POLITICS

Chinese lessons for Indian Marxists 

Jehangir Pocha

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THE dithering of India's Left over privatisation and disinvestment in the public sector contrasts sharply with the approach Beijing, their ideological beacon, is taking on the issue. While India's Left is holding on to the remnants of a socialist economy, Chinese president Hu Jintao is accelerating reform, disinvestment and privatisation - probably writing the epitaph of China's state-controlled economy

Over the last seven years, the total number of state-owned enterprises (SOEs) in China has fallen from 262,000 to 159,000. By 2006 "very, very few enterprises" will remain wholly state-owned, said Li Rongrong, chairman of the State-owned Assets Supervision and Administration Commission (SASAC), which oversees 189 major SOEs estimated to be worth over $300 billion.

This year-old round of privatisation aims to streamline SOEs and sell controlling stakes in almost all of them - even those that previous president Jiang Zemin had kept for the state under his zhuada fangxiao, or 'Keep the large, release the small' privatisation policy. The reason, Li said, is that the government no longer sees it necessary to be the "controlling, influencing and driving force" in any industry, even the strategic ones. The proceeds of privatisation are estimated to be about $100 billion and officials say this money is being used to repair China's tattered social safety net - healthcare, pension and welfare.

It took a while to get up to speed, but Beijing is now hurtling towards total privatisation. Of the 44 enterprises SASAC has recast so far, including the China National Petroleum Corp., the state has completely withdrawn from 25, and cut its stake to sub-25% in the rest.

Take Dongfeng Motor Corp., a company comparable with India's Maruti Udyog. The company has just created China's biggest automobile joint venture by becoming an equal partner with Japan's Nissan Motors in a $2-billion project that will produce 620,000 vehicles - 320,000 Dongfeng-branded commercial vehicles and 300,000 Nissan-branded passenger vehicles.

Significantly, many city and state governments, which own SOEs valued at about $260 billion, are moving faster towards privatisation than the centre. For example, the port city of Tianjin in north-eastern China, which owns assets of more than $18 billion, has already begun privatising its road, water supply and power sectors. The southern city of Shenzhen has raised more than $3 billion by privatising its energy and public transportation, money which it says it is using to improve its social services.

China's privatisation of public utilities and not just commercial enterprises shows it has rejected state ownership of enterprises 'in principle', not just out of economic necessity. Now SOEs are considered more as hindrances to economic growth than the bedrocks of the economy and symbols of communism.

For decades, vast grey factories with anonymous names like Factory No. 26 were the workhorses vested with the task of delivering Mao's egalitarian utopia, tried to produce everything the Chinese people needed - from matchsticks to cars. Mostly, they failed. But life in China continued to be organised around it. Their mission, as they then saw it, was not to generate wealth, but simply 'to provide'. To the Chinese then, as to the India's Left today, the state was to be the ultimate mai-baap; for Factory No. 26 was not only the local employer, it was also the local educator, park ranger, cultural centre, department store and healthcare provider. And, of course, it was often mismanaged and corrupt, and, consequently, unprofitable.

Until 1997, China tried to conceal the drain that SOEs were on the exchequer by hiding the hundreds of billions being spent to keep them afloat in its banking system. Experts estimate that about 75% of the $500 billion in bad debt China's banks have accumulated is owed by SOEs. But after the South-east Asian crisis ripped through the sails of the 'tiger' economies and exposed the rot below their Plimsoll lines, China's then president Jiang Zemin rammed through the much-needed but politically difficult decision to privatise these lumbering enterprises.

Significantly, apart from Jiang's 'Keep the large...' directive, which is akin to the Indian Left's current argument against privatising India's oil companies and other profitable public sector firms, there were no other guidelines on what SOE to sell. If the company was profitable, it fetched more; if it was not, it fetched less. As long as there was a buyer, China sold. Consider the deal Beijing struck with imaging giant Eastman Kodak in 1998. It bundled together all its SOEs in the imaging industry except the profitable China Lucky Film Corporation, and sold them to Kodak for $1 billion. Describing this approach as "extremely pragmatic", Stoyan Tenev, IFC Asia economist and China expert, said: "To the Chinese, ownership per se is not that important. Local governments are more interested in aspects such as tax revenue and employment. And they find the way to deliver that is to have more private ownership." New president Hu's decision to sidestep Jiang's zhuada fangxiao and sell off even "the large" SOEs is seen as proof of the state's determination to face the pain of undoing past errors.

Shortly after Li announced the widening of China's privatisation and disinvestment, Zhang Silin, minister of labour and social security, said over 20% (9 million) of China's remaining 42 million SOE workers would probably lose their jobs by 2006, when the restructuring of China's public sector is expected to be completed. Zhang said that by 2006 the government would also close its re-employment service agencies, which were introduced in 1998 as an interim measure to help laid-off workers and which claims to have placed about five million people so far.

The numbers are staggering, and could be worse than the official figures. Beijing maintains the urban unemployment rate is a manageable 4.7%, analysts say it could be double that. Among the discrepancies they point out is that many laid-off workers are not counted in these figures as they get a regular but meagre dole from their old employers or the re-employment agencies.

But officials say postponing privatisation will only make it harder - time will only allow sick companies destroying capital to destroy more, and this fundamental weakness will undermine China's global competitiveness.

Instead, Beijing has focussed on improving the process of privatisation. Rather than capitulating to employees protesting privatisation, China is giving them the option to buy out their companies. The city of Suzhou privatised Suzhou Fine Chemical by selling it for $15 million to its management team.

The SASAC is also restructuring many of China's premier SOEs - streamlining those with unfocussed operations, merging those with complementary capabilities and capitalising those with potential - before selling them to private investors. Li says his primary focus is to strengthen failing companies with new management and technology. Any SOE that does not rank in the top three in its industry by 2005 will be restructured, he says.

The government knows that doing the dirty work itself rather than leaving it to private investors gets it top-dollar. This is a major consideration for Beijing, which was bitten in earlier rounds of privatisation by sweetheart deals between investors and the existing management of some SOEs. To prevent a repeat of this, the SASAC has stated that no listed SOE will sell for less than its net asset value, and said it will chose investors based on the specific business plans they have for the SOE instead of just the highest bid.

What is the practical impact of China's new-and-improved privatisation? Well, Kodak has now signed a $100-million, 20-year co-operative deal with Lucky Film under which Kodak will contribute $45 million in cash and provide an emulsion-making line for colour products to Lucky in exchange for a 20% stake in the company.

It's a win-win situation - Kodak gets into the Chinese market, Lucky gets funds and technology, and consumers get better services. Some jobs may be lost in the short term, but Kodak's investment will secure Lucky's future. It will be guarded from turning sick and either shedding all its jobs or swallowing up millions in public money in a bid to stay afloat.

China's communists have understood this. When will India's?