CHINA'S INDUSTRIAL MANAGEMENT REFORMS: ROUGH ROAD AHEAD

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP04T00907R000200100001-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 23
• Document Creation Date: December 22, 2016
• Document Release Date: May 21, 2012
• Sequence Number: 1
• Publication Date: April 1, 1987
• Content Type: REPORT

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Directorate of
Intelligence
See, et
Secret
EA 87-10014
April 1987
Copy 2 0 8
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Reforms: Rough Road Ahead
China's Industrial Management
A Research Paper
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Directorate of Secret
Intelligence
Reforms: Rough Road Ahead
China's Industrial Management
This paper was prepared by
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Office of East Asian Analysis. Comments
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and queries are welcome and may be addressed to
the Chief, China Division, OEA
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Secret
EA 87-10014
April 1987
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Summary
Information available
as of 27 March 1987
was used in this report.
China's Industrial Management
Reforms: Rough Road Ahead 25X1
Chinese officials increasingly have recognized that modernizing industrial
management is a precondition for overcoming the inefficiency, uneven
product quality, and poor use of equipment and technology that character-
ize Chinese industries. Beijing made management reform an integral part
of its economic reform program in 1984, and in 1986 called for enterprise
management to be evaluated on the basis of three criteria: improved
product quality, reduced material consumption, and increased productivity.
In November 1986, Premier Zhao Ziyang stated that invigorating major
enterprises through managerial reforms would be the focus of China's
economic restructuring in 1987.
To create a new industrial management system, Beijing is promoting
greater enterprise autonomy and more responsibility for factory managers.
Measures such as reducing or eliminating mandatory state production
plans, phasing out state provision of raw materials and investment funds,
and allowing enterprises to retain more of their earnings are intended to
shift the government's role to indirect guidance of industries as a whole.
Within the factory, reforms such as the "factory manager responsibility
system" call for directors to have full authority over production, personnel,
and administration; managers will be rewarded on the basis of the
enterprise's profits and losses. Beijing also is testing other more radical
management reforms, such as allowing individuals to lease factories after
posting personal property as a guarantee, or permitting managers to issue
stock to raise capital. We believe, however, that the factory manager
responsibility system will be the mainstay of China's management reforms
for some time.
Many of the showcase factories instituting management reforms have
achieved impressive results in areas such as technology use, quality control,
and stimulation of creativity. This suggests that the changes could improve
the management, innovation, and productivity of Chinese industry if the
leadership commits itself to a long-term reform program in this and related
sectors of the economy.
However, resistance to reform is strong and is coming from several
directions. At the local level, party secretaries and administrative organiza-
tions have little motivation to accept management changes. The new
policies often go directly against the interest of party and government
officials by reducing their authority and, with it, their prestige and perks.
Workers also resist changes affecting employment levels and wages.
Secret
EA 87-10014
April 1987
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In addition, the renewed debate over political and economic reforms in the
wake of Hu Yaobang's resignation has led to the reemergence of conserva-
tive economic themes-including calls for more state control-and criti-
cism of enterprise management reforms. The ongoing debate reflects
disagreements over the respective roles of party and government-an issue
at the heart of management reforms. Failure to resolve the conflict among
party, administrative, and factory management officials over their roles in
production will prevent Beijing from instituting a permanent, new manage-
ment system. Conservative criticism has already forced suspension of
related economic measures-such as price and labor reforms-that are
essential to factory modernization. Moreover, the debate probably will
cause party officials to be even more recalcitrant about following reforms,
and managers more hesitant about implementing them. These factors plus
the sheer enormity of the task of modernizing one-half million enterprises
suggest that, over the near term, management reforms will continue to
bring improvements to industrial performance only at the margin.
The reforms, in any case, give managers only new responsibility and
authority, but not the knowledge to handle the new opportunities. Current
training programs-under both international and domestic auspices-
reach only a small portion of the enterprises in need of management
modernization, although Beijing is working to expand the effort. Since
1978, when Deng Xiaoping first asked the United States to establish the
management training center in Dalian, four other training centers have
been established with international assistance. A number of countries and
foreign firms are also providing training through seminars, cooperative
programs, joint ventures, and on-the-job experience in foreign factories.
The United States has generated considerable good will by being at the
forefront in offering training to Chinese managers. Many of the graduates
of the US-sponsored program at Dalian have been appointed to senior
government posts, and Chinese leaders have expressed their appreciation
for the quality of US management programs.
