Shaping China’s Economy : Enterprises: Since the crackdown on Western-style reforms, China’s leaders have been seeking a balance between market forces and state control.

Zhang Xiandi, head of a rural synthetic thread factory near Shanghai, talks like a hard-driving capitalist entrepreneur.

“Some factories from neighboring provinces were selling this kind of thread in the Shanghai area, but after we started production, we ran them out of here,” Zhang said in a recent interview, a triumphant grin flashing across her face. “The quality of our product was better, and we provide good service to customers.”

Aggressive “village and township enterprises” like Zhang’s have boomed in China during the past decade. Often called “collectives,” these market-sensitive firms usually belong to local governments but function like private companies, buying and selling on open markets. Profits go to bonuses, expansion and local services.

Now, however, China’s private and collective businesses, a total of about 28 million enterprises employing 110 million people, are facing hard times. They lost their strongest backer when former General Secretary Zhao Ziyang was ousted from power early this summer for refusing to support a military crackdown on pro-democracy student demonstrators.

Zhao, who also favored experimenting with the sale of stock in large state corporations, always insisted that he was merely trying to improve socialism. But many observers felt that his ultimate goal was a Western-style market economy.

In the wake of Zhao’s ouster, hard-line leaders in Beijing are showing renewed favoritism to large state-owned firms, even though many of those companies have records of poor management and inefficiency.

Within the Communist Party, a complex struggle is under way over the shape of China’s economy. Debate hinges on the proper balance between market forces and state control. The issue is expected to be a major focus of a pending meeting of the 175-member Communist Party Central Committee. The outcome may affect the pace of China’s modernization and ultimately its prospects for social and political liberalization.

Since the June 4 martial-law crackdown in Beijing, Premier Li Peng and Vice Premier Yao Yilin, backed by elderly hard-liners, have led an accelerating effort to reassert a wide range of central controls.

Development of a true market economy has been explicitly rejected for as long as current leaders remain in power, and experiments with the issuance of new stocks have been put on hold.

“If we persist in weakening and totally negate the planned economy, and try to create a completely market-oriented economy, it wouldn’t work in China and would surely throw the economy and the entire society into confusion,” Communist Party General Secretary Jiang Zemin declared in late September in his first major policy address.

China’s paramount leader, Deng Xiaoping, has stated that reforms must continue--but within the context of continued primacy for the system of public ownership.

These positions are the new orthodoxy, publicly supported by all of China’s leaders.

Beneath the surface, there continues to be a severe clash of opinions.

Some Chinese intellectuals and foreign analysts believe that the real goals of Li and Yao extend all the way to a rollback of reforms and re-establishment of a Stalinist-style command economy such as China had during the 1950s. Standing in the way of any such retreat are many officials committed to market-oriented reforms who remain entrenched in powerful positions both in Beijing and the provinces.

In addition to Deng himself, this reform faction includes leaders such as Vice Premier Tian Jiyun, National People’s Congress Chairman Wan Li and Guangdong Governor Ye Xuanping. General Secretary Jiang and Politburo Standing Committee member Li Ruihuan, the two politicians who won the most important promotions in the wake of the June crackdown, also have long records of favoring moderate economic reform.

Many changes of the past decade--growing contacts with the outside world, investment by foreign businesses, freer thinking by Chinese intellectuals and the growth of collective and private enterprises--are also powerful factors promoting a more open economy and society.

“What I know is that everything is still in a process of change,” Shao Jingwu, director of the Shanghai Diesel Engine Works, commented when asked about prospects for further reforms. “What things ultimately will change to be like is very difficult to say.”

Shao said he believes that return to a 1950s-style system is out of the question, but that “currently, we cannot foresee development of a complete market economy where the only restriction on our prices would be whether customers are willing to buy our products.”

Beijing is trying to direct a greater share of funds and raw materials to large state-owned firms such as Shao’s company, which employs 11,000 workers.

