China Asks New Power for Factory Heads

A law designed to make China’s state-owned enterprises function much like capitalist corporations was introduced Thursday to the National People’s Congress, where its passage is virtually assured.

The law, widely viewed as the key reform planned for this year, gives great power to many factory directors to respond to market influences in the pursuit of profits. Other factory directors, however, will have their managerial authority boosted but still will be required to operate within the constraints of state planning.

Lu Dong, director of the State Economic Commission, told delegates in the Great Hall of the People that the new law will “enhance the vitality” of China’s 90,000 state-owned enterprises, which account for more than 70% of the country’s industrial production.

Other measures presented to the Congress on Thursday, all of which reflect China’s emphasis on market-oriented reforms and opening to the outside world, were:

-- Constitutional amendments confirming that private enterprise is legal and allowing land-use rights to be bought and sold.

-- Legislation defining the rights of Chinese and foreign organizations in joint ventures, of which there are now more than 5,000. This measure would strengthen the legal framework for foreigners who conduct business in China.

-- A proposal to designate Hainan Island as a province and make it China’s largest special economic zone, with liberal economic policies designed to encourage foreign investment.

The enterprise law is meant to guarantee small businesses the right to develop as a complement to the state-owned economy.

One of the law’s important effects will be to trigger implementation of a provisional bankruptcy law passed by the Standing Committee of the National People’s Congress in late 1986. The bankruptcy measure will not be put into effect until three months after passage of the enterprise law.

Issue of Social Impact

Market-oriented reformers view a limited number of bankruptcies as useful in eliminating unproductive enterprises and increasing incentives for industrial efficiency. But partly because Chinese leaders fear the social impact of unemployment, the new laws are not expected to lead to widespread bankruptcies in the near future.

Last year, ideological hard-liners blocked consideration of the enterprise law by the National People’s Congress. With reformers now firmly in control, its passage this year is considered certain.

Private enterprise accounts for only 3% of total industrial output in China. But 18 million people run street stalls or other family businesses, and there are 225,000 private enterprises employing eight or more workers, according to a report earlier this month in the official China Daily. Now, the government is prepared to let this sector of the economy grow.

The amendment allowing the sale and purchase of land-use rights, meanwhile, will permit development of a real estate market based on long-term land leases. China recently has begun experimenting with auctions of land-use rights in cities, while some rural areas have encouraged peasants with factory jobs to lease their agricultural plots to the best, most ambitious neighboring farmers.

Invigoration of state-owned industries, however, remains central to China’s reform efforts.

Lu explained Thursday that the new enterprise law aims at “the separation of ownership and managerial authority.” The state will still own enterprises, but factory directors appointed by government departments are to run them.

In layman’s terms, the people of China, represented by the state, are vaguely equivalent to stockholders, while the government department is like a board of directors and the factory director is the chief executive officer.

By the end of last year, about 75% of China’s state-owned enterprises had given management authority to factory directors.