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Summary
Creating a New Management System
Redefining Industrial Priorities 2
The Reforms: Changing the Way Factories Are Managed 2
Initial Steps for Improving Managerial Skills 5
Management Training Programs 5
International Programs 5
Domestic Training Programs 8
Debate Among the Leadership 9
Macroeconomic Reforms and Their Impact on Management 15
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Major Industrial Areas and Joint Management Training Centers
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China's Industrial Management
Reforms: Rough Road Ahead
Chinese and foreign observers alike have for years
acknowledged that poor management in Chinese fac-
tories has been a major cause of China's low produc-
tivity, ineffective use of technology, and poor product
quality. As part of its larger economic reform pro-
gram-aimed at improving performance by gradually
adopting a system combining central controls, free
market forces, and microeconomic incentives-China
began experimenting with management reform as
early as 1979. The issue has remained a central one
for economic planners. For example, in early 1986, Lu
Dong, Minister of the State Economic Commission,
called management reform extremely important to
the overall economic situation and stressed the "ur-
gent need to improve enterprise management." ' And
in November, Premier Zhao Ziyang stated that invig-
orating major enterprises through managerial reforms
would be the focus of China's economic restructuring
in 1987.
Creating a New Management System
Throughout most of China's industries, factory direc-
tors serve as government functionaries fulfilling or-
ders from above. The state supplies raw materials to
factories and tells managers what to produce, to
whom to sell, and what price to charge. The factory
party secretary approves production plans and ap-
points personnel; he even approves, in consultation
with higher authorities, the appointment of the fac-
tory manager, who then manages "under the leader-
ship of the party committee."
China: Growth Rates of Gross
Value of Industrial Output (GVIO)
-8~ I
0 1980 85
8Includes private, state-collective, state-private,
collective-private, and foreign joint venture
enterprises.
Source: Statistical Yearbook of China
Beijing has for some time publicly recognized the
problems inherent in this system. Fulfilling the plan
often becomes the goal, with little need to consider
whether the product meets the needs of consumers or
whether the enterprise is profitable. Factory directors
have little authority or incentive to improve the
factory's performance by increasing output, upgrad-
ing quality, or adopting technological advances. De-
termining even the costs of production is difficult,
given the state-controlled prices of supplies and fin-
ished goods. At the national level, the subsidies to and
the poor performance of state enterprises constitute a
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major drain on government resources. In the past,
China has sought to improve enterprise performance
by stressing capital investment, and, more recently,
investment in technical upgrading to increase enter-
prise output. These attempts to solve problems by
"throwing bricks at them" have increased state invest-
ments, but poor state enterprise performance, rapidly
rising state deficits, and mounting state enterprise
losses have underscored need for management reform
(see figure). China's State Statistical Bureau reported
that the number of deficit state enterprises rose from
10.5 percent in 1984 to 17.6 percent in 1986.
Redefining Industrial Priorities
Beijing has tried to refocus industrial priorities on
correcting management problems. Major economic
reform documents issued in 1984 established guide-
lines for creating a new socialist economic structure in
which enterprises can respond in a competitive way to
market signals. The State Council last year further
specified that enterprise management is to be evaluat-
ed on the basis of three criteria: improved product
quality, reduced material consumption, and increased
productivity. It also established targets in each of
these categories that enterprises must try to reach
during the Seventh Five-Year Plan (1986-90).2 Since
July, Vice Premier Li Peng and others have urged use
of a fourth criterion-how well a factory uses and
manages its equipment.
The State Council documents called for industrial
upgrading to begin in machine building, electronics,
iron and steel, nonferrous metals, chemicals, textiles,
and some light industries. Enterprises are to adopt
new management systems, introduce advanced man-
agement techniques, and use advanced technology to
reduce waste and improve quality. Beijing says other
sectors, such as transport, post and telecommunica-
tions, service, and building industries, also will work
out ways to strengthen enterprise management
The Reforms: Changing the Way
Factories Are Managed
To achieve these goals, Beijing is trying to reduce
direct involvement of government and party officials
in factory affairs and give managers responsibility for
enterprise performance. Although the reform pro-
gram continues to evolve, the basic program appears
currently to have two main tenets:
? Enterprise Autonomy. To give enterprises greater
autonomy in responding to market signals, Beijing is
shifting the government's role in industry from
direct involvement in production decisions to a more
indirect role of planning, coordinating, and supervis-
ing industry as a whole, according to published
reform documents. The reforms call for the state to
reduce mandatory production plans, provide a
smaller portion of raw materials for production, and
eliminate interference by government officials in
factory affairs. A key area of change is the financial
relationship between the state and enterprises. Beij-
ing is reducing state-supplied investment funds;
allowing enterprises to retain a larger share of their
revenues and to decide how to use those earnings;
and granting enterprises the right to sell overquota
production at prices above state-set levels.
