Date: Sat, 12 Feb 1994 22:33:32 -0500 Subject: CCF #9406 (Weekend Edition: China's Economy in the New Year) ==+==+==+== C h i n e s e C o m m u n i t y F o r u m ==+==+==+=== Sunday, February 13, 1994 (Issue No. 9406) Weekend Edition: China's Economy in the New Year +=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+= Chinese Community Forum (CCF) is a journal published on China-Net. CCF is dedicated to the discussion and debate on the issues related to the Chinese community. The opinions expressed here do not necessarily represent the views of the Editorial Board of CCF. Contributions to the discussions and suggestions of new topics are very much appreciated. +=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+= Table of Contents Author | # of Lines ============================================================================ 1. China: Birth of a New Economy...........Joyce Barnathan, et al........244 2. THE ROAD TO MARKET: A TALK WITH ZHU RONGJI.......Business Week.........90 3. "Red Capitalists" On The Takeover Trail..........Pete Engardio.........83 ===========***==========***==========**==========***==========***=========== From The Editor ---------------------------------------------------------------------------- We have stepped into 1994, the 16th year after Deng Xiao-ping launched his market oriented economic reform. At the beginning of the year, we have heard a lot of bold talks about the new reform steps the government is going to take in this year. The first we saw was to unify the two-tier currency exchange system. What will be the next? Zhu Rong-ji, the so-called "economic czar" or the Chinese Gorbachev, what is his vision about the reform in 1994? Will he succeed? We herein provide our readers several articles and an interview with Zhu Rongji, which were carried on the Western news media. We invite our readers to read these articles and write to us your opinion, your expectation and your frustration. ---------------------------------------------------------------------------- 1. CHINA: BIRTH OF A NEW ECONOMY............... ..........Joyce Barnathan, Pete Engardio, Lynn Curry and Bruce Einhorn..244 ---------------------------------------------------------------------------- Vice-Premier Zhu Rongji is an ex-acting taskmaster. The intense, technocratic boss of all China's economic affairs has scant patience for error. During an interview in Beijing's Purple Light Pavilion, an ornate meeting hall built during the days of the emperors, this drafter of China's boldest reform package in a decade reels off one economic statistic after another without notes. He also repeatedly interrupts his interpreter to make sure she has given his exact meaning--and nothing less. "Banking," he says, when she mistranslates a word as "financial." Meanwhile, nine aides sit nearby, scribbling notes. Zhu's leadership is now being put to the supreme test. Appointed governor of the nation's central bank last summer, he has been showered with admiration from the international business community for his vision of China's economic future. But at home, his abrasive style has left enemies --and more than a few who hope he'll fail. Now, with his job on the line, Zhu is pushing ahead with a revolutionary agenda to forge a modern, market- oriented economy. In an exclusive, two-hour talk with BUSINESS WEEK, Zhu laid out in detail his three-pronged plan to federalize the nation's unwieldy banking and tax systems and also overhaul state industry. The blueprint, he says, is "comprehensive, extensive, in-depth, and unprecedented." It is also fraught with peril. OLD WARLORDS. For his plan to succeed, Zhu has to find a way to harness China's economy, which in 1993 grew at a dizzying pace of 13%--for the second straight year. Inflation is on the rise, with prices in the largest cities climbing more than 20% annually. Subsidies to money-losing state enterprises, relics of the Stalinist economy, are bleeding the center dry. And decentralization has created a crisis between Beijing and the provinces. In the midst of an economic boom, Beijing's revenues are falling, as provincial leaders grab an ever expanding share of taxes for themselves and help local companies evade Beijing's collectors. As he launches his plan this month, the 66-year-old Zhu must stare down history. China has almost always functioned as a sprawling empire with strong regional warlords. The new accommodation between the provinces and the central government will give Beijing more power over the economy. While Zhu struggles at home, pressures are mounting overseas as relations with the U. S. heat up over human rights and trade. In a draft of its annual human-rights report, the State Dept. blasted China for lack of progress, endangering renewal of its most-favored nation trade (MFN) status. Making matters worse, while Beijing had an overall deficit of $12 billion in 1993, its surplus with the U. S. is $23 billion and growing. That puts it second to Japan in the size of its imbalance with Washington. High-ranking officials on both sides of the Pacific are scrambling to stem the damage. Treasury Secretary Lloyd M. Bentsen met with senior Chinese officials on Jan. 19, while Secretary of State Warren M. Christopher plans to talk with Chinese Foreign Minister Qian Qichen in Paris on Jan. 24. Beijing's leaders are suddenly taking a more conciliatory tone. Instead of insisting that human rights is none of Washington's business, Zhu says that "we are certain to see more progress." If China takes steps needed this year, the Clinton Administration may separate human rights and trade in the future. Zhu's task is far trickier than Deng Xiaoping's 15 years ago. Deng set the process in motion by freeing up peasants and entrepreneurs and by welcoming foreign investment. Zhu is going a step further by reforming key institutions. He wants to set commercial banks free, spin off state enterprises to professional management, and create a U. S.