China Faces Reality

Still much promise, but also worry about money and lower goals

Not since the turn of the century have so many Western businessmen been so determined to cash in on China's vast promise. The question both for outsiders and for the Chinese is whether the world's most populous nation can really modernize .its poor and backward agrarian economy in a mere 20 years. That is China's ambitious goal, but economic realities have already forced Peking to reconsider some of its grand plans.

Last week Treasury Secretary Michael Blumenthal became the first U.S. Cabinet member since the normalization of relations to visit China; he hopes to arrange to help supply much of the products and technology that it needs. He established the outlines for a new trade pact and announced that the nagging problem of assets seized by both countries during the cold war had been solved.

For years, these "frozen assets" have been a major block to trade because the Chinese could not send ships or planes to the U.S. for fear that they might be confiscated under court orders. Now the U.S. has agreed to free blocked Chinese bank accounts totaling $80.5 million, and Peking has agreed to pay just that amount against 384 separate American claims totaling $196.9 million. The China payout is about 41-c- on the dollar, a settlement that is high by the standards of other similar U.S.-Communist pacts, but which is worth only about 15-c- per dollar in 1949 terms. The pact will permit the U.S. to help China with its development plan.

The initial eight-year plan, unfurled in 1978, set some Olympian goals, including a 30% increase in China's grain production, a doubling of steel output and the completion of 120 major new industrial projects by 1985. Today the general commitment to modernization remains, but there is apparently a shift in strategies and priorities. The Chinese are suddenly worried about two key problems: 1) How to pay for the transfusion of technology that will be required? 2) How to absorb it into an economy in which education levels are low, "modern" machinery is out of date, and 70% of the labor force still toils in the fields?

Peking has agreed to buy nuclear reactors from France, a steel mill from Japan and oil drilling equipment from the U.S., and hundreds of other sales are under discussion. The cumulative import bill could easily exceed $40 billion by 1982.

Blumenthal came under considerable pressure from his hosts to help get China most-favored-nation status, which would cut U.S. tariff barriers. But China's immediate export potential is modest. The size of the country's mineral and oil reserves is uncertain, and they cannot be quickly exploited. Joint ventures will help, and the most likely schemes will give foreign companies a 49% stake if they put up the cash and expertise in exchange for a share of future production. Talks along these lines are already going on with major U.S. oil companies, which want to explore offshore. China already has credit lines totaling $8 billion from the British and French, and will need perhaps as much as a total of $40 billion over the next few years. But Peking is understandably cautious. Says Blumenthal: "They are determined not to overextend themselves."

Despite the prospects for profit in China, some bankers are wary of lending and some companies remain reluctant to plunge into joint ventures. They fear the future. It is not certain that the modernization program will survive the death of its architect, Vice Premier Teng Hsiao-p'ing, 74, and any hard-line successors might default on loans and seize foreign-owned projects. Adds John McGillicuddy, president of Manufacturers Hanover Trust: "We don't go looking to lend to countries at war."

The problems of finance are small compared with the difficulties of absorbing the technology. China's ports and railways are old and cannot handle much more traffic; the work force is untrained and ill prepared. This is partly the legacy of the "lost decade" between 1966 and 1976, when the Cultural Revolution and the turmoil before Mao's death disrupted society. Universities were closed, the flow of new technicians dried up, and factory hands were forced to put down their tools and talk politics.

The price of these ideological upheavals was high. TIME Washington Correspondent George Taber, visiting China with Blumenthal, filed this report:

"Starvation has been wiped out, but the first overwhelming impression is of poverty and lack of development. At an electric generating plant outside Peking, workers labor to maintain machinery provided more than 20 years ago by the Soviet Union. At a nearby agricultural commune, horses work some fields, while men and women throw straw on the ground to protect the crops. Living conditions are often starkly primitive.

"The economy still staggers under the problems of the Cultural Revolution and the rampages of the Red Guards, when productivity in some plants dropped by a third. A manager at a heavy electric machinery plant near Peking complains that he still suffers from a lack of trained engineers. Now, workers on the job are surrounded by signs urging greater efforts. Chien Hsing-chen, 51, an assistant engineer who speaks English, proudly points to one reading SAFETY FIRST, QUALITY FIRST. Shyly, he notes that 'it is just like General Electric.'"

China is now lowering its development sights, and the eight-year goals for steel and grain have been quietly shelved. Last week Peking stunned and worried hopeful exporters when it announced that about 30 contracts already signed to buy $2.1 billion worth of heavy machinery from Japanese companies would be held up and renegotiated. Pending U.S. deals have also been put on hold, and several businessmen have left for home ahead of schedule. Essentially Peking is seeking to rationalize and slow down its buying and switch growth emphasis away from heavy industry to energy and agriculture. "The Chinese have a very pragmatic approach," Blumenthal told a group of U.S. businessmen visiting Peking. "They are willing to amend plans when necessary and are anxious to learn from my experiences as a businessman. They almost talk like capitalists."

Once sacred Maoist principles are being abandoned for more efficient but heretical ideas such as industrial competition, higher incentive wages, and productivity bonuses. Private plots on which agricultural workers can raise and sell their own crops are making a comeback. Companies are now allowed to withhold some profits to invest as they wish. An editorial in the People's Daily urged further progress down the capitalistic road. "In the process of competition," it said, "a small number of enterprises will be eliminated because their products are of poor quality. What's wrong with that? It will encourage the advanced and retard the backward."

Yet China's task is staggering. Even if it maintained a 6% growth in G.N.P. between now and the year 2000, its per capita income still would not exceed the internationally accepted poverty level of $1,000 a year. The country is starting its development struggle with a heritage of chaos, when the nation's economic machinery rusted and the human capital went untrained. It will take tremendous work and continued ideological flexibility to achieve even the more modest goals that have recently been set. sb

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