The plant has debts totalling two billion yuan (about HK$1.8 billion) to three billion yuan, according to the official press, equivalent to nearly three times the value of its assets.

'There is little demand for these engines and things will worsen when we join the World Trade Organisation,' the resident said. 'Many of the workers have been laid off.

'But how can they shut the plant and put so many people on to the street? Beijing already has 750,000 people out of work.'

That is about 10 per cent of the urban population.

Faced with this crisis, the city government, which owns the plant, has decided on two measures. One is to sell 180,000 square metres of its land, where the demolition men are at work, to earn money to pay the wages and daily running expenses. The other is to merge the plant with the Beijing Auto Group (BAG), which makes trucks, vans and jeeps - and is losing money.

The merged company, Beijing Auto Holding, officially comes into existence today.

The merger makes no economic sense, since both companies are losing money and face strong pressure to move as part of the city's plan to transfer all the factories from the central urban area into the suburbs, a scheme that would involve expenditures of billions of yuan to build a new plant.

In addition, the business outlook is worsening with the approach of WTO entry. China's car sector will be one of the hardest hit thanks to cheaper imports and stronger competition, as foreign makers buy into local ones.

Last year, China's more than 100 plants produced two million vehicles, less than any single one of the world's top 10 car-makers. Economic sense dictates that most of these plants close down.

Last Monday, the State Development Planning Commission lifted price controls on domestic cars, which will intensify the existing price wars.

'The merger is for no purpose,' said one BAG official. 'The government has no strategy for the two companies after the merger. It is a way to buy time.'

BAG gains little from inheriting the debts of the engine plant.

This is what its chairman, An Qingcheng, said at a national car conference in April: 'To put it nicely, Beijing's car industry is in a period of restructuring. To put it bluntly, we have entered a period of life and death.'

Asked about how the engine plant has reached such a pass, an official of the Beijing City Economic and Trade Committee, responsible for the two factories, said that he could say nothing 'because we are very close to the central government'.

But, according to the 21st Century Economic News , the plight of the engine plant was the result of a bad decision by the government.

It had flourished throughout the 1980s and early 1990s, with clients all over China, and did so well that in May 1993 it left the BAG and set up as a separate company, with assets of 2.5 billion yuan. Its most popular product was its 492 engine. Then the State Planning Commission decided to install in the plant a production line from General Motors to make two-four litre engines, at a cost of 500 million yuan, over-riding the wishes of the factory managers who wanted to continue selling their own engines. They argued that the imported model would cost 5,000 yuan more than the 492 and that the final cost to users would increase because customers would need to buy imported spare parts to keep them running.

The production line installed has never turned out a single engine, and has cost the factory millions of yuan in maintenance.

'It is still in working order,' one of the staff said. 'If someone else wants it, we could give it away. If we wait several more years, it will become scrap metal.'

Had the production line never been installed, the plant would not be in the mess it is today.

The BAG also blames its losses on government decisions, above all its inability to obtain a licence to make a passenger vehicle, the fastest growing segment of the market. Its main products are trucks, vans and jeeps, including two models unchanged since the 1960s, and the Cherokee, produced in a joint venture with DaimlerChrysler since 1985.

Its share of China's light-vehicle market has fallen from more than 20 per cent at its peak to about 10 per cent and is still dropping.

In 1993, it planned to make a passenger car similar to the Audi, and its joint-venture partner, then American Motors, transported a production line to the West Coast for shipment to China. But the central government refused to approve the project, because it wanted to protect existing car-makers. Similar car projects, with Hyundai of South Korea and Renault of France, collapsed for the same reason.