-style tax system. The goal is to have a market economy running smoothly by 1999. "It's an enormously daunting task," says Richard Mounce, vice-president of Chase Manhattan Bank i n Hong Kong. NO WAY BACK. As far-reaching as his economic reforms are, Zhu has steered clear of political reform. While chaos has crippled Russia, Chinese leaders say they have allowed economic liberalization but maintained strong political control. Over the past 15 years, China has encouraged entrepreneurial growth and foreign investment while gradually freeing prices and creating a strong currency. With the resulting growth, Beijing's technocrats are able to tackle the wrenching issues of remaking companies and financial institutions and of consolidating control over a vast empire. What if the challenge proves too great? China would remain stuck in boom-bust cycles that would grow even more dangerous over time. That would hurt the foreign investors, both Western and Asian, who have been pouring in billions. But perhaps the biggest losers would be the Communists. With Marxism discredited, economic growth may be the only way for the party to preserve its power. "The leadership knows there is no way for it to go back," says a prominent Chinese economist. "If it does, it collapses." Even so, many of Zhu's proposals will test the party's control, as workers and peasants are exposed to the harsh realities of the market. Although many laid-off workers are finding jobs in the thriving private sector, some grumble about losing their "iron rice bowls"--lifetime employment. One 38- year-old mother, let go after 12 years at Shanghai's state run China Record Factory, fumes: "I thought the factory had an obligation to take care of me. The managers sit in their Mercedes-Benzes, and we are hardly getting a thing." Communist Party hacks are worried about losing their clout, too. Some local leaders see their power threatened by Zhu's plans to rein in the provinces. So politically, Zhu could be on shaky ground. Lacking ties with the military and the security apparatus, he doesn't have a strong power base to fall back on during hard times. "He is the most vulnerable of the central leaders," says a Western diplomat in Beijing. And Zhu knows firsthand how uncertain life can be. Born in 1928 in Hunan province, he was educated as an engineer, but during the Cultural Revolution of the 1960s, he was forced to work as a peasant. After his rehabilitation in the late 1970s, he climbed through the ranks and in 1989 became mayor of Shanghai, where he was a favorite of Western executives. Deng hand-picked Zhu for service in Beijing in 1991. Since then, he has worked on his blueprint for radical reform. Zhu's ambitious program got off to a rocky start in late December. Farmers hoarded grain in anticipation of higher prices, causing panic buying. Other Chinese grew edgy when the government announced on Dec. 29 its intention to unify China's dual exchange rates by Jan. 1. That prompted people holding currency traded at the official rate to snap up gold and jewelry, for fear of seeing their money devalued 50% overnight. Others bought big-ticket items when they heard that China would slap on a new value-added tax. Undaunted, Zhu is pushing ahead. His plan involves three structural changes: # CORPORATE REFORM: China's state enterprises still account for about half of the economy and employ the vast majority of urban workers. Nearly two- thirds of such businesses don't make money--and 37% are big losers. The state spends billions each year bailing them out. But the government can't cut loose millions of workers who depend on their jobs not only for work but also for health care, education, and pensions. A new corporate law, to be effective on July 1, is the first legislation aimed at whipping these industries into shape. The goal: to get the party out of business management. These dinosaurs will be merged, sold, or turned into joint-stock companies, with shareholders selecting the board of directors. "The idea is to make them responsible for their own management and operations," says Wu Jie, one of Zhu's advisers. For a pilot program this year, the state will choose 100 companies. To make them competitive, the government will change factory leaders, redo organizational structure, and provide new technology and equipment. The government will spend $5.5 billion on renovating rust-belt plants next year. "If, despite all these measures, they still operate in