Four years ago, a solemn-faced manager named Hu Dan rode to the rescue of one of China's biggest cashmere companies. The state-owned firm, the Shaanxi Animal Byproducts Import and Export Corp., was losing $10 million or more a year despite feeding a cashmere craze created by foreign retailers like Banana Republic and The Gap.

Working in the shabby confines of the firm's headquarters, where he had struggled up the corporate ladder, Hu plowed into company records. He fired two-thirds of the firm's top 60 managers. He launched an internal inquiry into how the company could have both record sales and huge losses. During his first year, the company posted a profit.

And it was because of Hu's success, those close to him believe, that an intruder broke into his apartment on Aug. 30 and stabbed him to death.

From the moment he became general manager, Hu found himself in a battle with a band of Communist officials who, like those at state-owned enterprises across China, had made millions by turning the company into their personal fiefdom, company sources said.

Corrupt managers allegedly purchased low-quality cashmere at inflated prices from private dealers, dumped the cashmere on the international market at low prices, then collected kickbacks from the dealers. The state-run firm ate the loss.

"The bad books of the company are rooted in the fact that the company is riddled with worms who are eating state assets and involved in shady deals with outsiders," Hu wrote in an analysis of the company. "They created a convoluted net of mutual relationships to steal state assets, and drink the enterprise's blood to fatten themselves. The level of corruption is enough to make your hair stand on end!"

Hu's crusade on behalf of the firm caused him to be kidnapped by government prosecutors from another province. He then lost a court case and a $480,000 judgment in a judicial order that one prominent newspaper called a perversion of Chinese law. For the last two months of his life, he ran scared from constant death threats and rarely came home. His widow, Xiong Yuanying, said he eventually had to act like a member of "an underground party."

Hu's story provides a rare glimpse of the obstacles preventing reform of China's state-owned industries and of the specific interest groups that conspire to frustrate the opening of China's economy. This struggle has come into sharp focus recently as talks between the United States and China have intensified over China's entry into the World Trade Organization.

While some view China's accession to the WTO as a magic formula for pulling its economy into the modern age, obstacles to change run deep. The current system of state ownership and special relationships between state-owned firms and private companies set up by former government officials has created an environment that supports monopolies, soft-pedals competition and enshrines corruption, according to a broad array of Western and Chinese economists. More important than any ideological debate about capitalism or communism, privatization or public ownership, this system of public ownership determines the shape of China's economic future.

China's press frequently publishes stories about managers of state-run firms sentenced to prison after turning their companies around and making a profit, including the head of China's biggest tobacco company, Hong Ta, and the chief of a television picture tube company near Xian.

Many such managers have been charged with corruption because once the firm started making money, they paid themselves more than allowed under China's strict limit on salaries in state-run enterprises. And while successful firms are singled out for investigation, Chinese economists say, the majority of managers of state-owned enterprises are failures who are never punished for their incompetence.

China's state-owned sector makes up 41.9 percent of the economy, down from 56.2 percent in 1978, when broad economic reforms began. Official statistics released in August show that 39.1 percent of state-owned firms are losing money. The inability of these firms to pay workers is a source of instability in the rust belt that stretches from the far northeast in Heilongjiang through Xian to Wuhan, Chengdu and Chongqing. The failure of the firms to repay credit means that at least 25 percent of all bank loans, more than $487 billion, are nonperforming.

In September, despite continued ominous trends in the performance of state-owned enterprises, a meeting of top Communist Party officials decided to renew efforts to bolster the state-run sector.

But, as Hu Dan discovered, successful managers at state-owned companies can be more at risk than failures for facing jail, bodily harm and even death.

"This story shows that mediocre people can hang on for much, much longer than talented ones. Effective managers are not rewarded. In fact, they often become victims," said Fred Hu, an economist with Goldman Sachs in Hong Kong and no relation to the ill-fated general manager. "If Hu Dan had gone along with the crooks around him, they could have spared his life."

Hu faced pressures from the start of his tenure as general manager to endorse business as usual. In 1995, one of the firm's former customers in Hebei province sued the company, demanding several hundred thousand dollars for four tons of cashmere that Hu's predecessors had promised to purchase. According to company sources, in the past, the Hebei company had sold the firm bad cashmere at inflated prices and then paid kickbacks to corrupt managers. Hu's predecessors had already paid the Hebei company $250,000. It wanted more.

Hu fought the Hebei company in court. A court in the port city of Tianjin ordered the Hebei firm to return the cash to Hu along with $50,000 in damages. Then things got rough. Government prosecutors came to Xian from Hebei and kidnapped Hu. They had no warrant; they were acting solely as the paid representative of the Hebei cashmere merchant, sources said.

"The prosecutors called up the office and demanded money," said Hu's widow, Xiong. "They could hear Hu Dan in the background, yelling at [his employees] not to give anything."

Somehow, the Hebei firm won a ruling from the Supreme People's Court in Beijing, China's highest court, that moved the case to Hebei. In 1998 that court decided that Hu's firm must pay an additional $230,000 to the Hebei company for the four tons of cashmere. The court also confiscated the cashmere and auctioned it off--to the Hebei company for about $2,000.

So, Hu's firm paid $480,000 to the Hebei company for nothing. And the four tons of cashmere went to the Hebei trader for a song. It then resold for a second time for a huge profit.

"What's the use of the law in China? The law is a joke," said Hu's wife, Xiong.

To Xiong, the story sums up the futility of trying to change her country. In the 1950s, Hu's father, a correspondent during China's civil war, was purged in a Communist Party campaign and was not rehabilitated until 1980. Now, his son has been killed by, she says, the same forces trying to hold China back.

"In this country, a clean official leads a hard life, a dirty official has an easy one," she said in an interview in the apartment where she and her husband lived. "Even though they were all party members, what did the party give them? One political campaign after another and now this? Is this what happens to patriots in China?"

Xiong said that at the end of his life, her husband was resolved to continue reforms at the firm. "He was tired and he was scared, but he wasn't going to give in," she said.

On the day he was killed, a steamy Monday, Hu Dan was on a rare visit home. He had stripped off his clothes to beat the heat, when an intruder entered the four-room apartment. After stabbing Hu 19 times, the assailant slipped on Hu's suit, filched his mobile phone and a stack of cash from a dresser drawer and left Hu to die in the study.

Hu's death has gone unreported in Xian. A ban on the story has been issued by the province's propaganda committee. Only one paper in China has dared to publish the news--Southern Weekend, a sometimes crusading broadsheet from China's freewheeling south.

"State-Owned Worms Killed Hu Dan," the paper's headline screamed in mid-October.

The only thing that gives Xiong any consolation, she said, is the police. "They've been vigorous," she said. "But nobody is talking to them."

It is a silence that Hu came to know in his own dealings with the judicial system. In a report about the court case involving the Hebei firm, he wrote: "This type of naked theft of state assets constitutes serious criminal behavior. We must not allow judicial corruption to become a tool to plunder state assets."

Shaanxi provincial authorities launched an investigation into his charges at the time. But when investigators arrived at the gates of the Hebei cashmere merchant, they found a sign with the signatures of various local government agency officials: "Investigation Forbidden," it said.

CAPTION: Xiong Yuanying points out a picture of her husband, Hu Dan, who was allegedly killed for his attempt to make the firm he ran profitable.