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Chinese capitalism brings big money to entrepreneurs, boom to country

THE BALTIMORE SUN

BEIJING -- The only thing really remarkable about Yang Zhongwei is how well prepared he was to shuck the security of state employment for the profits and uncertainties of private enterprise.

Other than that, he's just another new Chinese millionaire, moving as fast as he can to ride along the top of the country's red-hot economy without getting burned.

There are hundreds, perhaps thousands, of private entrepreneurs as successful as Mr. Yang in China these days. They're having a ball -- for now.

For the last year, China's economy has been rocketing. The boom has drawn worldwide attention and cash, enticed risk-takers from all levels of Chinese society into free-market pursuits, and sparked an explosion of increasingly upscale consumerism in every major city.

The momentum now is such that everyone -- from peasants fleeing the land to U.S. corporate giants sidestepping the worldwide recession -- seems to be trying to grab a piece of what may become the world's largest economy within the next generation.

Many Communist Party organizations and military units have jumped on the bandwagon. China's legislature, which opens its annual two-week meeting tomorrow, has been ordered by the party to change the nation's constitution to underscore the growing role of market forces in the Chinese economy.

Even academics such as Mr. Yang -- a group traditionally disdainful of commerce -- are "jumping into the ocean," as the Chinese phrase for venturing into money-making goes.

Before joining the Chinese gold rush, Mr. Yang, 42, was a respected economist who had parlayed advanced training in Germany into a research post at the prestigious Chinese Academy of Social Sciences.

But after the 1989 Tiananmen Square massacre, he had "no choice" See CHINA, but to leave state-sponsored academic life, he says. He had been an adviser to former Premier Zhao Ziyang, the reformer deposed by hard-liners after the crackdown on the Tiananmen protests. He had written letters to the government, discouraging the use of force against protesters.

Friends told him he ought to return to Germany. But Mr. Yang had another idea. He had done research for Pierre Cardin, the French fashion firm, when it set up an export factory in China, and he was convinced he could sell 10,000 of its expensive suits a year to the wealthiest of Beijing's 11 million residents.

"No one believed me," Mr. Yang says.

Nonetheless, Pierre Cardin licensed him to open its first store in China, in December 1989.

His sales exceeded his first-year forecast by 50 percent and have grown steadily since. Mr. Yang now sells about 25,000 European-cut suits a year for $400 to $600 each from his 13 stores -- 10 in Beijing and three in Shanghai.

Unlike some of China's nouveaux riches, Mr. Yang is not conspicuous in his wealth. He has a fake gold Rolex watch, drives a tiny, Chinese-made Suzuki and rents an ordinary two-room apartment. But last year he made more than $1 million, he says.

'Seize the day'

Although relatively few are yet as successful as Mr. Yang, millions of other Chinese have recently embarked down the "capitalist road" condemned for decades by Mao Tse-tung but resurrected with a vengeance last year by China's current patriarch, Deng Xiaoping.

Official reports say the total registered capital of private Chinese companies grew by 79 percent last year. Officially, there are only 139,000 of these firms. But that doesn't include millions of unregistered enterprises, from noodle stands to mini-conglomerates run from briefcases and portable phones. Also, many private firms pose as collectives or state subsidiaries for protection from official harassment.

The non-state sector of the economy -- private companies, collectives and foreign investments -- now produces the bulk of the nation's output. While most state firms are mired in red ink, non-state enterprises are leading China to spectacular growth.

Its economy last year expanded by almost 13 percent. Foreign trade and foreign investment surged, with China expected soon to join the world's top 10 trading nations, Hong Kong firms racing in to tackle huge infrastructure projects and U.S. companies lusting after China's burgeoning consumer market.

Thousands of local development zones have proliferated beyond the central government's control and compete in offering foreign firms incentives. A speculative land rush is in full swing, with cities handing out long leases for key properties at astronomical prices.

