COLUMN ONE : China’s Neighborly Capitalists : Once notorious for spying on others, local Communist cadres have a new job--passing out product samples door to door and researching the huge consumer market for foreign firms.

In the back lanes of a residential area of this booming metropolis, a clutch of Chinese cadres gathered to discuss an unusual agenda: new bus schedules, the “seven no” campaign that bans “antisocial” behaviors and the marketing strategy of multinational corporations.

Enlisted by foreign companies to deliver product samples door to door--including Lux soap, Pantene and Rejoice shampoos, L’Oreal cosmetics and Omo detergent--these apparatchiks applied a collective, critical eye to the new consumer goods.

“It’s a good way of trying new things,” said the group leader, a straight-backed woman with few teeth. “We give the product to residents, and they just try it. . . . If they like it, they buy it again.”

An elderly man with thick black glasses volunteered: “I like Lux!”

The chairwoman berated him. “Safeguard is much better than Lux, and you know it! You just like Lux because it has a pretty woman on the package.”

A 30ish woman with a label still stuck to her glasses--a show of heightened brand consciousness--interjected: “Pantene makes your hair feel softer for a day or two, but after a few days, it becomes dry again.”

The man, trying to be helpful, chimed in again: “You should try Rejoice! It has conditioner in the shampoo.”

“What do you care about conditioner? You hardly have any hair, old man,” the chairwoman retorted as her object of scorn smoothed his head self-consciously and her comrades laughed.

For savvy American shoppers, this scene might have come from just another Madison Avenue focus group. But even more than pinpointing consumer tastes, these Chinese offered a startling demonstration of how China’s economic reforms are changing this nation from the ground up--and how a quintessential Communist institution has become a capitalist tool.

The group was literally one of 1 million here, as its members were from the Neighborhood Watch Committees--a grass-roots legacy of China’s elaborate Communist Party structure.

Created to “serve as a bridge between the government and the masses,” the committees regulate and report on most aspects of residents’ daily lives. They are known to conduct spot-checks to see that households are clean or to ensure that families adhere to China’s strict population limits. During the Cultural Revolution, their knock on a door signaled a house-to-house search to root out and punish “capitalist roaders.”

Now, they’re knocking on doors again. But to the delight of foreigners who are eager to tap into what potentially is the world’s largest market, committee members are tackling tasks such as selling cable television subscriptions and delivering product samples for multinational corporations. They are encouraged by a government that sees increased economic opportunities for its people.

The cadres don’t make much on such jobs, though compared with their sparse salaries the sums can add up, especially if the Chinese show entrepreneurial zeal.

As a shortcut to reaching potential customers, the committees are “perfect,” said Mark Hu, general manager of S. C. Johnson Corp. in Shanghai. The company distributed 400,000 samples of Soft Sense skin lotion with the groups’ help.

“They know everything about every household--who has babies, who has a Western-style toilet, who is likely to buy shampoo or bug spray,” he added. “They can focus right in on our target market.”

First formed in the 1950s under Communist Party Chairman Mao Tse-tung, the committees were charged with “passing the leaders’ orders to the people and to pass the voice of the people upward.”

There is roughly one eight-person committee for every 1,000 households. And virtually every community is linked--like it or not--in a chain that connects the neighborhood groups to local leaders and the police, on up to the regional government and ultimately to the central powers in the capital, Beijing.

The committees have achieved their own notoriety in the past. In the anti-rightist campaign of the late 1950s, they turned in suspect neighbors whose views members considered to be at odds with the Marxist-Leninist orthodoxy. It was during the 1966-1976 Cultural Revolution that the committees hunted “capitalist roaders” who were then condemned to prison or labor camps.

Today, their role is edging toward a cross between Big Brother and the Avon Lady. Besides their commercial activities, the groups continue to handle a range of chores. For instance, they mediate squabbles and monitor sanitation. And they engage in the subtle surveillance that earned them the nickname in Beijing’s back alleys of the “KGB with tiny feet”--a reference to the once-bound feet of the elderly women who often dominate the committees.

Maintaining security, one of the committees’ main charges, still can lead them to report to police any strangers who enter a neighborhood; committee members say they try to keep “bad elements” out.

Sometimes, though, they also keep “bad elements” in. When, for example, Beijing hosted the International Women’s Conference in September, committee members stood guard to ensure that dissidents and “trouble makers” stayed at home and received no visitors.

But required now by the government to be more self-supporting, and lured by the attractions of the market, the groups of neighborhood busybodies also are laboring to become business bodies.

In the tiny office of the Tai Yuan Neighborhood Watch Committee, tucked in a labyrinth of narrow lanes in central Shanghai, committee secretary Huang Guozheng shuffled through a stack of files containing intimate details about his neighborhood’s 800 families. He had data about their jobs, children, contraception and even addresses of relatives overseas.

“A lot of intellectuals live around here,” he said, looking through his notes. “On average, their income is not so high. There are fewer children these days, and there are many people from this area living in America.” He pointed to a carefully penned address in a blue-bound book. “Look, there’s one in Los Angeles. Sometimes he sends money back here to invest.”

Such records are a gold mine to marketers trying to plumb China’s vast consumer potential, companies such as the Hong Kong-based Survey Research Group. It started working with the neighborhood committees in 1984 to help locate representative households for marketing surveys. Now the firm has a network spanning 62 cities across China.

