Murky figures cloud China state sector reform by Jeremy Page FUSHUN, China, June 19 (Reuters) - After a wave of factory closures, mass lay-offs and bankruptcies at state firms, officials in China's northeastern province of Liaoning say they see light at the end of the economic tunnel. But analysts say the actual progress of painful state sector reforms in China's ``rust belt'' is blurred by murky regulations on restructuring and opaque accounting which overnight can miraculously turn basket cases into pillars of the economy. On paper, Liaoning is on track. During an April visit to the province -- home to 10 percent of China's large state firms -- Premier Zhu Rongji declared there was hope of turning round all its loss-making state firms within three years. If Liaoning could do it, Zhu said, the rest of the country would be a walkover. This year, the province aims to slash the proportion of state firms in the red to under 30 percent, from 60 percent at the end of 1998. Analysts are sceptical. ``There are a lot of different ways of making enterprises appear profitable,'' says James Greener, General Manager of Shenyang Corporate Advisory, which helps attract foreign investors to the Liaoning capital of Shenyang. ``Until consolidated accounting comes along, it's going to be quite hard to work out exactly what the situation is in these enterprises,'' says Greener, who helps the city package assets of state-owned firms for foreign investors. GOVERNOR SAYS REFORMS ON TARGET Liaoning governor Zhang Guoguang maintains the reforms are on target. The provincial economy grew 8.1 percent in 1999, outstripping the national rate of 7.1 percent, due mainly to successful restructuring of state enterprises, he says. State firms are now preparing for competition with foreign companies after China's entry to the World Trade Organisation (WTO) expected later this year. ``It's not about how many enterprises are loss-making, it's about how we can increase our competitiveness,'' he says. ``We must develop key industries, develop core products and open up domestic and international markets.'' However, analysts say few have become competitive. Many have been closed or merged, thus reducing the number of firms in the red but doing little to alter the overall balance sheet. Others use nifty accounting tricks to hide losses. Inflating sales orders through subsidiaries in other provinces and disguising major losses as capital expenditure are common practice, says Greener. ``Several of the major expenses related to reform like paying for pensions, paying for redundancies, interest on loans, don't go through the profit and loss,'' he says. ``That way you can make your profit and loss look profitable even when it's not.'' VAGUE RULES ON SURPLUS LABOUR When it comes to trimming payrolls to offload crippling welfare obligations, regulations appear to be equally flexible. In theory, state firms are obliged to give laid-off workers a monthly allowance of about 250 yuan ($30) for three years. But with no unified system covering medical care, housing and pensions -- all formerly taken care of by the Communist Party's ``iron rice bowl'' -- and no social security law to enforce payments, most firms deal with the problem on an ad hoc basis. Many cash-strapped firms simply refuse to pay the allowance, leaving workers to fend for themselves in the private sector. Firms in less dire circumstances offer workers a one-off payment of up to 10,000 yuan instead of the monthly allowance. Many more pass on their liabilities to insurance firms or the government, which launched a drive to reform state enterprises in 1997 through mergers, closures and share-owning schemes. At the other extreme, some simply transfer excess workers to non-core parts of their business, as did Petrochina Fushun Petrochemical Co, a unit of recently-listed Petrochina (PTR.N). When the refinery needed to shed 1,100 workers, it set up subsidiary companies ranging from hotels to shoe factories and staffed them entirely with former workers. ``These enterprises are not run to make a profit,'' says Fushun Petrochemical president Duan Wende proudly. ``They are run to look after the workers.'' He says the subsidiaries are not part of the listed company, and are not a drain on the firm's financial resources. ``They simply fulfil the functions we used to contract out to other companies. As long as their prices are competitive we direct all our business to them,'' he says. WTO TO BE LITMUS TEST While such methods provide a quick fix to the unemployment problem, they do nothing to help the overall streamlining of the state sector, analysts say. The litmus test of Liaoning's reforms will be China's WTO entry, they say. The provincial government has identified almost 500 state firms in trouble. The 60 largest will be given special help. The rest are to be left to sink or swim. Governor Zhang admits many risk being overwhelmed by foreign competitors. ``We have some immature sectors which have not been developed,'' he says. ``If they meet with international competition, their difficulties will be even greater.'' Especially at risk are steel and coal, crippled by oversupply of low-grade products, and the technologically-backward car and electronics industries, he says. That could mean another slew of bankruptcies and closures, threatening further protests by angry laid off workers who have already taken to the streets on several occasions this year. But analysts say such drastic steps are necessary to tackle the remaining structural problems in the state sector head on, rather than disguising them with clever accounting. ``Hopefully, it gives you the publicity to get away with all the rationalisation measures you needed anyway but wouldn't have had the political support for if it hadn't been WTO,'' says Greener. ``It's a good cover story to get things done.'' ($1-8.277 Yuan)
