'The growth rate of township and village enterprises keeps dropping' the China Economic Times, complained.

In 1997, investment shrunk for the first time by a sizeable 5.6 per cent.

At their peak the enterprises were creating more than 10 million jobs a year, but by 1996 this had slowed to six million.

'In the past two years 10 million jobs have been lost in the countryside,' said a report by Chen Jianbo, an expert on the rural economy at the State Council's Development Research Centre.

The slowdown in the urban economy and efforts by major cities to expel rural migrants had led to the disappearance of another 10 million jobs.

'Altogether the countryside has lost 20 million jobs in the past two years,' he said.

The loss of income for rural households, a third of whose cash comes from such employment, makes it difficult for the Government to stimulate rural demand.

Furthermore, county governments have seen their own revenues collapse - just as many of their enterprises have closed or are operating in the red.

Profits from the enterprises in 1997 contributed 45 billion yuan (HK$42 billion) to county governments, allowing them to subsidise agriculture, education and infrastructure spending.

But governments in rural areas, especially in central and western provinces, now find they cannot pay their employees and officials are going months without wages.

Some of the local governments that invested in failed ventures are running deeper and deeper into debt. Some have debts of five million yuan, while others are struggling to pay roll-over debts of 10 million yuan.

In an effort to raise money, local governments have taken to levying numerous fees and taxes on peasants. Beijing has been trying to ban hundreds of these illegal fees, but without much success.

So incomes are dropping and taxes are rising, which has meant that last year's financial stimulus programme has not been sufficient to turn the economy around.

Some now advocate a package of measures to breathe new life into the enterprises by making it easier for them to borrow money or to introduce tax holidays.

One reason the rural enterprises could grow so quickly is that they ignored all rules on safety, pollution and quality standards.

Products from such enterprises are notorious for being shoddy and in some cases dangerous. Reports of exploding beer bottles, poisonous medicines, dangerous liquors and so on are legion.

In 1997, the central Government ordered the closure of many factories which were responsible for massive water pollution. Many rivers have been ruined by the uncontrolled discharge of wastes.

State-owned enterprises naturally complained that the rural enterprises enjoyed unfair advantages.

China now faces a difficult choice between closing these companies at the cost of rural jobs and rural stability, or favouring the cities. Urban unemployment is even more dangerous and the state-owned enterprises have run up even bigger debts than the rural enterprises and the county governments who operated them.

Levelling the playing field would, in theory at least, be a fine idea because it would allow only the fittest and leanest to survive.

Vested interests make this hard to adopt as policy. Yet in practice it may be happening for producers of some goods like television sets or garments where the bigger enterprises with deep pockets will force the closure of local competitors.

Unfortunately there is no alternative employment in rural areas.

Another problem is that the 50,000 agricultural co-operative banks that take peasant savings and lend money to invest in these failed ventures now have liabilities exceeding their assets. At the end of the day the state is going to have to bail them out and shoulder the cost.