Down a rutted road lined with dirty and decaying brick houses next to the Jialing River stands a five-storey tower of rusting steel, covered with workers caked in dust and black powder. This is the unlikely spot for the next milestone in the mainland's economic transformation. The 688 workers and managers have purchased the Jialing chemical plant for 4.5 million yuan (about HK$4.19 million), making it the country's largest worker buy-out to date and the first of a medium-size state factory. Worker buy-outs are increasingly common, as local governments rush to sell small and medium-sized state companies that are losing money. In many cases, workers are forced to buy, with the threat of closure if they do not. The abuse has become so widespread that the Ministry of Labour last week issued an order reaffirming the ban on compulsory buy-outs. That was not the case at Jialing, where workers have been trying to take a share in their factory since 1988. The mastermind behind the buy-out was factory chief Li Shouchang, who paid 270,000 yuan to become the largest shareholder - with 7.63 per cent of the shares - and president of the new company, Chongqing Jialing Chemical Products. It was established on June 18 last year, with a registered capital of 10.53 million yuan. Of the workforce, 688 paid an average of 6,000 yuan to buy shares. Only two opted out, one saying he did not have enough money, and the other was said to be suffering from mental illness. They have taken over a 52-year-old plant with assets of 150 million yuan and debts of 136 million, producing chemical products for sale to the mainland and abroad, the most important being potassium permanganate, of which it exports 7,000-8,000 tonnes a year. For Mr Li, an imposing man who risked his life for four years repairing railways destroyed by United States bombers in north Vietnam, the buy-out was the end of a 10-year battle to get the government out of his business. 'It is interference from government departments that drove us to the brink of bankruptcy, ' he said. 'It is this interference that is the main reason why China's state companies perform so badly. 'If we had let the state retain 1 per cent of the shares, some bureaucrats would have used them to try to run the business.' So the government now holds no shares and has no right to interfere. By the middle of last year, the economic condition of the plant was so bad that it came down to a choice between the buy-out or bankruptcy. Between 1994 and 1996, the firm lost 20.67 million yuan and its debt-asset ratio reached 91 per cent. By June last year, it had a net asset worth of only 14 million yuan. No one else was interested in taking over the factory, leaving a worker buy-out as the only hope. The purchase price was reduced from 14 million yuan, which the workers could not afford, to 4.5 million by subtracting the value of invisible assets and taking into account the financial burden that would have fallen on the state if the workers had been fired. The shares the workers have bought are not tradeable and can only be sold to other shareholders. But they say they are optimistic. It was a risky decision, said worker Chen Wenyi, 47. With 28 years at the plant, he earns 700-800 yuan a month and invested 1,000 yuan. 'Some members of my family were opposed but I persuaded them, ' he said. 'For me, the issue was taking responsibility for my own plant and being paid according to my work instead of the old way under which you were paid whether you worked or not.' Su Jue, the head of the sales department who joined the firm in 1993, bought shares worth more than 100,000 yuan. 'I am confident of our products, which have high added value. They are polluting, and developed countries do not want to manufacture them.' Many state firms cannot pay wages or medical bills - the two most basic demands of workers. As a result of the buy-out, the workers have thrown away the iron rice bowl of being a state employee and bet their future employment, wages, medical insurance and pension on the new firm. Chongqing Jialing Chemical Products received two privileges available to such worker buy-outs - a three-year exemption from local taxes and a three-year grace period on repayment of interest and principal on its debts. It soon received a dose of the cold reality of life outside the state sector. Its banks stopped providing new loans, just when the cost of one of its principal raw materials, potassium chloride, soared. For 110 days in a row, it had just five days worth of stocks. Mr Li believes the worst is over. 'We expect sales this year of 200 million yuan and aim to pay back the 11 million we lost last year. I expect sales next year to rise 68 per cent and production to reach 30,000-32,000 tonnes.' He attributes the turnaround to the improved motivation of the workforce, the dismissal of 80 white-collar staff, a level of technology as good as that abroad and the fact his competitors are poorly run state factories. Looking further ahead, Mr Li envisages a listing of the shares, at home or abroad, and possibly moving the plant to the suburbs and selling its 6.7-hectare site in central Chongqing, worth about 90 million yuan.