? The Factory Manager Responsibility System. This
system-the heart of management reform within
the factory-is designed to:
- Establish the authority of the factory director as
key decisionmaker within the factory.
- Provide financial incentives for managers to
improve factory performance.
- Establish adequate checks and balances against
abuse of managers' newfound powers.
The factory manager responsibility system is also
Beijing's primary mechanism for redistributing power
from party secretary to plant director. The system
theoretically gives plant directors full authority to
manage production, appoint and dismiss personnel,
adjust and establish administrative systems within the
factory, and reward or penalize workers and staff.
Managers are rewarded on the basis of the enterpri-
se's profits and losses.
Implementation of the management reforms began in
1979 with experiments in selected locations, which
were gradually expanded until a backlash against the
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reforms occurred in mid-1985 and early 1986. Public
reports that managers were abusing their decision-
making powers proliferated; many were unwarranted
attacks by party conservatives against innovative
methods, although some instances of corruption were
also uncovered. Such reports caused reformers to
reconsider both the checks on a manager and the
protections afforded managers against malicious criti-
cism. Also, numerous problems during the period-
excessive industrial growth, inflation, and skyrocket-
ing investment-caused reformers to slow the reform
program until they could improve macroeconomic
control techniques, such as the use of taxes and
interest rates, and deal with criticism by conserva-
tives. Beijing renewed its push for modernizing man-
agement in mid-1986, when it publicly called for
expanding the number and types of enterprises subject
to management reforms during the Seventh Five-Year
Plan (see inset on page 4).
In practice the degree of autonomy accorded enter-
prises varies by industry, size of firm, and whether it
is state or collectively owned. In general, the greatest
autonomy is found in small, collective industries
producing items not directly related to the national
interest-a list of items that is apparently growing,
according to Chinese and foreign observers. Nation-
wide, only about 60 major industrial products, such as
steel, petroleum, and chemicals, remain under manda-
tory state production quotas. Industries that are major
foreign exchange earners tend to have less autonomy
than light industry.
erating in over 40 percent of state-owned industrial
enterprises, according to a Chinese State Statistical
Bureau survey of 21 provinces.
implementation is spotty, however, as evi-
denced by a 1986 survey of 10 provinces, which found
that only 20 percent of those enterprises practicing
the manager responsibility system had fully imple-
mented it. Nevertheless, numerous examples of im-
proved enterprise performance under the system en-
couraged the leadership to extend the manager
responsibility system to all state-owned enterprises by
1990.
Experimental Measures
Official Chinese statements and US Embassy report-
ing show that other measures have been proposed,
offering alternatives for increasing the managers'
personal stake in the success of the enterprises, forc-
ing them to consider the balance between the en-
terprises' immediate and long-term interests, and
creating a stronger process for auditing and evaluat-
ing the managers' performance. For example, the
Chinese official who says he devised the factory
manager responsibility system has come to believe it
does not give managers adequate tools to carry out
reform and to counter party and local government
interference, according to US Embassy reporting.
This official is now overseeing experiments with a
financial responsibility system that bases incentives
for managers on owning stock in the enterprise (see
inset on page 6).
Even more radical changes have been proposed, such
as reducing state ownership of enterprises and chang-
ing the party role within the factory to a voluntary,
unpaid position engaged in essentially extracurricular
activities. Some Chinese have argued, for example,
that the state must not only distance itself from
management but must actually transfer ownership of
its enterprises to managers and workers to motivate
them to increase productivity. Many of these reforms
are strongly opposed by party officials, however, and
we believe the factory manager responsibility sys-
tem-probably formalized by contracts that more
closely link the managers' incomes to their factories'
performance-will be the mainstay of China's man-
agement reforms for some time.
These reforms, at best, give a manager new decision-
making responsibility and authority, but not the
knowledge to handle the new opportunities and obsta-
cles presented by the evolving economic system. Ex-
amples of managerial successes cited in the Chinese
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Chongqing: A Microcosm of Management Reforms
The course of management reforms in Chongqing
captures the problems, trends, and progress seen in
varying degrees elsewhere in China. One of the largest
industrial cities in the southwest, Chongqing was
among the first sites in China to experiment with
management changes.
Early experimentation began in 1979, when Premier
Zhao Ziyang was in charge of the province. The
experiment included over 100 enterprises by 1982;
further acceleration occurred in 1984.
