A generous compensation package for the work force and 635 pensioners of the match factory was crucial to winning government clearance for the takeover, officials of Dadi and the match factory say. But the seven-year-old Dadi group, drawn to the company's $6 million in assets, mostly in real estate, faced more difficulty dealing with the workers.

``There were two moods. Some people from families which have worked for this factory for generations can't accept the sale. But other people realize this is a changing period in China, and they can't avoid the trend,'' recalls Li Yuan, the chairman of Dadi.

Although, initially, many workers stayed on out of fear of not finding work elsewhere, eventually the factory, in which Mr. Li is investing $1 million and converting to electronics production, will only employ about 400 workers.

Gao Guoqiang, a boilerman in the match factory, is being retrained on new equipment. Although he likes the tougher work regime of a private company, he said many other workers couldn't adapt.

``The work discipline is stricter. I had no doubts I could do it because if you have more skills, you can do better for yourself,'' he says. ``But many people weren't sure about working for a private company. They said there is no sense of security, and private entrepreneurs do not treat workers well.''