the red, then we'll have to enforce the bankruptcy law adopted in 1989," Wu says. With an eye to the day when big companies fail, the government is experimenting with a new safety net. This year, there will be various experiments to test unemployment insurance, pensions, and workers' compensation. On top of that, the technocrats are steadily reducing the number of ministries in Beijing. Powerful corporations run by experienced managers rather than bureaucrats will take their place. And the pace of privatization will increase. Fifteen of the strongest state enterprises will follow the example of the "Gang of Nine," companies that floated shares on the Hong Kong exchange last year. Among the new listings: two major airlines, a railroad company, and several power plants. # TAX REFORM: Perhaps Zhu's toughest battle was to win the provinces' approval for his new revenue plan. Aides say he traveled throughout the country to underscore the need for the richer provinces to share the wealth. Last year, the financial revenues of local governments jumped 20%, while the central government suffered a deficit. China is establishing two separate tax bureaus in localities across the country. Existing bureaus in the provinces will be converted into central government ones, while provincial authorities will open new bureaus of their own. Before the year 2000, the state hopes to be pulling in 58% to 60% of all revenues, as opposed to the 38% it gets now. Actually collecting the taxes, though, may be the real challenge. Local leaders have found many ways of keeping money out of Beijing's hands. In one popular scheme, provincial leaders allow local companies to underreport income, thereby sheltering them from central government tax rolls. Later, the companies make "contributions" to local governments. "When the provinces need the money, they call it in," says Fan Gang, an economist at the Chinese Academy of Social Sciences in Beijing. "But it never shows up on the books." But many experts remain optimistic. "We believe [reform] will work, though it won't be effective from Day One," says Meocre Li, managing partner of Arthur Andersen & Co. in Hong Kong. Other problems loom. This year, Beijing will meet the provinces head-on over the wild growth in infrastructure projects. With good reason: There is massive overlapping. Almost every coastal region wants to build a major port. "It's a little bit out of control," says Gao Lianbin, director of the northeastern city of Dalian's port authority. # BANKING REFORM: The People's Bank of China is a relic: It still doles out loans for projects whenever the government sees fit. In early 1993, banks went on a lending spree, providing billions in cheap funds to property speculators and causing a liquidity crisis. Last summer, Zhu stepped in, forcing the banks to call all loans by the end of the year. The picture for this year is healthier: Banks must increase their reserves from 5% last year to 13% this year. SQUEEZED. The breakthrough will come this spring. That's when China's rubber-stamp parliament, the National People's Congress, is due to approve wide-ranging laws regulating the central bank, commercial banks, and money markets. The goal of the reform is to create a central bank that can control money supply. The country's major specialized banks will be converted into true commercial banks that lend money based on risk assessments. Three new banks will handle loans for big government projects. "These laws will pave the way to create a basic legal framework for the future banking system," says People's Bank Deputy Governor Chen Yuan. But the transition will be slow. To prevent state enterprises from going bankrupt, commercial banks will be forced to continue extending them credit. But small business borrowers aren't so fortunate. They get harshly squeezed by the banks. So to help them, the government wants to let mutual funds and financial institutions lend to this most dynamic sector. For Chinese and foreigners alike, the changes are sometimes baffling. Zhu insists December's panic buying was caused by poor communications. As a result, he intends to launch a TV and radio blitz before further reforms. Foreign investors are scrambling to keep up. After returning from a 10-day trip to the U. S. over Christmas, Dudley Schleier, general manager of Pfizer China, a pharmaceutical joint venture in Dalian, was suddenly confronted by a currency devaluation, new VAT, new customs duties, and increased tax rates for expatriates. "The biggest challenge I face is change," he says. The months ahead will test whether wide-scale reform can be managed by any technocrat--even one as savvy as Zhu. As long as he enjoys the support of the ailing Deng, his position is relatively secure. And after Deng's death, Zhu and his reformers may continue to have party backing. Even conservative leaders such as Premier Li Peng know that controlling industry the Stalinist way won't provide prosperity. Moving toward Zhu's goal of a modern economy will. So Beijing's formula is to keep a firm grip on politics, but ease up on economics. Of course, most Chinese citizens had no say in these policies. Despite the new jobs being created in the private