Nascent, loosely regulated stock markets in Shanghai and Shenzhen have sucked in millions of Chinese investors, as well as foreign-based mutual funds. Despite the festering Sino-British dispute over Hong Kong's future, the China fever has propelled the colony's stock market to new highs -- with the latest Chinese stock offer drawing so much interest that it was oversubscribed by 657 times.

In his annual Chinese New Year TV appearance in January, Mr. Deng urged his countrymen to "seize the day." Accordingly, China's legislature has been told to endorse a higher economic growth target than the 6 percent annual figure in the nation's current five-year plan.

The Chinese auto industry plans to triple its output this decade. China wants to add 12 million phone lines a year for almost 30 years, twice the annual U.S. market. Over the next few years, it will import a phenomenal $80 billion worth of foreign technology annually, much from the United States.

The new boom follows a decade of reforms in which the Chinese economy more than doubled in size.

Some economists now predict it could become the world's largest in absolute terms within 20 years, even outstripping that of the United States.

This prospect already is unnerving China's immediate neighbors Asia, who fear a wealthier China will turn expansionist. It also bodes an ever-diminishing U.S. ability to presume to dictate its geopolitical ground rules to China.

Overheating

But predictions about China's future economic strength must be tempered by a recognition of the huge problems already restraining its development.

These include: growing regional and urban-rural imbalances; worsening energy and material shortages; severe rail and port bottlenecks; agricultural production stagnation; mounting corruption; uncontrolled pollution; and the nation's huge population load.

"The Chinese economy's growth is real, and its potential is tremendous," says economist Robert F. Dernberger, director of the University of Michigan's Center for Chinese Studies. "But, unfortunately, the Chinese government's history of the last 40 years is one of failed potential."

The most imminent danger comes from the possibilities of the boom's overheating, the central government's inability to manage inflation and a boom-to-bust scenario leading to social, if not political, turmoil.

After two years of low inflation, prices rose last year by almost 15 percent in some major cities. China's money supply last year expanded by more than 30 percent; its controlled currency has plummeted against the U.S. dollar in the few legal swap markets and the black market. People in cities are rushing to buy gold jewelry as a hedge against inflation.

Government leaders insist that they are in control. A leading Chinese banker recently said that there was no need to rein in credit or take other special measures.

But many economists foresee a repeat of 1988, when inflation exceeded 30 percent in major cities, forcing a national austerity campaign that virtually shut down the economy. The consequent social pressures played a key role in fostering the 1989 Tiananmen protests.

"Sooner or later, there will be a crash," Mr. Dernberger says. "They basically haven't done anything about improving their monetary control. They still have nothing but crude levers to stop inflation. They are definitely running a real political risk."

Despite the Chinese leaders' rhetoric about fostering free markets, Mr. Dernberger is not optimistic about their willingness to dismantle four decades of central economic controls.

"China has had success where the central government has gotten out of the way and allowed local, individual initiative," he says. "But the guys at the top are still Leninists, still believe the state should run things, still are basically trying to save the old system."

Mr. Yang, the Pierre Cardin retailer, and many other Chinese entrepreneurs share some of that pessimism. In the absence of more legal guarantees, Mr. Yang says, individual businessmen here are "skating on thin ice."

As a result, he sends his savings overseas, keeping none in Chinese banks. He's considering buying a house in California rather than in Beijing. And he's been holding off on further major investments here until after he can get a firmer fix on the political climate -- perhaps from the opening sessions of China's legislature.

Adds another entrepreneur who has parlayed three tiny street stalls into $80,000 worth of quiet investments in various factories: "I keep my money hidden. If the police come, I tell them all I have is what's in my pockets."

'Earn and spend'

Such insecurities -- coupled with widespread tax evasion here in the form of unreported salaries, under-the-table payments and bribes -- are playing a big role in China's consumer boom.

On paper, China's per-capita gross national product approaches in Beijing and Shanghai, it exceeds $600. But many economists believe the actual spending power of the 1.2 billion Chinese may be three times greater.

"It is unbelievable how much money is floating around here," Mr. Yang says. "Many people just earn and spend, earn and spend."

