HOW do you reform an ageing state enterprise in Shenyang? The official prescription reads more like a riddle than a solution: first, throw away the iron rice bowl; then build big boats, graft new plants, swap caged birds, or liquidate. For many large public industrial enterprises in northeast China straining under the pressure of fierce competition and a national crackdown on lending, this metaphorical goulash translates into 'find a way to make a profit, or face bankruptcy'. Shenyang has 980 state enterprises which employ about 60 per cent of the working population and account for 41 per cent of industrial output. Like public-sector enterprises worldwide, they are faced with obsolete technology, insufficient capital, excess labour, mounting debts, enormous social obligations, industrial pollution, poor management and a distorted regulatory regime. State firms cringe at the prospect of eliminating the cradle-to-grave communist social welfare system known as the 'iron rice bowl', but almost all leaders concede that some elements of Maoism have outlived their usefulness. Their main worry is how to reform without stirring social unrest. Zhang Dianjun, a full-time member of the Shenyang Economic Structural Reform Commission, is a blunt student of market economics. 'Bankruptcy is a good thing. State assets can be recycled and the whole enterprise system can be improved,' he says. Three medium-sized state enterprises have already gone under this year and another two will declare bankruptcy by the end of December. Mr Zhang said five more large companies, and about eight smaller ones, would probably go bankrupt next year. But even as bankruptcy curbs one problem - the drain of state assets - it creates new ones, such as finding employment for dismissed workers. In Shenyang, only about 30 per cent of enterprises are running well; about 30 per cent are barely making ends meets; and the rest have no chance of survival. Residents say that more than half of the enterprises cannot afford to pay their workers, much less turn on the heat without government assistance. Still, bankruptcy will remain a last resort for years to come because the government is in the early stages of organising the labour market, social security, pension schemes, medical insurance plans and unemployment insurance, necessary to handle the volatility of a market economy. That is why officials and factory managers alike speak of building big boats (zao da chuan ), grafting new plants (jia jie ) and swapping caged birds (teng long huan niao ). Shenyang has already assembled six 'big boats', or group companies, to support both strong and weak enterprises in key industries, such as electronics, chemicals and medicine. Individual companies are not always interested, though. They argue that they 'would rather be the head of a chicken than the tail of a phoenix' (that is a big fish in a small pond). 'Grafting new plants' is another option. State enterprises can look for foreign joint-venture partners and co-operative agreements, but the companies' large debts often scare away potential investors. So far, 28 medium and large-sized state enterprises have located foreign partners, which include Toyota, Toshiba, Panasonic and Sanyo of Japan, General Motors of the United States, and the Kerry Group, New World and China Resources of Hong Kong. 'Swapping caged birds' calls for replacing old machinery with technologically advanced equipment to upgrade the company's efficiency and product quality. This is generally restricted to small enterprises because of the high costs. Shenyang officials have bigger ambitions. This year they launched a pilot project to test the feasibility of creating a 'modern enterprise system' by 2000 which embraces all companies in the city. Twenty-four state enterprises were selected for the experiment, but only one, the Shenyang Machine Tools Co, had been given final approval by the Internal Trade Commission due to difficulties in drafting practical reform plans, said Mr Zhang. Once approved, each of the enterprises will see its long-term debts converted into state investment, bad debts cleared, redundant workers purged and re-employed, and social welfare burdens absorbed by various government agencies. The government can only assist in the reform process, though. Factory managers agree that turning around money-losing companies requires painful changes in management techniques and utilisation of workers, and investment in new technology. 'It's easy to say, 'Let's reform! Let's reform!' But when it comes to making changes that will affect individual workers, few are eager to go along,' Ding Boxiong, deputy chief economist at Shenyang Transformer Works, said. 'We can't fire workers and we can't lay them off. 'We're limited to diversifying into other businesses to find a place for our redundant workers.' He estimated that 2,000 of the company's 9,100 workers were unnecessary. The company also supports about 2,000 retirees. Shenyang Transformer Works has one big advantage over many state enterprises in the city: it makes a profit. This year it was listed on the Hong Kong stock exchange as a subsidiary of Northeast Electrical Transmission and Transformation Machinery Manufacturing Co (NEMM). Nevertheless, a nationwide clampdown on loans since the summer of 1993 has hampered business growth. Approvals of power projects, which are the group's main customers, have slowed to a trickle, and Mr Ding said he did not expect a dramatic improvement before the second half of 1997. Shenyang Steel Rolling General Mill is also one of the bright stars. Under the leadership of Zhang Zhongqiang the company has begun turning a profit, but austerity measures and a weak steel market have caused turnover to drop about 20 per cent this year. 'Mao Zedong was famous for saying 'The people must have enough clothes and food' (feng yi zu shi ),' he said. 'What I say is: 'Revitalising the enterprise will reward the workers.'' By creating a merit system and a competitive wage structure, he boosted pre-tax profits per worker from 6,107 yuan (about HK$5,679) to 7,100 yuan between 1993 and last year. He has also expanded the company's product range from 30 to 144 since 1992 and found a niche for the company in specialised steel products for cars, trains and machinery. But a 700 million yuan, joint-venture steel mill with Toyo Steel Corporation of Japan holds the key to Shenyang Steel Rolling's long-term profitability. The technologically advanced mill, which will go into operation next April, will boost the company's steel production capacity from 50,000 tonnes per year to 320,000 tonnes per year. That will eliminate the need to purchase steel from other companies for its rolling and processing activities, drastically cutting costs and improving the company's competitiveness in the domestic market. Summing up his theory of enterprise reform, Zhang Zhongqiang said: 'If you've got a noodle maker, you'll never produce dumplings.'