sector, workers and peasants may resist giving up the safety and benefits of the old system. Chinese who do prosper may not be satisfied without democratic reforms. Zhu's gamble is that economic progress will salve the tensions on the surface of Chinese society. Many hardships lie ahead. But after more than four decades of Communist rule, Zhu's vision offers China's 1.2 billion people a fighting chance for more prosperity than they have ever seen. [From Business Week, Januray 31, 1994] ---------------------------------------------------------------------------- 2. THE ROAD TO MARKET: A TALK WITH ZHU RONGJI............Business Week....90 ---------------------------------------------------------------------------- Sipping coconut milk, a relaxed Vice-Premier Zhu Rongji fielded questions with ease at Zhongnanhai, a government compound in Beijing. He spoke for two hours with BUSINESS WEEK Managing Editor Mark Morrison, Hong Kong Bureau Chief Joyce Barnathan, and Beijing Correspondent Lynne Curry. Q. What kind of economy are you trying to build? A. What we want to achieve through reform is to adopt the operating mechanism of a market economy, which is the same as you have in your economy. The only difference is that your economic system is based on private ownership, while our market economy will still be based on public ownership. Q. How are you going about trying to create this new model? A. Mainly, we will conduct reform in three areas: fiscal policy, the banking system, and state-owned enterprises. Fiscal reform will be aimed at adjusting the relationships between central and local governments. Now, we have a new system under which revenue tax is shared between the central and local governments--similar to the system you have between federal and local government. The aim of banking reform is to establish an independent financial system. Lastly, we will change the relationship between the state and its ellterprises. Q. Won't you meet strong resistance? A. We have had a long process of preparation. A consensus was built between central and local governments, and between the government on the one hand and enterprises on the other. So some agreement was reached. We are glad to see that the general situation in the country and in all industries has been stable. No big problems have cropped up, and this has greatly boosted our confidence. These reforms also must have the Chinese people's understanding, support, and acceptance. That is by no means easy. Q. In changing the tax system, haven't you and the provinces had a pretty fierce struggle? A. It's true that last year we did a lot of work with local and provincial governments to convince them. It is not possible to take money out of the pockets of another person without that person's resisting. But the measures we introduced are not so drastic. They are actually quite moderate. Q. Right now, your economy is growing by 13% a year. What is your target? A. My target is 9% to 10% for this year. It is not possible for us to achieve 7% because that would createa major disruption to the economy. In addition, that kind of fluctuation would lead to social instability. Q. Are you comfortable with the level of foreign investment in China? A. In 1992, we saw an unprecedented level of direct foreign investment in China--some $11 billion worth. It is a good phenomenon. Q. Would a U. S. decision to revoke most-favored-nation (MFN) trading status cripple your economy? A. It is not correct to think that it would be a terrible thing for China if MFN were withdrawn. I think that it's the American public--the general American consumer--who would suffer the most. Therefore, I sincerely hope that trade relations between China and the U.S. will continue to develop and that there will be no large fluctuations. Q. Are you concerned about U. S.-Chinese relations? A. Ever since the Seattle meeting took place between President Jiang Zemin and President Clinton, a new stage in friendly relations between the two countries has been ushered in. High-level exchanges between the two sides have been on the increase. Therefore, I am optimistic about the future of such relations. However, we hope MFN will not be linked with human rights. And we are sure the human-rights situation in China will continue to improve, and we are certain to see more progress in this regard. Q. On a personal note, can you tell us how you manage such a vast portfolio of economic policies? A. Within the State Council, I am the chief assistant to Premier Li Peng. And within the party, I am a member of the Standing Committee of the Politburo responsible for economic work. But when it comes to making decisions, all issues have to be subjected to the collective leadership of the Communist Party's Central Committee and the State Council. No decision has been my personal one. That's why I'm not that fond of being described as an "economic czar." My title is Vice-Premier. [From Business Week, January 31, 1994] --------------------------------------------------------------------------- 3. "Red Capitalists" On The Takeover Trail--Powerful pals and sharp financial minds have Everbright booming again.......Pete Engardio...83 --------------------------------------------------------------------------- More than most Chinese companies, China Everbright Holdings Ltd. knows that operating in the free market is not a one-way ticket to riches. In the early 1980s, the financial group was a highflying "red capitalist" arm of China's State Council. But then Everbright fell on hard times because of staggering losses and the political fallout of Tiananmen Square. To restore order, Beijing installed as chairwoman Qiu Qing, a tough former central bank official with close ties to economic czar Zhu Rongji. For a career bureaucrat, the 65-year-old Qiu has proven a surprisingly astute corporate doctor. She has ditched money-losing assets, refocused Everbright's investment strategy, and hired some of China's brightest young financial talent. Assets now exceed $1.2 billion--compared with $100 million in 1991. And Qiu's goal is to triple Everbright's size in three years, creating an empire spanning financial services, real estate, manufacturing, and retailing. "Everbright has woken up," says Deputy General Manager Alexis Wong. FEW ENEMIES. Everbright has plenty of company on the takeover trail in China. The intensifying campaign to reform state enterprises has triggered a nationwide fire sale of assets. Everyone from state-run companies such as China International Trust & Investment Corp. to Morgan Stanley & Co. is amassing war chests. But the biggest players are well- connected ethnic Chinese tycoons such as Indonesia's Oei Hong Liong, Thailand's Dhanin Chearavanont, and Hong Kong's T.T. Tsui. Thanks to Qiu, Everbright boasts guanxi --connections--galore. A former vice-governor of the People's Bank of China, Qiu is regarded as a shrewd and decisive manager with few political enemies. She has recruited dozens of rising stars at Chinese banks, many of them with foreign experience. Nearly 90% of Everbright's 300 staff members are under 40 with college educations. One of her top hires is 39-year-old Wang Yake, a key central bank official. Now president of Everbright's Hong Kong subsidiary, he's the group's top dealmaker. The new team has helped Everbright recover from earlier mistakes. Formed in Hong Kong in 1983, the company stumbled badly at the end of the decade. Its biggest bungle was backing out of a $120 million property deal with Hong Kong billionaire Li Ka-shing in 1984 that then skyrocketed in value. And it picked some losers. From 1987 to 1991, Everbright racked up $100 million in losses, as annual sales plunged from $647 million to $97 million. To top it off, former Chairman Wang Guangying, a confidant of deposed party chief Zhao Ziyang, supported the protesters in Tiananmen Square. Nine months after the 1989 massacre, Wang was replaced by Qiu. To get back on track, Qiu built a lucrative foreign-exchange brokerage and raised $50 million from foreign banks. With the proceeds, Everbright scored quick profits in China's red-hot stock and property markets. When the markets overheated in 1993, Everbright turned to corporate takeovers. It spent $145 million to acquire four publicly listed holding companies in Hong Kong and Singapore involved in real estate, retailing, and consumer electronics. These companies are now being used as vehicles to mount takeovers in China. Newfoundland International Co., acquired last spring and renamed China Everbright International Ltd., bought a 55% stake in Xinxing Pipes Co., an iron tube plant in Hebei province, and is close to buying a major pharmaceutical company. NEW MOLD? Qiu has big plans in finance. Everbright last year paid $60 million for 20% of the $1.2 billion International Bank of Asia Ltd. (IBA), the Hong Kong subsidiary of Arab Banking Corp. Decision-makers in Beijing are helping their friends at Everbright--the company won approval for the IBA deal in less than a week. With Beijing promising to open its market to foreign banks, IBA/Everbright is a leading candidate to become one of the first foreign joint-venture commercial banks. The real test of how much Everbright has learned since the 1980s will come when it actually has to manage all of the businesses it has acquired. Says one U. S. investment banker in Hong Kong: "The unknown factor is whether they will be able to break out of the mold of state-run Chinese business and become entrepreneurial." Better than anybody, Everbright should know how badly things can go awry. So Qiu's confident young managers just may have what it takes to be front-runners as Chinese capitalists. [Everbright Holdings Ltd. is the English name of the Guang1 Da4 Group formerly headed by the "Red Capitalist", Mr. Wang Guang-ying. -- CCF Editor] [From Business Week, February 14, 1994] +=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=++ + Executive Editor: Bai Yang Executive Moderator: Changqing Yang + +--------------------------------------------------------------------------+ + For subscription: mail "SUB CHINA-NT Your-First-Name Your-Last-Name" + + to LISTSERV@UGA (bitnet) or listserv@uga.cc.uga.edu (internet) + + For back issues of CCF: + + anonymous ftp to cnd.org[132.249.229.100]:pub/community/CCF + + For contribution and inquiry: mail to ccf-editor@ifcss.org + +=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=++