At the same time, new restrictions are being imposed on collective and private businesses, including rural enterprises. Such businesses stand accused of draining financial and material resources away from state-owned factories, sometimes through illegal means. They are also charged with frequent tax evasion and with being major sources of pollution. Officials in Beijing say those found to be wasting energy or raw materials, producing poor quality products or causing severe pollution should be shut down.

These new pressures come in the context of a program launched late last year to “improve the economic environment and rectify the economic order.” The key goal of the program is to reduce inflation, which ran at an official rate of 26% in 1988, by stopping many construction projects, tightening credit and reintroducing some price controls. The program also aims at directing resources away from light industry and toward improvement of the basic infrastructure. So far, the main effects have been to provoke a severe economic slowdown and sharply reduce inflation.

Efforts also have been stepped up to restrict the highly profitable but illegal diversion of materials from controlled distribution channels, where goods sell at low, state-set prices, to free markets, where they are worth much more.

Qiu Zongcheng, deputy director of the Shanghai Diesel Engine Works, complained that in recent years, small companies set up in the course of reforms would sometimes make money by buying his firm’s diesel engines at state-set prices and reselling them illegally for high profits.

“This problem now is being solved step by step,” Qiu said. “This has eliminated interference that cropped up in the course of reform and brought us trouble.”

The diesel engine factory, which receives subsidized raw materials according to the state plan, still is not free to sell its products at market prices. But as part of the shift in government priorities, it received a loan equal to about $3 million that helped it boost production by about 7% this year, Qiu said.

Reformists’ hopes centered on Zhao had been largely to eliminate the two-track pricing system by allowing more goods to sell at market prices. But efforts toward this goal were sidetracked when the top leadership decided last year that first priority must go to the fight against inflation.

Now, in the face of austerity and tightened controls, many enterprises in the market-oriented sector of the economy have collapsed for lack of loans, raw materials or markets, or have been shut down by administrative orders.

The number of small individually owned urban businesses employing eight people or fewer fell by 2.18 million during the first half of this year, leaving a total of 12.34 million businesses employing a total of 19 million people, according to the State Administration for Industry and Commerce. China also has about 220,000 private enterprises in a separate legal category for those employing more than eight people.

Additional pressure has been placed on private businesses since midsummer, when a further effort was launched to “inspect and clean” such firms. While some aspects of the campaign aim to stop illegal activities such as the sale of pornographic publications or counterfeit goods, other features simply impose new bureaucratic barriers.

Even more important than these privately owned urban businesses are the rural enterprises owned by peasants and local governments, which constitute the main force in the market-oriented sector of China’s economy. Early this year, China had about 18 million of these enterprises, employing about 95 million workers, or 24% of the rural labor force, according to official statistics. Such enterprises produced $175 billion in goods last year, about 35% of China’s total industrial production, according to Ministry of Agriculture figures.

Rural enterprises enjoyed 30% real growth in output during 1988, according to the State Statistical Bureau. But production during August of this year, the most recent month for which statistics are available, was up only 9% above that of August, 1988.

Guo Mantang, director of the Ministry of Agriculture’s Township Enterprise Management Bureau, was quoted in May by the official China Daily as stating that as many as 30% of township enterprises in the country might go bankrupt this year because of the austerity policies.

Things seem not to have reached that point of severity. But a sharp slowdown is under way.

The Ministry of Agriculture announced in August that 1.8 million rural enterprises, 10% of the nation’s total, shut down during the first half of this year, and that 3.6 million more slashed production by 50% or more. Between 10 million and 15 million workers lost their jobs, according to a ministry official who was quoted on state-run radio.

But Zhang, head of the rural factory that dominates the Shanghai-area market for specialized thread used in making leather products, is still splitting her work force into three shifts to keep her spindles running 24 hours a day. Her firm, which buys synthetic fibers at 10% to 15% above the government-set price and sells thick thread to about 80 leather-working factories, is expanding.

“Village and township enterprises have been affected to some degree by the economic retrenchment,” Zhang said. “But if an enterprise is well-managed and produces good products, the effect isn’t too great. We are still confident about the future of our factory.”