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Manufacturing Competition

Private Sector Hit Hardest in China's Efforts to Slow Growth

By Peter S. Goodman
Washington Post Foreign Service
Wednesday, August 11, 2004; Page E01

CHANGZHOU, China -- Only a few months ago, the privately owned Jiangsu Tieben steel plant seemed an archetype of China's emerging entrepreneurialism, the brainchild of a small-town construction worker turned industrialist. Now it is an abandoned void, its half-finished smokestacks standing idle under the summer glare as weeds creep across the grounds and a security guard dozes on a bench in front of locked gates.

Founder Dai Guofang sits in jail facing charges that he violated financial and land-use regulations. Local government officials who secured the land for the project have been rebuked by the central government for ignoring land-use regulations, and a Bank of China official has been fired for helping finance the venture.

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In the evolving world of Chinese capitalism, officials from Premier Wen Jiabao down have pledged to open the way to a new crop of entrepreneurs, encouraging them to create jobs and expand the economy even as many of the old state-owned companies disintegrate, deprived of the connections to government officials and finance that have sustained them for decades.

But the shutdown of Tieben, along with the slowing of other private projects around the country, has called into question just how far China is willing to go in allowing private capital to compete with state-run enterprises, and how far its central bureaucrats are willing to step back from their traditional role of picking who succeeds economically.

As the government tries to cool an overheated economy, it is tightening credit and cracking down on the sort of corrupt financial and land trading that has been an everyday part of doing business during China's period of swift growth. But the burden of these new policies appears to be falling disproportionately on private entrepreneurs.

"The private sector may suffer a little bit more," said Zhou Xiaochuan, the governor of China's central bank, speaking recently at an international finance conference in Shanghai.

Tension between public and private companies may be natural as China makes the transition from decades of communism toward a market economy. Despite recent new policies that officially entitle private companies to equal credit and even allow entrepreneurs to join the Communist Party, history and the flow of money tilt heavily toward the state sector. Rivalries between central and provincial governments also generate tension. While private companies pay taxes to provincial authorities -- and can be tapped by them as a source of patronage and bribes -- state-owned firms pay directly to the central government, giving Beijing a powerful financial incentive to protect their interests.

According to economists and government officials familiar with China's economy, state-owned companies are exploiting the climate of forced economic slowdown by using their ties with the central bureaucracy against upstart private competitors like Tieben.

"Tieben is not a state-owned company, so it became a casualty," said Fred Hu, chief China economist at Goldman Sachs in Hong Kong. "The majority of projects in China have exploited loopholes or gotten land without approval. The examples are ubiquitous. This is a symbol of the old ways the government has handled the economy, resorting to heavy-handed administrative policies to pick the winners."

Indeed, two hours to the west of here, the government-owned Nanjing Steel forges ahead with a new mill, unimpeded for now by allegations -- similar to those raised against Tieben -- that it sits on improperly acquired land. A Nanjing Steel official, who spoke on condition of anonymity, confirmed the finding of the investigation that the project sits on illegally acquired land. He said the project will continue, declining to explain how.

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