A Difficult Journey to a New Economy

TIMES SENIOR ECONOMICS EDITOR

To begin to grasp the full import and direction of the changes occurring in China today, visit the Beijing Yanhua Petrochemical Co. at a sprawling complex about an hour's drive from China's capital city.

Yanhua, a subsidiary of a government-owned chemical enterprise, was created last year to expand output of ethylene, a basic material for plastics, and of butadiene styrene rubber, a material for tires.

To finance that expansion, Beijing Yanhua raised almost $200 million--by selling stock on the New York Stock Exchange and the Hong Kong Stock Exchange.

"We needed the money," Chen Ge, the company's director of planning, says with a shrug, explaining why a major industrial asset of Communist China's government chose the form of financing most emblematic of capitalism.

As if to demonstrate what the money is buying, Chen points proudly to an ethylene plant under construction. He walks a visitor into a modern control room where young men and women at the keyboards of Honeywell computers control Yanhua's existing petrochemical production.

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Yet business is not brisk at the moment, with China's economy slowing. Beijing Yanhua stock (ticker symbol: BYH), brought to market by a consortium of the world's finance houses, led by Bear Stearns and Swiss Bank-Warburg, has slid to $6 per American depositary share from a high of more than $25.

Still, long-term dynamics favor the company, says analyst David Loomis of Vicker Ballas, a Hong Kong brokerage. Demand for ethylene is growing 10% to 12% a year in China, and the country can produce only half of what it needs, importing the rest. So expanding production makes sense if Beijing Yanhua can remain competitive with world suppliers.

So Yanhua officials worry about competitiveness. "We must reduce the work force to become competitive," says Wang Yuying, a director who is also Yanhua's chief Communist Party representative.

A Communist talking like an American CEO, state-owned companies floating stock on the Big Board, young people using U.S. computers to run industrial complexes--all these and more are part of the transformation of China today.

It's hard to say in a word what China is evolving into--an economy guided by open markets, surely, but still dominated by the state, or perhaps a decentralized economy no longer hewing to five-year plans but not yet capitalist, either.

To their credit, the Chinese leadership isn't arguing semantics but is making great changes rapidly in what a leading economist here calls a New Deal for China, quoting Franklin D. Roosevelt with admiration.

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Until last year, not only the industrial but the essential social base of China's economy lay in more than 300,000 state-owned enterprises employing more than two-thirds of the work force, making everything from steel to toothbrushes and providing housing, medical care and other social benefits.

However, in the 20 years since the late Deng Xiaoping began restructuring China, the economy has relied on more than state companies alone. Town and village cooperative enterprises have grown up and now account for more than half of China's annual output of goods and services. Entrepreneurial ventures have mushroomed.

Then last year the Chinese government decided to reduce the number of state-owned companies to 1,000, forcing the rest to either make a profit or vanish. It decreed that company-owned housing should be sold to the employees. The employees' down payments will pay some of the state enterprises' massive debts, goes the government's thinking. New mortgages on the housing will give state banks an opportunity to make good loans.

As a result, China today is bustling with change and commercial energy.

But there are severe problems too. Unemployment is rising as enterprises restructure: 13 million out of work in China's cities this year, probably more next year, economists estimate.

The great fear in international markets and in the rest of Asia is that China will have to devalue its currency, the yuan, to increase exports. Such a devaluation would spur a downward spiral in other Asian countries and possibly a worldwide recession.

But out of both self-interest and statesmanship, China's government, led on economic matters by Premier Zhu Rongji, has pledged not to devalue. It is looking rather at developing China's vast domestic economy, potentially the largest in the world with its 1.2 billion people.

"We will have a New Deal for China, as President Roosevelt had for America in the 1930s," says economist Hu Angang of Qinghua University, China's leading center of science and math learning.

Hu even mentions the Tennessee Valley Authority as a model.

"China's need to build roads and waterways will contribute to the world's prosperity," Hu goes on, making a case for the Beijing government's plan to sell $750 billion worth of bonds on world markets to finance infrastructure.

Can China hope to borrow that much money? Theoretically, yes.

By the International Monetary Fund's method of calculation, China's gross domestic product already stands at $3.5 trillion, close to that of Japan, and is growing much faster.

The IMF statistics capture a trend, says economist Stephen Roach of Morgan Stanley. "Post-crisis Asia offers far greater opportunity for China than Japan," Roach says.

Whether or not that turns out to be true, the high savings rate of the Chinese people--40% of their incomes, a tribute to the rising living standards of the last 15 years--provides a solid foundation for China's economy as it undergoes important changes.

In another move toward modernization, the government is issuing $32 billion in bonds to recapitalize the 18 state-related banks and turn them into commercial banks. Heretofore, state banks have served merely as conduits to finance state enterprises.

Zhu Rongji has already persuaded an old friend to set up an independent commercial bank as a model for what the state banks should become.

China Minsheng Bank, China's only non-state bank, was organized two years ago by Jing Shuping, an 80-year-old businessman, public figure and longtime associate of President Jiang Zemin and Zhu.

Minsheng, capitalized at $200 million by investments from town and village enterprises, makes loans to non-state companies--farmers and merchants cooperatives, entrepreneurs and the new high-technology firms being set up in the shadow of Beijing's universities.

"We are a commercial bank in the real sense," Jing says. Real sense? "We lend on collateral and disciplined credit terms. Our books are audited by Price Waterhouse," says Jing, tall, erect and vigorous as he leads a company of bright young bankers.

"Non-state enterprises are the fastest-growing organizations in China's economy," says Jing, a onetime entrepreneur himself.

Jing owned a cigarette factory in 1940s Shanghai, then saw it taken over in 1956 when all industry was nationalized. But from 1954, shortly after the beginning of the Communist regime, Jing has served on the People's Consultative Conference, a high-level advisory group to the government.

And now he is bringing back private finance with full government approval in a bank named Minsheng, a word meaning livelihood. The name itself is evocative. Minsheng, or livelihood, was one of the three basic rights--the other two were democracy and civil rights--proclaimed by Sun Yat-sen when he set up the Chinese Republic in 1912.

Conscious of history, China today is ambitious to have its economy expand and to take its place among the world's leading nations. Scholars see the process as manifest destiny.

"China will grow 8% a year while the developed countries grow only 2%. China will be the engine for the world," economist Hu declares.

And Chinese officials at the highest levels are demanding that their country be admitted to the World Trade Organization, a move that would lower tariffs on its exports. So they miss no chance to point up China's helpful role in the current turmoil.

China's deputy foreign minister, Yang Jiezhe, seated in an elegantly furnished receiving room in Beijing's new foreign ministry, says, "We have played a stabilizing role in the Asia crisis."

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Yang, who has degrees from the London School of Economics and two universities in China, makes his country's case: "We have made commitments and paid a price. We did not devalue our currency, and we have suffered in our exports and in reduced foreign direct investment."

Clearly, says Yang in arguments no doubt rehearsed for President Clinton's Beijing visit later in June, China should gain entry to the World Trade Organization and a welcome to all the leading councils of the world.

Without a doubt, if energy and ambition are anything to go by, China in the years ahead will gain all the recognition it is working for.

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