A backlash appeared in 1985, as exemplified by the
case of the director of the Chongqing Rubber Belt
Factory. After taking office in 1982, the director
established detailed production plans and regula-
tions. By 1985, the factory had risen from last to first
place among the nation's rubber belt factories. But
criticism by conservatives of the director's methods
began to appear in the press, focusing on excessive use
of funds to host a sales meeting at which potential
buyers were entertained by singers. After an investi-
gation, city authorities declared the charges unfound-
ed and their faith in the director unwavering. Simi-
larly, five managers of other factories were cleared of
charges after city and party officials held public
hearings.
In a renewed emphasis on reform in 1986, Chongqing
took steps to eliminate some of the friction over
implementation of the reforms. In May, the city
government issued a regulation stipulating that fac-
tory directors cannot, without reason, be removed
from their posts at the will of their superior depart-
ments. City officials announced in July that, to
further resolve the 'power struggle between adminis-
trative units and enterprises, " 52 administrative com-
panies changed their nature from administrative
management to economic service organizations that
provide marketing and other services.
At present in Chongqing, over 460 industrial enter-
prises operate under the manager responsibility sys-
tem. According to Chinese press accounts, managers
in these factories can appoint and dismiss assistants
and decide production and discipline issues. Manag-
ers in 20 percent of these enterprises operate under a
set term of service.
More innovative reforms are also being tested. In the
summer of 1986, Chongqing began advertising for a
director to head the first factory to operate under a
leasing arrangement, called the asset management
responsibility system, that ties a director's salary to
how closely he meets goals for production and capital
gains. In September 1986, city officials announced
that 20 state enterprises would implement the system.
Chongqing also has loosened controls over technology
supplies and major industrial materials, allowing
managers to directly acquire needed inputs. Other
reforms under way include encouraging enterprises to
attract capital by issuing stocks and leasing some
small state-owned factories. Chongging's.first stock-
holder-owned factory was established in September
1985, with 3.24 million yuan (US $880,000) invested
by one state-owned company, three collectively owned
enterprises, and individuals.
The role of the state has been reduced. Only those
products essential to the national economy, such as
iron and steel, remain subject to targets; only 12
percent of Chongqing 's total industrial output value
is produced under mandatory planning.
In the future, in keeping with the State Council's July
1986 decision on management reform, the Chongqing
party committee and government announced in Sep-
tember 1986 that the factory manager responsibility
system was to be immediately implemented in all
enterprises.
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When the manager of this Shenyang automotive
company switched to leasing the state-owned
enterprise, he used his expanded authority to
increase profits 35 ld over a four-year period.
press credit "gutsy" individuals who took charge, but
many Chinese factory directors find the new demands
incomprehensible. Foreign observers note that most
managers, although conscientious and hard working,
see themselves primarily as conduits for information
from higher authorities to workers.
Initial Steps for Improving Managerial Skills
China initially emphasized the need to put better
educated, more qualified persons in top factory posi-
tions. As part of a national campaign to rejuvenate
industry by replacing older officials, Beijing instituted
mandatory requirements in 1982 to abolish the life-
long term of office and began stressing the importance
of higher education and technical background in
selecting replacements. As a result, a 1985 survey of
29,000 key enterprises disclosed that 89 percent of
people in leadership positions had higher education,
and that the average age of managers had dropped
significantly.
examination scores were linked to future promotions.
According to Chinese press reports, more than
100,000 managers had taken the exams by the end of
1986, including almost 70 percent of managers from
key enterprises. Leaders of smaller enterprises are
also being tested. Despite these measures, one recent
Chinese survey reported that 85 percent of industrial
leaders believe the majority of factory managers are
not qualified to carry out present reforms.
Management Training Programs
The State Council has specifically noted the impor-
tance of advanced management techniques for quality
control, internal factory financial accounting, estab-
lishment of technical standards, and streamlining
factory organization (see inset on page 8). Manage-
ment training programs have proliferated under both
international and domestic sponsorship.
International Programs
Under a Sino-US science and technology protocol, the
United States began management training classes for
senior executives and industry directors at Dalian in
1980. The Dalian program, considered a complete
success by both sides, has spawned such offshoots as a
joint M.B.A. program between the Dalian institute
and a US university. Many of the Dalian graduates-
such as Wang Zhaoguo, now a Chinese Communist
Party Central Committee member-have been ap-
pointed to senior party and government posts, and
Chinese leaders have expressed their appreciation to
the United States for being at the forefront in training
Chinese managers in advanced management tech-
niques.
China also has established joint management training
centers with the EC (in Beijing), Canada (Chengdu),
West Germany (Shanghai), and Japan (Tianjin). Beij-
ing is discussing the establishment of another man-
agement training center with French and Australian
participation, and also
has held discussions with Bulgaria and East Germany.
