The privatisation of China's 250,000 state owned enterprises (SOEs) has begun, but in some places such as Shunde in Guangdong province it has already been completed - in great secrecy. Shunde prefecture is one of the four 'tigers' of the Pearl River Delta and home to some of the largest and most successful collective enterprises in China - churning out air conditioners, refrigerators, cookers, VCRs and many other domestic appliances and consumer goods which are shipped through Hong Kong. Southern Guangdong has long been at the forefront of China's economic reforms, a tradition which some way stretches back to before the opium wars, but never before have the local Cantonese done anything so daring. While the rest of the country has dithered over the 100 million workers employed by the state in enterprises whose losses have risen, steeply depleting government tax revenues and burying state banks in bad debts, Shunde just went ahead. 'It is done. We just sold them all off. Several hundred altogether. In 1992 we could see it was going to be inevitable,' said Zhao Guanya, deputy party secretary of the Wanjiale Factory. His company, which listed on the Shenzhen stock exchange in 1992 and employs 2,500 workers, claims to be the largest manufacturer of gas-fired water heaters in Asia. Local officials say they have tried to keep quiet about what they refer to as 'experiments' for fear of offending Beijing. 'Some left-wing hard-liners insist that the SOEs must remain in the ownership of state. We were worried that if they heard about it they might stop us,' one said. Officials in Shunde do not call the process 'privatisation' but say it is about turning enterprises into joint-stock companies in which the government has a large and often controlling stake. The scale of the problem confronting China is much bigger than statistics reveal because in practice there is no difference between SOEs which operate under central government plans, and collective or township enterprises which are the responsibility of local governments. 'They are all supported by the government and the party which are obliged to keep them going no matter how big are the losses they accumulate,' says Deng Weigen, the Party Secretary of Beijiao township. Hailed by the local press as the 'Professor Party Secretary' because he has a doctorate in economics from Guangzhou's prestigious Jinan university, Mr Deng has guided the process in this pioneering model township. Beijiao is simultaneously home to some very profitable companies such as the listed Meidi company, which employs 7,000 workers largely making air conditioners, and some incorrigible losers, all of which produce goods for export. About 70 of these township enterprises have run up debts exceeding 300 million yuan (about HK$278.4 million) In many cases, they are technically insolvent with their liabilities far exceeding their assets. Until recently, the local government assumed unlimited responsibility for keeping them going and bankruptcy was out of the question. However, Mr Deng admits that the real nub of the problem is not their economic inefficiency or the fact that their goods cannot find buyers, but corruption. 'The factory managers kept transferring state assets and loans to their relatives. There were a lot of husband-and-wife factories, or cases where money was passed on from father to son,' he says. In other words, the factory directors channelled state assets to operate private factories run by other members of their family. 'We call this an underwater current. It has proved very difficult to prosecute many of them. They either fled or we could not come up with the evidence,' Mr Deng says. In effect, the local authorities have been forced to declare an amnesty in order to draw a line under the haemorrhage of state loans and assets. After selling off the factory, usually to the state-appointed manager, no more state loans were given. In principle, all the factories were publicly auctioned off after a price was worked out by calculating what it was worth minus its liabilities. Whoever put forward the highest bid won. 'Of course, many enterprises were worth nothing,' Mr Deng says. The new owners have undertaken responsibility for the existing debts but are not obliged to pay interest on the outstanding loans. So far the government has been unable to recover any of these loans and after factoring in interest, the debts in fact keep growing. Yet from now on the local government can count on revenues from tax revenues and land rent to offset the losses. The new owners can buy the enterprises with a down payment and pay the rest of the principal stage by stage. The workforce is at the same time given a guarantee that there will not be mass layoffs for at least one year. 'We drew up rules saying that no more than 5 per cent of the workforce can be sacked at the beginning,' Mr Deng says. 'There hasn't been any industrial unrest but we did set up a complaints hotline. They may or must reply within seven days.' For those enterprises which are not on the brink of insolvency, the share distribution formula has been a matter of heated debate. Meidi, for example, issued shares by giving 50 per cent to company employees, 30 per cent to the government and offering 20 per cent to the public. Elsewhere the formula has been, 40 per cent of shares going to the government, 30 per cent to the management and 30 per cent to the workforce. 'The workers usually sold their shares immediately, often to the management because they didn't understand their value,' Mr Deng says. The biggest headache has been creating a welfare system of health and accident insurance, pensions and housing to replace that provided by the state-run factories. Shunde factory managers like Mr Zhao claim this has been sorted out satisfactorily, pointing out it is not so difficult in Shunde because it is a wealthy place. Post privatisation, management is then held personally responsible for further debts that accrue and this is supposed spur them to increase the efficiency of production. In practice it has turned out rather difficult to make this work as long as there is still not a level playing field in the whole economy. Competitors may get special treatment because they are in special economic zones, others because local governments subsidise them and their exports. As a result inventories continue to pile up. 'It is a big problem - local governments elsewhere are bound to give their enterprises special policies. We hope there will be fair competition in the rest of the country eventually,' Mr Deng says. At this year's 15th Party Congress, new policies will be set and the rest of the country is almost certainly bound to have to follow Shunde's example in way or another. 'Experts are mostly debating whether to call this a 'partnership system' or a 'state-holding system',' Mr Deng says. In his factory's line of product, Mr Zhao reckons there are now 100 competing factories and within a decade only three or four big manufacturers will be left: 'It is really survival of the fittest. The planned economy is dead.' One competitor in Shenyang in northern China has shut down completely, despite investment by a British company. Wanjiale is thinking of buying it up if the price is right. Chief competitor in Shunde, Shenzhou, once the top brand in China, has gone into partnership with Germany's Bosch which bought shares in the Chinese company. Yet it has lost market share to Wanjiale which has Japanese partners. Mr Zhao claims quality, efficiency and above all marketing are now the key - not subsidies: 'Soon only giants will be left.'