By the early 1990s, according to state statisticians, practically every Beijing household already owned at least one color TV, a refrigerator and a washing machine. Most owned a camera, and 4 out of 10 households had a video recorder. These rates equal or exceed those in major cities in some far more developed societies.

Now, fancy restaurants and karaoke bars, high-priced even by Western standards, are commonplace in major cities. Privately owned Mercedes, Lexus and Cadillac automobiles are evident. Not a few regularly pull up to the growing number of glitzy stores that have opened in the last six months.

The Yaohan department store -- a Japanese venture featuring the world's top brands -- may be the glitziest. It's been packed with as many as 50,000 shoppers a day since its December opening.

The store features a swimming pool in its basement and offers a $9,913 Omega watch, an $8,695 Waterman gold pen, $4,000 Japanese stereo systems, Italian crocodile-skin shoes at $1,252, Gucci handbags up to $852 and 1-ounce bottles of Christian Dior perfume for $250.

And it is the big-ticket items that appear to be selling the best.

"A few years ago, I would never have bought these, but now I run my own restaurant and I have a little money," says a 40-year-old entrepreneur purchasing a pair of $140 shoes at the Yaohan. "I don't think it's extravagant. I want to look good, and I can earn back the money in less than a month."

Adds Xu Dongxiang, 31, buying a $133 remote-controlled toy car for his 5-year-old son even though he says he's out of work: "This isn't so much money. I know that America is rich, but we Chinese are no longer so far behind. Our economy is getting stronger and stronger."

Such relative high-rollers aren't the only Chinese embracing the new market mentality.

Part-time jobs are the rage among college students. Professors are jumping into moonlighting; schools at all levels are raising their tuition and founding for-profit enterprises. New, high-tech companies are vying for trained talent with bounties of cash, cars and apartments.

One man in the central Chinese city of Zhengzhou recently auctioned off the services of his son, a new university graduate, for $26,000 -- promising he'd produce $250,000 worth of profits in five years.

Local party and government units have recast themselves as money-making entities, charging fees for their services. Increasingly forced to support itself, the state press is trying to attract readers with more aggressive reporting -- as well as tabloid-style near-nudity and features on China's newly rich.

Even the hallowed Great Hall of the People, home to China's legislature on Tiananmen Square, has gone commercial. It rents out its gargantuan rooms to foreign corporations for cocktail parties and offers Western-style fast-food to tourists.

Volatile resentments

But in this vast, under-educated land where an egalitarian ideology has long held sway, hundreds of millions are not so well prepared to capitalize on the fast-paced changes.

Rising prices for basic goods -- grain, eggs, cooking oil, flour, coal -- are hitting hard the many on fixed salaries. "Everything is getting more expensive," says Guo Jinhong, 48, who runs a Beijing work unit's apartment building. "The government prints more and more money, and it seems to be worth less and less. What can we do? We still have to eat."

Volatile resentments are particularly building among more than 100 million workers at large state factories, who face being cut adrift from lifetime employment, and among China's 800 million peasants, many of whom are being handed IOUs instead of cash for their crops by the revenue-starved state.

The Chinese army reportedly had to be called into the northern city of Tianjin last year to quell disturbances at a state watch factory. Small-scale peasant revolts -- against high fees and low or delayed crop payments -- are on the rise.

But among those who already have weaned themselves from the state's hand, many believe it is simply too late for China to do anything but move further toward its own form of a market economy.

"It can't be stopped," says Xing Xiaojun, 42, a former Beijing bus driver who has worked for foreign companies for 10 years and now drives around in a German-made Ford monitoring his own investments.

Mr. Xing sits in a 35-seat restaurant that he and his wife just opened. The place offers home-style dishes that cost under $2 each, and it is hopping with customers. He expects to recoup the initial investment within six months and pocket $50,000 more by year's end.

"How could the government push people out of state companies and jobs, and then make them go back?" he asks, immediately providing his own answer: "It just can't be done. Once people are on their own, they won't go back."

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