China's determination to reform its debt-ridden state firms is especially apparent in the heavy industrial cities of the north-east. Mr Mu Suixin, Mayor of Shenyang and a vice: governor of Liaoning province, has vowed to support foreign investors all the way once they show an initial interest. "I am prepared to use administrative measures, if necessary, to force Chinese companies to co-operate with foreign investors," he said on a recent 20-day road-show across Europe.
His government is even prepared to franchise out the management of state-owned companies so that foreign investors need not risk investment capital. Such companies will be treated favourably as joint ventures – up to 70 per cent of net profits will be repatriated to management. Foreign investors in such franchises will be given priority to purchase stakes in the companies concerned. They will also be granted a 10 per cent tax break if they introduce other foreign investors to the city.
Yet despite all the rhetoric and the generous incentives on offer, buying a state enterprise in Shenyang is not for the faint-hearted investor.
"We know we are lagging behind in a big way." admits the mayor. "But we don't want to be behind for ever. We want to learn modern management as well as modem technology and he able to walk alongside the Western giants." Mu's direct approach has won him a reputation as being one of the provincial officials most supportive of state sector reforms.
Liaoning province is one of China's most important centres for heavy industry, containing 26,000 state-own companies. More than one-third of its state industries are categorised as large or medium-sized, accounting for about 10 per cent of all the state firms in the country in terms of asset value.
In China, a large asset base is seldom a good sign. In most cases it indicates that a company's equipment is outdated, the work-force bloated and management old fashioned. In fact, the state firms throughout the region are in such a desperate condition that Zhu Rongji chose to visit Changchun, capital of neighbouring Jilin province, for his first official trip as China's new premier. He called on all three provincial governments in the region to accelerate their reforms in the state sector.
During his visit to Europe, Mayor Mu brought with him opportunities from the city's. 18 key conglomerates in trade and industry for priority foreign investment. Some companies are listed in Hong Kong or local stock exchanges and 11 of them have a workforce of more than 12,000, the largest employing, nearly 50,0(X) workers.
The city authorities would prefer Western investors not to make any employees redundant, but the mayor said he would under-stand and co-operate if redundancies were absolutely necessary. This contrasted with a message delivered by Premier Zhu in April, who urged British companies to invest in China but on "one condition that no single worker is made redundant".
According to Shenyang government regulations, the redundancy bill will be split between three parties ?the foreign investor, the local partner and the local government. But redundancy is a highly sensitive subject, involving severe social and political consequences because of the lack of a social welfare system in the country. There have already been unofficial reports about demonstrations and sit-ins by workers in the north-east demanding payment of wages or pensions. Liaoning province as a whole has more than two million unemployed, one-sixth of the country's total.
For foreign investors which intend to sign management contracts or purchase stakes in companies, the difficulties lie far beyondstreamlining the operations. Company managers are traditionally government-appointed officials. They are afraid of being accused of selling state assets too cheaply or failing to secure the best management con-tracts for the state. They may also fear losing their own jobs. Negotiations therefore can be long and hard.
Shenyang's Asset Trading Centre, an exchange for selling state companies, has been established for four years, yet little interest has been aroused in the 310 state and collective firms it has put up for sale. The companies have a combined debt of nearly Yn9bn (US$1.08bn) and assets of Yn 11 bn.
Mayor Mu seemed to be aware of grass-roots resistance when he promised to take administrative measures, if deemed necessary to push a deal through. But having to resort to the influence of a mayor to resolve negotiational difficulties may in itself create hostility between potential partners.
In March the integrity of some senior company managers and auditors in Shenyang was called into question when Northeast Pharmaceutical Group, one of the 18 key conglomerates promoted in Europe, was openly criticised for misleading the public by the national securities watchdog, the China Securities Regulatory Commission (CSRC).
Warning to investors
The Shenzhen-listed company forecasted in its 1996 prospectus a net profit of Yn l 08m for the same year but its real earnings reported at the end of the financial year were only Yn20m. The CSRC concluded that the forecast was excessively optimistic and misleading. It also criticised and fined the Shenyang Accounting Office for its audit of the company's financial statements.
Shenyang hit the headlines again at the end of April when one of its prime companies listed in Shenzhen became the first `special trading stock', a new category to alert investors to a company which reports two consecutive years of losses.
Shenyang Materials, engaged in recycling, reported a net loss of Yn 151 m for 1997, compared with a loss of Yn30m for 1996. Despite the worsening performance, market rumours of asset restructuring have pushed up the company's share price by 70 per cent from the beginning of the year.
The special trading status which imposes a five per cent limit on the movement of the share price on a trading day, was introduced only recently to curb such speculation in order to protect the interest of investors. Analysts have questioned whether the company itself was behind all the rumours.
Lack of understanding
"Europe is too far away. It is very difficult for Europeans to understand this place," Financial Times quoted Mr Chen Gang, the new general manager of Northeast Pharmaceutical Group which employs 35,000 workers. "The best way for foreigners to enter the local market is to rely on Shenyang people and do things step by step."
This may be true but there are also limitations to Shenyang's understanding of foreign investors. For example, the mayor and his entourage gave only one month's notice for his major European tour, insufficient time for the organisers, so soon after Premier Zhu's visit. China-related organisations in the UK including the China-Britain Trade Group and the Chinese Embassy were preoccupied by the logistics relating to Zhu's visit.
"They should have given us at least three months to prepare and organise well," said Mr John Armour, representing the Times Publishing Group of Singapore whose chairman is a special government adviser to Shenyang.
As a result, the mayor's press conference in London failed to attract significant local interest or media coverage. Many who did attend failed to grasp much of what he said because of poor interpretation ?apparently, there wasn't enough time to find a better interpreter.
Mayor Mu may very well be disappointed after his trip to Europe. At least he will have discovered that it is not easy to attract the right audience in the West, let alone entice them to invest in his troubled state enterprises back home.