“Our goal is to reach the entire nation,” said Louis Tong, the company’s Hong Kong-based director. “It’s very important to get their cooperation.”

Foreign marketers for years have sought to find better ways to penetrate China’s vast market. Ten years ago, for example, Coca-Cola’s efforts to distribute its beverages through neighborhood outlets were stymied by state-run monopolies. And companies like Survey Research Group had to tread carefully around another government body with a special interest in its consumer information: China’s Public Security Bureau.

“They didn’t like that we were asking people a lot of questions, even though we’re careful to avoid anything political,” Tong said. “But if we mention that the information is very useful for China, and that foreign investors will use that information to invest in China, then they like it.”

Especially if it means more money in the country’s coffers.

Even the Chinese government has discovered the commercial prospects of its Communist structure. The committees started selling cable TV subscriptions and collecting fees for the state in neighborhoods in 1992. “It’s part of their government duty to sell TV,” said Sun Hongming, vice president of Shanghai Cable Television.

The groups initially did the work free, enlisting almost 1.5 million subscribers. Now they receive about 6 cents per household in commissions.

Procter & Gamble, which started production in China in 1986, was one of the first multinational corporations to find its way into the system, perhaps urged on by the precedent of Sidney Gamble, a descendant of the company’s founder and one of the pioneers of social research in China. Over the three decades before World War II, he organized teams of surveyors to keep meticulous records of Chinese buying and living habits.

Now, echoing his efforts, committee members tramp through neighborhoods collecting statistics and passing out sachets of Rejoice shampoo (known as Pert in the United States) and Ariel laundry detergent.

The prospect of a ready-built distribution network, like that offered by the neighborhood committees, has caused other companies to copy and expand on P&G;’s idea. Now companies such as S. C. Johnson, Unilever, Johnson & Johnson and PepsiCo are using the networks to distribute products and samples.

S. C. Johnson--as in Johnson Wax, Raid and Pledge--used the committee system to introduce potential customers to Soft Sense skin lotion. The company also found that in areas without hot water the groups had organized “baby washing stations” where young mothers and nannies gather to bathe children--a perfect spot to test-market products for infants.

“Chinese consumers are not used to having a lot of choice, “ said Hu of S. C. Johnson. “They’re not sophisticated, but they’re not stupid, and they can perceive a solid, quality product if we can get it in their hands.”

Coupons and discounts also do not work well to sell goods in China, where shoppers believe that if a product’s price has been reduced, that means there is something wrong with it, he said. To introduce a new brand, “delivering it door to door is the most effective,” he said.

The system has snags. Not all the samples handled by neighborhood committees end up in potential customers’ hands; some are given as gifts to friends or resold in corner kiosks, causing companies doing sampling to institute costly follow-ups. “We even had to spend our own money to buy back products from shops,” Tong, of the Survey Research Group, said with a laugh.

Still, the committees offer the most efficient way to get around China’s unwieldy state-run distribution system, and they can produce startling results.

When PepsiCo recently launched its Cheetos snack food in Shanghai, company teams using committee maps saturated this city of 14 million with samples, neighborhood by neighborhood, in seven days. In the week after the give-away campaign, the company sold out its 1 million bags of Cheetos and had to ration supplies to retailers.

“We’re making use of their relations and presence in the neighborhood,” Kelly Yu, general manager of Pepsi Foods International in Shanghai, said of the committees. “It’s low-tech, low-cost and highly controlled. We can save 10% by cutting out the middlemen.”

International manufacturers may also benefit from a new move to cut down on the proportion of older people on neighborhood committees. The groups have traditionally been the province of retired volunteers.

But in May, the government lowered the once-lenient retirement age for members--from 75 to 65 for men and from 65 to 63 for women--and raised the low stipend for committee work to attract younger, more entrepreneurial members.

The top pay, for example, went to the equivalent of $11 a month, but with a little drive, members can use their position to earn many times that. The government also hopes the money will provide more opportunities for middle-aged workers laid off from state enterprises.

And depending on the district, committee members also now are either appointed (after passing an examination) or--in a tiny expression of grass-roots democracy--are elected to three-year terms.

The result may be an enlivened neighborhood committee system that fosters new enterprise across the country.

Still, some of the older group members are resisting the rush to build material civilization at the expense of the spiritual side of their mandate.

“Before, we couldn’t sell one needle,” said Huang, the Tai Yuan committee secretary and a member of the Communist Party. “Now look at this,” he said as he flashed his group’s vendor license, marked by a supermarket-style bar code.

But to those like Zheng Cuiyu, 66, who has been a committee member near this city’s famed riverfront since 1953, the shift represents opportunities.

A few years ago, her group started some side ventures to supplement a waning government allowance. It began repairing watches and lighters, selling detergent and converting the neighborhood library and recreation center to rental property. Its slogan: “I help everybody. Everybody helps me.”

Now she is a director of a company that the committee set up with its real estate profits. She recalls the old days when the committee focused on ideology, not business.

“Our job was to support political campaigns and to encourage people to go up to the mountains and down to the countryside for education through labor.

“This is much harder work,” she said. “But I like making money.”