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Beginning in October 1983, China required that all
managers of large and medium-sized enterprises take
an examination on a number of economic, manageri-
al, and party topics. To encourage participation,
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Experiments in Factory Management
Beijing is also experi-
menting-but on a much more limited basis than the
factory manager responsibility system-with addi-
tional incentives, guidelines, and controls.
Management contract system. Contract systems for-
malize and extend many of the elements of the
factory manager responsibility system. These sys-
tems-also called term responsibility systems or
tenure responsibility systems-require managers to
sign three- to five-year contracts specifying targets for
categories such as profits, quality and variety of
goods, and managerial and technical innovation. If
the contract is fulfilled, a manager's salary increases;
failure to accomplish the goals may result in demo-
tion, or, in cases of serious breaches of safety or
production disruptions, dismissal. Managers appoint-
ed under the traditional industrial system submit
yearly production plans, but no rewards or penalties
are attached to achieving the goals. Some Chinese
press reports imply contracts are a basic ingredient of
management reforms, while others suggest contracts
are used much less widely than the factory manager
responsibility system. In Beijing, for example, 20
state-run factories began management by contract in
April 1986, while the experience of 233 Shenyang
enterprises with this system was so promising that the
city government in 1986 decided to introduce the
system to all enterprises.
Enterprise leasing. As a means of increasing the
manager's stake in an enterprise's success, small
firms-usually heavily debt ridden-have been
leased to individuals selected through a competitive
process. The new enterprise director is required to
have two financial guarantors and to commit a
certain amount of personal property as collateral.
The manager is given full power over the factory's
personnel and operations, and agrees to pay a fixed
level of profits to the state at the end of a predeter-
mined period. Any extra profit may be kept by the
manager, but shortcomings must be made up from
the personal wealth of the manager and the guaran-
tors. In 1986, according to the State Statistical
Bureau, 2,900 small state-owned enterprises were
experimenting with leasing.
In the first enterprise to try leasing, according to
Chinese publications, profits rose from 13,000 yuan
in 1981 to 460,000 in 1985. The same person served
as factory manager throughout the period, but, ac-
cording to Chinese press reports, was able to make
improvements in later years because leasing greatly
increased his authority. The manager even fired 10
workers, and the party secretary with whom he
frequently disagreed was transferred.
The asset management responsibility system. This
system applies selected aspects of enterprise leasing
to large, state-run enterprises. A committee-usually
consisting of government officials, factory officials,
and outside experts chosen by the factory-advertises
for a factory manager. Applicants for the post submit
proposed plans for managing the factory, and a
prediction of capital gains. The successful candidate
is required to post collateral; one account reported a
director put up his family property and one-third of
his annual income; another manager provided a
personal bond of 1,500 yuan (US $400), compared to
a basic salary of 150 yuan a month. Through a series
of contracts, the manager is given control of planning,
management, and the employment, dismissal, and
pay of workers. Standards for fixed-asset additions,
capital turnover, and profits are agreed upon at the
outset and are tied to a schedule of bonuses or fines.
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An important addition to the manager's duties is the
responsibility for obtaining capital funding, further
severing the financial relationship between enterprise
and state. The factory must obtain bank loans to
meet its needs, and debt service payments are to be
deducted from posttax profits. The state collects not
only a corporate income tax but also a fee payable for
the use of assets provided to the director.
enterprises operating under this
system will be taxed at a lower rate to encourage
enterprises to make better use of their capital and to
expand production. Trials of asset management be-
gan in the summer of 1986 in four enterprises, with at
least 20 more planning to adopt the system, according
to a Chinese press report.
Financial responsibility system. The financial respon-
sibility system goes beyond the asset management
system by basing incentives for responsible manage-
ment on ownership,
The enterprise issues stock to
workers, managers, and the general public, although
the state maintains a controlling interest. An enter-
prise advisory board chooses a manager, helps in
basic planning, reviews the enterprise's performance,
and rewards or dismisses managers. Stockholders are
represented on the advisory board, a device intended
to neutralize political influences. Decisions not based
on economic reasoning risk financial loss for both the
enterprise and the individual. The Chinese official
who01evised both the factory manager respon-
sibility system and the financial responsibility system
believes the latter is vastly superior, and that owner-
ship is the key to improving factory performance. In
September 1986 the State Council agreed to selected
experiments with financial responsibility in a handful
of cities.
Foreigners are helping improve Chinese manage-
ment skills through government-sponsored train-
ing centers, joint ventures, and on-the-job train-
Sweden and Great Britain are cooperating on a
project to train Chinese in S&T management and
planning.
