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.
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 land that was improperly acquired. 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 elaborate.
According to two sources with knowledge of the company's operations, Nanjing Steel began construction without gaining the approval of the Department of Land and Natural Resources, prompting an investigation from the central government when farmers complained. However, the project is still underway, a fact the sources attributed to the company's influence with officials in Beijing.
In the Tieben case, steel industry and Jiangsu provincial officials familiar with the matter said that in the days before the plant was shut down, senior executives from China's largest steel producer, the government-owned Shanghai Baosteel Group Corp., met with top central government officials.
Shortly after a separate meeting with Baosteel, the central government also ordered that construction cease on another private steel venture in Zhejiang province -- the $2 billion Ningbo Jianglong plant. Ningbo Jianglong was launched without the required approval of the central government on improperly acquired land and through illegal finance, according to accounts published in the state press. In April, the central government ordered that construction cease, though Zhejiang provincial officials have allowed it to continue, the sources said.
A Ningbo Jianglong official confirmed the findings of the investigation and the fact that the project was launched without required central government approval. He said the company was awaiting the determination of the Ningbo city government as to whether the construction may continue.
Outside the steel sector, work on high-profile projects such as a Universal Studios theme park in Shanghai, and the city's 101-story World Financial Center, have been postponed. He Jun, president of Shanghai Jufeng Industry Co., a private company that makes generators and other electrical equipment, complained that the same banks that once solicited him for loans now treat him as a pariah. The local branch of the Industrial and Commercial Bank of China recently refused to cash a check for nearly $40,000 from one of his biggest customers.
"The bank told us they couldn't do business with us anymore because we are a small private company," he said.
The more restrictive economic environment comes as part of China's effort to engineer a gradual slowdown of its economic boom.
Years of government-led building in China, combined with loose lending and unprecedented flows of foreign investment, have now spawned fears of inflation, a looming collapse in property values and bad times for a banking system already choked with some $500 billion in bad loans. A crash in China, as opposed to the desired "soft landing," could also affect the global economy if the country's demand for imports and raw materials drops sharply.
China's government has sought to avoid the worst by limiting credit to the hottest areas of the economy, particularly steel, concrete and real estate. The central bank has raised the percentage of deposits that lenders must keep on hand and has increased from 20 percent to 35 percent the slice of capital that developers must contribute to their own projects. Beijing has dispatched teams of investigators across the country to crack down on unauthorized land transfers.
Recent signs suggest the measures have been effective. According to government data, China's economy expanded by 9.6 percent on an annualized basis from April through June, down marginally from 9.8 percent in the first three months of the year and far slower than the 10.7 percent that had been expected. Industrial production also has slowed, growing in July by about 15 percent, down from more than 17 percent in July last year.
But beyond curbing China's boom, some economists contend that current policies demonstrate the central government's intent to keep substantial parts of the economy in state hands.
Though thousands of government-owned firms have been sold to private investors in recent years, they have tended to be weaker and less important players, according to Arthur Kroeber, managing editor of China Economic Quarterly. The largest state-owned businesses, meanwhile, continue to account for 96 percent of the assets of the country's 500 largest companies, and 85 percent of the profits, according to statements from a member of the State-owned Asset Supervision and Administration Commission that were published in China Economic Quarterly.
Favoritism toward state-owned companies in the steel industry may reflect the fact that private entrants have made significant headway in recent years, according to analysts. During the first three months of the year, more than $4 billion poured into new steel projects, double the amount from the same period the previous year, according to government figures. Between 2001 and 2003, private steel mills increased output from 15 million tons to 40 million tons while capturing about 18 percent of the Chinese market, according to Andrew Rothman, an analyst at CLSA Asia-Pacific Markets in Shanghai.
Tieben was a big part of that surge.
Dai, the owner, was a construction worker from a village in Jiangsu who had launched a small scrap metal business in the 1980s.
Two years ago, he parlayed his connections with local government officials in Changzhou -- an industrial city 100 miles west of Shanghai -- into a $1.3 billion iron and steel complex. He aimed to produce about 8.4 million tons of steel per year, putting Tieben on track to challenge even Baosteel.
The district government gave Tieben the right to build on more than 1,000 acres of land along the Yangtze River, arranging to move the roughly 4,000 farmers who lived there, according to state press accounts. The local branch of the Bank of China and five other lenders pledged to provide about 40 percent of project costs.
This symbiosis between private enterprise and local government has been a basic feature of China's swift development. Yet as the central government this year decreed the end of easy credit, local authorities and their pet projects found themselves at odds with Beijing.
In April, the State Council -- essentially China's cabinet -- sent a team to investigate Tieben. According to a report of the probe released in the state media, the project lacked required central government approval. Tieben disguised the size of the venture by breaking it up into 22 smaller projects, gaining provincial approval for each component. Tieben also padded its financial reports to get around limits on borrowing, according to state press accounts.
According to sources close to the provincial government who are familiar with the investigation, a delegation of Jiangsu provincial officials traveled to Beijing in mid-April to lobby on behalf of Tieben. But on April 28, Wen chaired a meeting of the State Council, then emerged with a rare public order to halt Tieben's operations and severely punish local agencies that had been "grossly negligent of duty."
Dai and seven of his managers were swiftly arrested. The head of the Bank of China branch was fired, according to state media.
Tieben had basic business troubles. An executive at a major commodities company said the venture never managed to lock up long-term supply contracts for iron ore to feed its mill. It launched its project on the eve of what became the steepest climb in raw materials prices in memory.
Yet those familiar with Tieben's demise say it is mostly explained by its political vulnerabilities as a private company. Tieben was clearly breaking the rules, yet it was operating within the everyday norms of Chinese business.
"Allowing private companies to continue to emerge in the steel sector would eventually kill off state companies," said Andy Xie, an economist at Morgan Stanley in Hong Kong. "Private companies can build at a fraction of the cost."
Special correspondent Jason Cai contributed to this report.