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SCMP Reporter

Of all the business ventures gone awry, none ever mastered the concept of futility like Qingdao's Textile Mill No 9.

  At the state-owned mill, workers and managers produce garments nobody needs at a price no one can afford - that is, when they make anything at all.

  Multiply the mill's dilemma 370,000 times and you have the makings of the world's clumsiest welfare scheme masquerading as an industrial sector.

  In pre-communist China, the mill ran at a profit for 30 years. Now, as a state-run enterprise in the mainland's 'market economy with socialist characteristics', the company bends all laws of economics to the breaking point.

  Xie Siliang , director of the mill, said: 'It has been a very heavy burden for state-run factories [since reforms were introduced in 1979]. We are facing some difficulties.'   The factory has 3,000 workers, another 2,000 retired employees on pensions, plus the cost of a health plan and schooling to cover.

   Monthly production costs include US$210,800 in wages and $192,800 for interest charges on old debts at a state-owned bank.

   Management has spent nothing on new equipment since 1985. Mr Xie admitted: 'All our products are very ordinary and not competitive.'   Allied to this, government-fixed prices for labour, cotton and electricity have risen steadily in the past two years.

   Even a 10-year contract to supply uniforms to the People's Liberation Army is not enough to get the No 9 mill in the black. 'We are actually losing money,' said Mr Xie. 'With all these problems, the only way to stay in business is to borrow.'   The more China's debt-ridden state enterprises produce, the more money they lose.

  The more they lose, the more they must borrow from the state to produce all over again.

  The World Bank, in its 1996 Development Report, described China's state sector as 'a drag on growth and employment creation', with combined debts of more than $620 billion, warning: 'Heavy losers, with little future, need to be closed down.'   Yet China's mines, mills and factories received more than $10.6 billion in loans in the first half of this year. Annual write-offs on bad debts will average $20 billion by December, according to the mainland's central bank.

  As Qingdao's Communist Party secretary, Yu Zhengsheng, said: 'This may be difficult to understand in the West.'   Qingdao, an old German-built port in east China's Shandong province, is typical of the country's heavily subsidised industrial regions. Seventy per cent of the workforce works in state enterprises.

  'The government has the budget to help enterprises in difficulty for the welfare of the workers,' said Mr Yu.

  'In a market-oriented economy, it is only reasonable to have some money-losing enterprises. Our problem is, we have too many.'   About four in 10 local factories are losing money, according to official estimates.

  Mr Yu said that, in the heyday of state planning: 'We preferred that everybody worked. But we paid no attention to efficiency. It will take a fairly long time for Qingdao companies to get in a better situation.'   Nearly two decades after proclaiming the death of Mao-era industrial rule, a hopeless number of state factories show no sign of adopting market economics.

  In the words of the China Daily newspaper: 'The state-owned economy will remain the pillar of the national economy.'   Some pillar.

  Of 20 factories run by Qingdao's Municipal State Assets Commission in 1992, all but four remain in business despite marginal operations. Bankruptcy is never an option. Instead, 'mergers' are common.

  Some 215 money-losing enterprises were 'merged' in China in the first half of the year - a process whereby, in Qingdao, the managers of a failing state-owned pencil factory were appointed to run a failing state-owned hotel.

  Nobody seemed to mind, least of all workers guaranteed up to 80 per cent of their salary while awaiting reassignment. 'The performance has been very satisfactory', boasted one city official.

  Other Qingdao cadres have taken to the new economy with revolutionary zeal.

  If Beijing decrees it is glorious to be rich, factory managers are out to prove they are rich, though the results would leave auditors in stitches.

  Exaggeration of production claims is so widespread that the National People's Congress passed legislation last May to outlaw the deliberate falsification of statistics.

   At the Qingdao Aucma Group, a state-run freezer factory, business is reportedly so good the party committee chief acting as president travelled to Europe in September to 'meet investors'.

  Vice-president Wan Xuejun said: 'We are the freezer manufacturing kings!'   Aucma claims sales revenues have increased 269 per cent since 1990, net profits are up 511 per cent and the assets of the factory on the edge of town have grown faster than General Motors.

  Ms Wan credited the company's performance to 'good-working and plain living', and a handsome $1,800 bonus she paid herself last year 'because of my heavier responsibility'.

  Aucma pledges it will produce one million freezers this year - the equivalent of nearly two a minute - though, on one weekday afternoon, not a single freezer rolled out the factory gate and half the shop-floor was used to store Korean-made compressors.

  'We do not deny some factory directors, in order to promote their own fame, exaggerate production figures,' said party secretary Mr Yu.

  'To get rid of this problem, you can't simply dismiss a certain leader or hold a meeting and give a speech,' he said.

  Earlier this year, China's state sector made history by reporting its first quarterly net loss - an estimated $361 million - since the introduction of market reforms.

  By official estimates, China will invest more than a trillion dollars on mills, mines and other state-run relics over the next five years.

  At Qingdao Textile Mill No 9, director Mr Xie has no illusions as to what the Five-Year Plan will bring.

  Management is desperate to score another bank loan to upgrade the plant's antique looms and perhaps to 'merge' with a slightly less inefficient mill in Inner Mongolia.

   'Now, winter is coming,' Mr Xie said. 'Our target at the end of this year is just to keep our balance.' 



Economic dinosaurs that refuse to die