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China has further encouraged the transfer of manage-
ment skills through joint ventures with foreign firms
and through numerous seminars, some under govern-
ment-to-government cooperative agreements, others
sponsored by universities, businesses, international
organizations, institutes, and societies. For example,
Harvard University and the Chinese management
association are cosponsoring a series on Beijing televi-
sion to introduce Chinese viewers to US management
techniques. Visiting experts discuss Western manage- 25X1
ment experience through lectures, teaching assign-
ments, and hands-on experience in Chinese factories.
China also is sending management trainees to Japan
and the United States to receive private and corporate
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Matching Management Techniques
to Factory Problems
China needs to use modern management methods in
upgrading factory operations, particularly in such
areas as:
? Equipment justification. Because of the difficulty of
obtaining equipment in the past, Chinese managers
try to buy whatever equipment they can, rather than
what they need; this is one reason Chinese enter-
prises generally ask for the most advanced
technology.
? Inventory control. Enterprises hoard materials be-
cause of the uncertain supply; there is no concept of
the cost of excess inventory.
? Quality control. China is increasingly familiar with
quality control but lacks knowledge and personnel
to institute statistical sampling and factory quality-
control procedures.
? Accounting. Internal accounting procedures are
needed, but firms are not used to gathering infor-
mation, and data integrity is a problem.
? Financial decisionmaking. Use of economic grounds
to evaluate proposed projects could improve
choices, although application could be extremely
difficult in China, where the cost of inputs such as
material and capital is unknown.
? Shop floor control. Basic knowledge about how
materials flow through the factory and how to
efficiently organize steps in the production process
is lacking in most Chinese enterprises.
? Marketing. Chinese firms lack basic information on
suppliers, customers, and other producers. Methods
for conducting market research are needed.
Domestic Training Programs
A new domestic training program will train nearly
50,000 people by 1990; a trial program started in
September 1986. According to Chinese press releases,
only graduates of the program, run by institutes of
higher education, will be entrusted with important
posts and be eligible for promotion.
Other domestic training efforts include:
? Colleges of economic management, created by refo-
cusing former party cadre schools; Chinese press
reports claimed that by early 1987 a network of 93
such institutes existed.
? Management training programs run by the Chinese
Association for Science and Technology, the Chi-
nese Economic Management Association, and vari-
ous ministries.
? Local educational efforts, such as an educational
program in Shanghai-initially for younger work-
ers-that attracted 24,000 technical and manage-
ment personnel in 1985.
? Management study programs and research centers
at colleges and universities, as well as postcollege
adult education programs in management.
? Programs offered by the newly founded Women's
Enterprise Association to promote an exchange of
management knowledge and experiences among
female managers.
? Publication of management materials, including a
Chinese enterprise management encyclopedia by the
State Economic Commission and the party propa-
ganda department
The impact of these reforms has been blunted by
several factors. First, Beijing is struggling with sever-
al fundamental issues, and this is slowing implemen-
tation of the reforms. In the past, for example, the
party made sure that industry served socialist goals,
but now industry's attention is focused on making a
profit and improving efficiency. The enterprise has
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looked after workers' welfare by providing housing
and other social services, but some reform leaders
want to break off social welfare functions from fac-
tories. Similarly, the government is uncertain which
responsibilities it should retain to sufficiently control
the economy-for example, whether state ownership
of enterprises must be loosened to stimulate produc-
tivity and, if so, how to justify such action in terms of
socialist thought.
Second, management reforms now provide direct in-
centives for managers but little motivation for party
secretaries and administrative organizations. On the
contrary, policies often go directly against the inter-
ests of party and government officials, reducing their
authority-the source of their prestige and perks-
and holding out the possibility that their very jobs will
be declared unnecessary. In comparison, the few
benefits to these groups-more taxes from profitable
firms and improvements in the quality, price, and
supply of goods-are neither direct nor persuasive.
Debate Among the Leadership
Beijing has yet to demonstrate the resolve to sort out
the key problem regarding the respective roles of the
factory manager, the party official, the worker, and
the state. A July 1986 State Council decision and
regulations issued in October largely confused the
situation, both by endorsing decisionmaking powers
for managers-as embodied in the factory manager
responsibility system-and by calling for directors to
accept the supervision of workers, staff members, and
other concerned parties.
