TOWARD A NEW ASIAN ORDER : A WORLD REPORT SPECIAL SECTION : Market Scene : Profit Computes in China : The success of Beijing Stone Group demonstrates the staying power of capitalism.

When Mayor Chen Xitong of Beijing delivered a harsh report in the summer of 1989 vilifying participants in that spring’s pro-democracy protests in Tian An Men Square, one of his prime targets was China’s top computer firm.

Chen accused the Beijing Stone Group Co. of contributing supplies worth tens of thousands of dollars to the demonstrators. He noted that Wan Runnan, Stone’s founder and president at the time, gave political support to the protests.

As Chen spoke--a month after the brutal crackdown that ended the demonstrations--People’s Liberation Army soldiers were still deployed at the company, lending weight to a government investigation of the quasi-private firm. Wan himself would soon surface in exile to become a leader of the democracy movement overseas. At least a dozen other company employees also fled abroad.

Reports in the Hong Kong media that summer reflected pessimism about the company’s future. One article spoke of the firm’s “downfall” and quoted an escaped dissident who predicted that Stone would “either be dissolved or become part of a state-owned work unit.”

Now, however, Stone is booming. Its success is a tribute not only to what may seem to be Houdini-like skills on the part of its management but also to the fundamental resilience of China’s market-oriented reforms.

After dipping 31% in 1989, Stone’s profits rose 45% in 1990 and jumped another 67% last year, hitting $18.9 million on sales of $434 million. The firm, with 2,300 employees, sells a variety of domestic and imported computer equipment and holds about 80% of China’s lucrative Chinese-character word-processor market. It also has spawned or promoted the growth of a host of loosely affiliated companies.

The firm’s current management--drawn from a small group of people who worked with Wan to set up Stone in the mid-1980s--is careful not to challenge the government. But Stone executives are still enthusiastic boosters of reform.

Duan Yongji, the Stone Group’s president since last year, said in a recent interview that the pessimism of many foreign observers in 1989 was based on a mistaken impression that the Tian An Men crackdown meant the end of economic reform in China.

“With such a premise, Stone would not have a good future,” Duan said. “However, this appraisal was not true to the facts. China’s reform accords with the will of the people and the general trend of events, and it cannot be reversed.”

Duan expressed optimism that China is now entering a new era of accelerated reform.

A widely publicized tour in the south taken early this year by senior leader Deng Xiaoping to promote new economic reforms, and a Politburo decision in March that included a warning against excessive leftism, “remove obstacles on the road of advance and clear up many wrong ideas in the minds of people,” Duan said.

“This will push reform forward and add new vitality,” he said. “ . . . Stone Co. thinks this is a very good chance. We should seize it and quicken our pace of development.”

The Stone Group already has a wide-ranging structure. It includes a high-technology industrial firm, a finance company, 28 wholly owned subsidiaries, 12 Chinese-foreign joint ventures, 14 branch offices in various parts of China, two affiliated enterprises and six overseas branches.

Stone was created under laws that apply to “collective” firms, yet it is often referred to as a private company. In theory, it belongs to all employees; in practice it is controlled by a self-perpetuating board of directors set up by the original founders. Under current law, no one has the power to sell off the company’s assets and pocket the cash.

Shareholding is a controversial concept in China, but Duan said that his firm supports wider use of stocks, something that might help clarify Stone’s ownership structure, now ambiguous in a way that would be impossible in the West.

“Presently it cannot be divided up into shares,” Duan explained. “Whether it can be divided in the future depends on government policy.”

The now-exiled Wan quit his job as a computer specialist at the prestigious Chinese Academy of Sciences to establish Stone in 1984 together with half a dozen colleagues. They borrowed about $5,000 from a rural township government in suburban Beijing and worked out of two rooms.

From the beginning, Wan saw himself and the firm as path-breakers for China’s reform effort. Chairman Mao Tse-tung had bragged of socialism’s “iron rice bowl”--guaranteed lifetime employment. Wan spoke of a “mud rice bowl,” whereby job security depended on high-quality work. Employees were given annual contracts. Good performers got raises and renewed contracts, while slackers were asked to leave. For China, this was revolutionary.

“In establishing Stone, I just wanted to provide a stage for Chinese scientists to show their talent and transform their ideas into products,” Wan told the official China Daily in 1988.

In the early years, Stone salaries were well above anything its employees might get elsewhere. Today they are still much higher than average.

In a city where most workers earn about $500 a year, annual salaries at Stone range between $1,000 and $2,200. While very low by Western standards, the money is enough for employees to live fairly comfortably in Beijing because of government subsidies.

Stone has been controversial ever since it was founded. During its early years of success, Communist Party ideologues repeatedly accused it of smuggling, black-marketing and profiting from political connections.

The official Economic Daily noted in 1988 that critics called Stone “the biggest profiteer in China” and accused it of helping foreigners “exploit” the Chinese people.

In one controversial incident, Stone bought two old navy ships at rock-bottom prices, then resold the electronics for a fat profit.

At the same time, Stone’s ability to satisfy customers, bring in profits and steadily expand made it a potent symbol of reform.

“Many professionals see in Stone the future of all enterprises,” China Daily reported in 1988.

Then came the political upheavals of 1989. In March that year, as political ferment grew, a social research center under Stone helped sponsor a conference on constitutional reform. Yan Jiaqi, a senior research fellow at the Chinese Academy of Social Sciences, who would later flee into exile, spoke at the conference in favor of direct popular elections to China’s Parliament.

Later, when students launched protests in Tian An Men Square, Stone provided financial and material support. After the government declared martial law in late May, members of the Stone research center, in support of embattled reformists, circulated a petition calling for an emergency meeting of Parliament to deal with the crisis.

Zhou Duo, a sociologist-turned-businessman who worked for Stone until he joined a hunger strike at Tian An Men Square, emerged as a leading figure among the demonstrators. He was later imprisoned for 10 months.

After the crackdown, Stone faced two broad categories of difficulties, Duan said.

First were political issues, he said. “How much was Stone involved in the incident? How much did it donate? What was the nature of its role?”

And then, Duan said, there were ideological questions: “What is the nature of Stone? Should such enterprises be developed? Should banks continue to lend us money? Should newspapers accept our advertisements?

“The investigation team sent by the government issued a formal report after its work here,” Duan said. “It said Stone should keep working and should perform even better. The conclusion was that the role Stone played in the incident was not very big, the money donated was not very much and not many (Stone) people participated in the demonstrations.”

After the crackdown, “authorities distinguished between Wan Runnan and Stone itself, between questions of individuals and questions of the company,” Duan said.

During the past three years, Duan said, Stone has bolstered its manufacturing capacities, aiming to become more of an industrial firm and less of a trading company. Among other facilities, it now has two word-processor factories, each turning out more than $40-million worth of equipment annually.

Despite the turmoil and pressures of the past few years, Stone exudes an aura of unbowed pride.

A statement on the cover of a slick brochure promoting Stone’s latest products proclaims: “We are devoting ourselves to a cause--a cause of reform. We are creating a new image--a revolutionary image. Not only does Stone contribute high technological products and economic benefit to society, but also an enterprise culture. . . .”

Soaring Sales

Beijing Stone Group sales, in billions of Chinese yuan

* 1991: 2.3 billion

* 1991 average value of yuan was 5.3 to the U.S. dollar