Chinese Industry Trying to Escape Time Warp : Reform: Changes in operation of Victorian-era textile factory in Wuhan point the way toward modernization.

More than half a century after British industrialists packed up and left this Yangtze River city, their Victorian-era textile factories are still cranking out cloth.

Red brick factories, their roofs patched and covered in grime, even use the original machinery.

Like much of Chinese industry, they are trapped in a time warp, but perhaps not for much longer.

Since paramount leader Deng Xiaoping paid a visit to southern China last year, the old museum pieces are facing the scrapheap.

Simple figures tell the story of the decline of Wuhan’s state-owned textile industry, a tale repeated in industries across China.

It employs 115,000 workers but is burdened with 60,000 retirees. Each year, it pays out $37 million in worker salaries and $26 million in pensions.

The socialist “Iron Ricebowl” provides free housing for everybody, pays the heating bills, maintains the properties and covers the costs of medical treatment and schooling.

Annual sales in the industry are running at a feeble $370 million. The result: annual losses of up to $15 million.

Nobody understands the problems better than Lin Shouqing, the head of the Wuhan Textile Bureau, an energetic man in his 40s who has watched the industry slide from profit to loss--and is now trying to get it back on its feet.

Lin’s radical methods have put him on the front line of reform in China.

For years, the Wuhan textile industry--founded by the British and taken over by the Chinese Communists in 1949--was the economic backbone of the city and its biggest contributor to the central treasury.

“We contributed to the building of socialist China,” Lin said proudly. “We helped lay the foundation for its industrial development.”

Things started changing in the mid-1980s as a result of Deng Xiaoping’s reforms designed to enrich the countryside at the expense of the cities.

The price of cotton doubled--a blow from which Wuhan’s mills have never recovered.

“It was great for the peasants, but a disaster for the workers,” Lin said.

But the real shift in fortunes came when the countryside started plowing its new wealth into small factories. Overnight, state plants had competition.

So-called township and village enterprises are capitalist-style businesses. They are nimble and flexible with low overheads and have shunted aside the state-run behemoths.

Across China, they account for 35% of industrial output, and the proportion is rising fast.

“We can’t compete,” Lin admitted.

Worse, there is even more formidable competition arriving each day in the form of foreign joint-ventures with modern management and marketing techniques.

About two-thirds of China’s state-owned industries are losing money, according to official figures.

Government bailouts amounted to $9.3 billion last year, and that doesn’t count forced loans from state commercial banks.

The Wuhan textile industry, as a whole, has been losing money for the past three years.

“We’ve had the Iron Ricebowl and egalitarianism for too long,” said Lin, who has set about reform with a disregard for ideology unthinkable as recently as a year ago.

To compete with their rivals in the countryside, Wuhan’s textile plants must slim down their work forces and upgrade their products. Lin found a model in the Wuhan No. 2 Printing and Dyeing Works, one of China’s worst-performing factories, that he approved for sale to a Hong Kong company.

Hongtex Development took a 51% stake in the plant earlier this year, fired almost two-thirds of the workers and has boosted production by 40%.

Money from the sale was used to set up small-scale businesses in the service sector, such as shops and restaurants, that have provided jobs for the laid-off workers. The city government has taken over the retirees.

It was the first time a socialist enterprise had been swallowed by an overseas company, and the sale has put other factories on notice that they must either change or go broke.

Workers are taking the threat seriously, and many fear for their jobs.

Deng’s aim is not to privatize state industry, but to make it more responsive to the market. At the same time, by encouraging competition, his reforms ensure the state’s overall stake in the economy will shrink.