Chinese ‘Capitalists’ : Business Not as Usual in Yuyuantan

Wen Suming isn’t exactly a capitalist, but she’s a long way from Mao Tse-tung’s idea of communism.

Wen, a pleasant 42-year-old with an easy laugh, is deputy director of Yuyuantan township. It is a former rural commune caught in the urban sprawl of Peking, much of its farmland taken for city construction projects.

Besides her role in governing this township of 19,000 people, Wen helps run what amounts to a mini-conglomerate of business investments ranging from metalworking shops and garment factories to barbershops, photo studios and hotels.

Yuyuantan township offers some insight into the reforms sweeping this country as part of the effort to stimulate economic development.

Sales, Better Salaries

Street vendors and other individual entrepreneurs are back in favor. Business decision-making is becoming far more decentralized. Income, once nearly all collected by the government and doled out in low wages, is now beginning to be left more in the hands of individuals and local enterprises.

In this socialist system, however, where the private sector is still a microscopic part of the business scene, Yuyuantan township may be as close as China comes to significant Western-style private enterprise for some time.

“This is really an astounding experiment going on here,” this attempt to wed market principles to a socialist system,” a U.S. Embassy official in Peking said. “No other socialist countries have been willing to take these risks.”

The idea of trying to let the market determine how the economy should operate is being patched into all sorts of non-free market institutions.

Province Airlines

Provincial governments are being encouraged to start airlines to compete with the national government monopoly. Plans are afoot to encourage individuals to own their homes outright and to force renters to pay more than the several dollars a month now collected under a government subsidy program; the effort is aimed at attracting further investment to needed residential construction.

Capital Iron & Steel, one of China’s major state-owned steel mills with 110,000 employees, was permitted last year to retain about $87 million, or 31%, of its $278 million in profits for use in making its own future investment decisions. Its share of 1985 profits will be 40%.

The mill--its rose garden and tree-lined streets hide the usual ugliness and grime of steelmaking--has introduced U.S.-made computer controls in the last few years, eliminating about 10,000 jobs and boosting profits 20% a year. The excess workers have been diverted to other activities, including a commercial flower-raising sideline. Most of the “greening” of the plant dates from 1979, when the effort to improve operations began.

Large state-owned companies, however, reflect only a part of the new Chinese economy. Township investment capital is becoming a significant force in much of the country.

Although the $70 million that Yuyuantan township has amassed in business investments is the property not of individual investors or shareholders but the local community, it is nonetheless a growing and increasingly sophisticated investment pool under local management.

According to Deputy Mayor Wen, who greets visitors in a dusty driveway outside the township’s modest, one-story brick office building, this new sophistication extends even to seeking foreign investment partners.

“We’ve made tentative contacts with foreign business interests,” she said.

One of them is an American firm. The immediate goal is to create a joint venture to build a new, $10-million hotel, one of seven or eight that the township hopes to invest in over the next five years. Getting overseas partners is one way this Chinese area can make the most of the $7 million it still has in ready cash.

A 253-unit traditional Chinese-style hotel opened last September. Built by the township without a partner, it is, in her words, “already quite successful.”

Toll of Urbanization

The prime motivation for all this effort has been “to create some means to run our life, because we keep losing our land” to urbanization, Wen said. Some industries began years ago, but the activity has gained momentum now that the central government in Peking has permitted the township to retain a share of the profits and decide on its own how to invest the money.

She figures that the township made a healthy $12 million in profits last year, a 17% rate of return on its investments--enough to make most American capitalists envious.

The township retains ownership of these ventures but contracts with others--individuals or businesses--to operate them. Each of the enterprises is permitted to keep its own share of the profit, which it can reinvest as it pleases.

As in any venture-capital operation, there are failures, and Yuyuantan Township either has to bail them out or write them off.

Attracting foreign investors as partners is one way it can step up its investment activities. So far, it has no interest in that much-used Western business tool, leverage--otherwise known as heavy debt. In fact, Wen laughs at the suggestion of seeking loans, which the township has the authority to do.

“We’ve never borrowed up to now,” she said. “Banks do impose interest, and we’re not ready to pay interest.”

High-Fashion Socialist

Wen, whose only concession to China’s recent fashion reforms is a pair of gold-ornamented, mid-heel sandals to go with the standard gray pantsuit, came to her financial leadership with only a high-school diploma. She began as a statistician and later became deputy director of a nuts-and-bolts factory.

She explained that the township has an industrial and commercial department to oversee its investments, and that this department submits proposals to the township government and, in cases involving major projects, to the community’s People’s Congress.

To reinforce its own business skills, the township contracts with local university people and other experts to make feasibility studies of proposed new ventures.

Although many of the operations are small and most of the recent ones commercial rather than industrial, one of the township’s metalworking shops is China’s leading supplier of a pipe-threading tool, and it even exports some.

A typical business is a factory turning out men’s and women’s suits and overcoats. It employs 200 young men and women in several one- and two-story brick buildings near some remaining truck farms. The work areas, each with about 30 workers, are Spartan but clean, well-lighted and spacious.

An important change in recent years is the salary system; now, each worker’s salary is determined by his performance and the old policy, of paying everybody the same wage, is called “irrational egalitarianism.” Employees can make between $210 and $320 a year for 48 hours a week of labor, about average for the country. (The suits they make sell for $30.)

Dull Day Off

Indicative of the problems still plaguing the Chinese economy, and likely to continue for many years, is that the factory takes its one day a week off on Tuesdays. On that day, the electricity is turned off. Staggered weekly closings in industry ease the load on limited power capacity.

Yuyuantan township is by no means unique. Many townships are venturing into new businesses. A visiting Bank of America official says the firm has been contacted by many of them all over the country about lining up foreign investment.

The bank has just financed a joint-venture hotel project in Tianjin involving a township and a company in Singapore.

Leland Prussia, Bank of America’s chairman, who was in Peking after an Asian banking conference, expressed optimism that as the Chinese demonstrate some success with the economic reforms, they will move closer to some significant free enterprise.

“I’m very impressed with their sense of their own limitations,” he said. Because of the problems the Chinese still have with inadequate transportation and port facilities, “they are being very careful about making commitments.”

Economy-Wide Changes

Some of this optimism reflects the delight of most Americans here with the way that the Chinese economy is changing. Some overseas businessmen and diplomats who have been here longer caution that the government, having unleashed the economy, may become frustrated at its inability to control it and to set national priorities.

Chen Muhua, newly appointed president of the People’s Bank of China, the equivalent of the U.S. Federal Reserve, points out that the government tried its autonomy program in the rural areas first and experimented with it in the cities before deciding last October to make it a national effort.

Basically, the Chinese government is trying to back its way out of being the price-setter in the market and the main decision-maker in the average citizen’s economic life. In the process, Chen observed, it has had to cope with problems like a growth rate that she said reached 23% in the first quarter--too fast. She described the steps the bank has taken to tighten credit in recent months not as a step backward but rather as “fine tuning.”

There will be no stepping back from the new economic thrust, she declared. “If there’s any change, it will be to open the economy more.”