If it were not for Baling Petrochemical Corp, Yueyang would have remained a humble agricultural city. The petrochemical group, the ninth largest under the control of China National Petrochemical Corp (Sinopec), has been the driving force behind Yueyang's industrialisation. It contributed about 27 per cent of the city's industrial output, which totalled 13.7 billion yuan (about HK$12.7 billion) in 1995. Mayor Huang Jiaxi said: 'If it were not for Baling Petrochemical, the city would not look as it does now. 'But without Yueyang's strategic location, the petrochemical group would not have grown so quickly.' Yueyang's Economic Commission vice-director, Li Xianli , said small chemical fertiliser and pesticide plants mushroomed after Baling's first subsidiary, Changling Oil Refinery, was set up by state planners in 1969. Baling vice-general manager Wang Wenxi said the state decided to set up the group in Yueyang because there was no large petrochemical company in the area. The city's strategic location, as Hunan's only port on the Yangtze River and with the Beijing-Guangzhou Railway passing through the city, made it an ideal place for a petrochemical manufacturing base, he said. Baling consists of four major plants - Changling Oil Refinery, Dongting Nitrogenous Fertiliser Complex, Yueyang General Petrochemical Works and the newly built Yingshan Petrochemical Works. It also has two Sino-foreign joint ventures: Yueyang Baling Oil Industrial Co with its partner, the Malaysian conglomerate Chinteik Brother Holdings; and Zhongchen Building Ceramic Co, which is tied to an Italian company. Baling ranked 43rd among China's largest state enterprises two years ago, with fixed assets of 6.94 billion yuan and a workforce of 38,000. Sales in 1995 were eight billion yuan and profits and taxes 991 million yuan. Sales until November last year were 7.9 billion yuan, while profits and taxes were expected to fall, Mr Wang said. Mr Huang said Yueyang was now the third-largest petrochemical base along the Yangtze River, after Shanghai and Nanjing. While the city remains insignificant compared to petrochemical giants such as Jilin and Liaoning in the northeast, it envisions a rapid expansion of the industry by the turn of the century. Mr Li said: 'The petrochemical industry will be the pillar industry of our economic development in the Ninth Five-Year Plan from 1996 to 2000. We will become a significant petrochemical base in southern China.' The city's hopes of realising its ambition rely heavily on state support for Baling. Mr Wang said Baling would invest about 13 billion yuan by 2000, which would be financed by Sinopec, the Hunan provincial government and the group itself. The largest investment was to support its massive technical reform programme to expand production capacity. The reform is critical not only to the group's future development, but also to its survival in a difficult business environment. Mr Wang said: 'If we don't proceed with the technical reform, we cannot survive amid keen market competition. However, if we can successfully implement reform and expand production capacity for marketable products, we can gain a foothold in the industry by 1998.' China's petrochemical industry was hard hit by the dumping of imported products after import tariffs were cut last year, as well as the rising price of crude oil. Among Baling's four main plants, only Changling Oil Refinery was profitable last year, while the other three barely broke even. Mr Wang said: 'We need to expand production capacity at existing plants in order to enjoy economies of scale.' As part of the technical reform, Baling plans to invest 300 million yuan to expand annual production capacity of caproloctam from 50,000 tonnes to 70,000 tonnes at the Yingshan Petrochemical Works. It will also increase yearly production capacity of urea, a nitrogenous compound, from 500,000 tonnes to 800,000 tonnes at the Dongting Nitrogenous Fertiliser Complex. In order to relieve a supply shortage of intermediate petrochemical products for Yueyang General Petrochemical Works, which mainly makes downstream products, the group plans to invest 800 million yuan to build another oil refinery. Mr Wang said Sinopec had secured crude oil supplies from the Daqing Oil Field for the group. Despite a series of big investment plans, Baling is being dragged down by problems facing all state enterprises as China moves towards a market-oriented economy. Yingshan Petrochemical Works, built in 1992, has been weighed down by huge interest payments since the state converted its investment of 2.1 billion yuan in the plant into loans. Director of Yingshan Petrochemical, Sun Yufu said: 'We planned the plant in accordance with principles of a planned economy, but now we have to survive under a market economy.' Although Yingshan was built only a few years ago, it was saddled with the huge social welfare obligations of older state enterprises. How well Baling can deal with these problems will be critical to Yueyang's hopes of industrial success.