The difficulties involved in resolving this issue have
been magnified by recent events in China. The politi-
cal turmoil surrounding the student protests and the
resignation of Hu Yaobang as party general secretary
in January 1987 has intensified the debate over
economic themes and has put reformers on the defen-
sive.' The discussion reflects disagreements over what
role the party, government, and enterprise should play
in China's changing economic system. This issue is at
the heart of Beijing's management reforms, which are
predicated on redefining the functions of party and
government in daily enterprise affairs. Moreover,
conservatives may be uncomfortable that manage-
ment reforms have prompted the creation or expan-
sion of services usually associated with market econo-
mies, such as advertising and legal services (see inset).
As conservative officials have pushed themes such as
more centralized control, management reforms in
particular have been criticized. Conservative senior
officials have stressed the importance of factory party
leaders, sometimes building them up more than fac-
tory managers. At the same time, however, a number
of key leaders and organizations have echoed Zhao's
call for management reform in 1987, including Vice
Premier Li Peng, one of the most conservative senior
government leaders, suggesting that management re-
forms will continue as a policy initiative.
Within the Factory
The Director Versus the Party Secretary. According
to State Council guidance and public statements by
Chinese officials, the party's responsibilities are now
largely limited to overall enterprise policy (as defined
by state directives and the state plan), general worker
welfare, and political education programs. But, in
general, party secretaries are not easily accepting this
diminution of their authority. Chinese press accounts
and US Embassy reporting indicate that, in factories
experimenting with management reforms, managers
generally can assert their decisionmaking authority
over production but are encountering resistance from
party secretaries regarding control over functions
such as the appointment of midlevel cadres, changing
employment levels, and the distribution of bonuses
and housing.
The Director and the Workers. Although the formal
role of workers in factory affairs is generally limited
to annual meetings of factory workers' congresses,
managers have often found that they cannot threaten
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Changes in the Supporting Cast
As management reforms change the responsibilities
and functions of managers and their factories, the
supporting cast of characters is changing as well.
Besides the enhanced role of the banking community,
other new roles include:
producing under mandatory plans, but now allo-
cates only 23 materials. Firms often do not know
where to buy materials and equipment. According
to Chinese press reports, a number of groups have
stepped in to fill the gap. Over 858 capital goods
service companies help enterprises buy, sell, and
transport goods not included in the state plan. At
least one city has opened a capital goods market so
that enterprises can trade their excess materials.
Similarly, an association of machinery producers
established a central office in Beijing to facilitate
equipment sales.
? Legal services. A Chinese newspaper reports that
nearly 40,000 Chinese enterprises have set up legal
consultative offices. Such offices offer legal services
to factory directors, take part in decisionmaking
and management of a factory, and play a major
role in technical and trade negotiations. Some
factories report these offices have had an immedi-
ate impact; a Shanghai iron and steel works report-
ed its legal office settled 79 default cases since
1983. The need for legal services will continue to
grow as external relations become more complex.
? Marketing. Market information is a key need for
Chinese managers, and creative means for supply-
ing it are appearing. According to a sample survey
in 10 Chinese provinces and cities, 30 to 50 percent
of enterprises have established data collection and
analysis centers.
? Advertising. China has 70,000 advertising agencies
doing a business volume of 700 million yuan a year,
according to the Chinese press. Ads run in newspa-
pers and magazines, and on radio and television.
Some railways and urban communications depart-
ments have set up their own advertising agencies.
Shanghai recently reported the first known instance
of a Chinese suit for false advertising and faulty
product design.
? Suppliers. The state's Material Supply Bureau
formerly controlled the supply of over 250 kinds of
materials-steel, cement, timber-to factories
? The Press. Managers frustrated by interference or
criticism have turned for help to the press, which is
now allowed to investigate and publicize wrongdo-
ings in at least some locations. One Wuhan newspa-
per editor said his paper acts in part as a de facto
investigatory agency for the provincial party com-
mittee, empowered to investigate, report, and ex-
pose problems. The Wuhan municipal government
also decided to use the offices of city papers to
collect information on marketing conditions, prices,
and economic opportunities throughout China for
dissemination to Wuhan enterprises.
Beijing is playing an active part in setting up needed
support systems by adopting technical standards,
issuing regulations, establishing a nationwide
quality-inspection network of over 100 test sites, and
conducting quarterly inspections.
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worker employment, or even pay workers different
salaries, without encountering worker resistance.
Such resistance can seriously impair a manager's
attempts to improve productivity through promotions,
bonuses, the hiring and firing of workers, and adjust-
ing the size of the work force. Workers sometimes
resent additional income earned by managers, and, in
at least one case, resisted reforms intended to improve
productivity because they saw the measures as an
attempt by the factory director to increase his income
at their expense. Several managers have told foreign
observers they were reluctant to accept monetary
incentives for fear of criticism by workers. To
strengthen their positions, party secretaries sometimes
curry favor with the workers, making managers reluc-
tant to discipline workers for fear of uniting worker
and party against them.
Dealing With Higher Authorities
Closely related to party obstructionism is bureaucrat-
ic meddling by local government officials reluctant to
give up their role in enterprises, according to Chinese
observers. The network of personal and political rela-
tionships between factory party leaders and the bu-
reaucracy is extensive, with former factory personnel
often staffing government and regulatory offices.F_
Local Financial Assessments. Despite State Council
rules that local governments should not impose finan-
cial burdens on factories, many extract additional
"cash contributions"-for funding local public pro-
jects, for example-or extort personal favors. One
factory initially refused to donate an apartment for a
local registration office, according to the Chinese
press, but agreed after city officials refused to issue
marriage licenses to the factory's workers.
Administrative Meddling. Another form of obstruc-
tionism comes from administrative "corporations."
Local officials, unwilling to give up their role in
production, set up the corporations-ostensibly to
loosen their control over enterprises, but in effect
creating another layer of control. One People's Daily
article said most of the state's large and medium-sized
enterprises are under the control of these administra-
tive and semiadministrative companies; although the
central government has relinquished some of its con-
trols over industry, such companies have prevented
the devolution of power from reaching the enterprises
and continue to interfere in production decisions and
operations. These corporations severely limit factory
managers' decisionmaking authority over the hiring
and firing of workers, supplies, production, and mar-
keting. Moreover, according to the Chinese press, the
organizations usually have no assets, but, by calling
themselves corporations, they can intercept financial
and material resources intended for factories.
Beijing has called for an end to such interference, and
several jurisdictions have announced steps to limit
these corporations. Industrial bureaus in Chongqing
have been told to begin providing services instead of
controlling enterprise activities. In August 1986,
Shanghai announced it would disband 77 administra-
tive companies within a year to give factory directors 25X1
more decisionmaking power in production. It is un-
clear how much autonomy such factories will have,
though, since Shanghai's plans also call for some
plants to form into associations for specialized produc-
Thousands of factories-many widely publicized in
the Chinese press-have increased product quality
and profits through management changes, and these
successes will encourage other enterprises to try new
management techniques (see inset).
The management reform program faces a number of
significant obstacles, however, that suggest reforms
over the short term will bring improvements to indus-
trial productivity and efficiency only at the margin. 25X1
We believe management reforms will continue as a
policy initiative, but the ongoing debate over econom-
ic reforms will delay plans to better define the
relationships between key players. For example, Beij-
ing had said it would pass a state enterprise law to
provide a framework for implementation of bankrupt-
cy provisions and to define legal and working relation-
ships between ministries, enterprises, and party offi-
cials, but in mid-March, the National People's
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A number of trends have emerged that we believe
indicate Beijing's management modernization pro-
gram can, over time, address some longstanding
weaknesses in Chinese enterprises:
? Professionalizing management. Focusing attention
on management as a separate function requiring
special skills contributes to the establishment of a
corps of people who think of themselves as manag-
ers-an important step in overcoming traditional
ways of thinking about factory performance. Local
officials also are recognizing the need for trained
managers and are advertising for persons with
advanced skills to head factories. Some foreign
observers also suggest economic logic is slowly
supplanting administrative reasoning as a basis for
decisionmaking.
? New influences on production decisions. Managers
responsible for their firms' profits are increasingly
concerned with productivity and quality control.
Beijing's expanding network of quality-inspection
sites further encourages factory directors to take
quality control seriously; Beijing uses the quality-
control ratings to determine the distribution of
some resources, whether enterprises can use "quali-
ty" award labels on their products to attract con-
sumers, and managers' remuneration.
firms rejecting substandard or overpriced
components and finished goods reflect the addi-
tional pressure on factories to raise quality and
improve efficiency. State-sponsored experiments
with secondhand equipment markets are encourag-
ing factories to sell unused equipment and to
consider alternatives to expensive technology im-
ports. factories are beginning
to use feedback from consumers to guide
production.
? Stimulating innovation and technology absorption.
The Chinese press has noted several new product
designs by enterprises undergoing reform.
better management is slowly improving tec -
nology absorption.
managers are becoming
more interested in doing feasibility studies to assess
the need for new technology, while preliminary
training and preparation have greatly improved the
use of equipment in some cases. One small survey of
Chinese factories noted that technology import
offices were being established within enterprises to
evaluate proposed acquisitions, establish links to
suppliers of related equipment, and assist in tech-
nology utilization.
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Secret
Congress (NPC) Standing Committee decided not to
recommend its passage. The Chinese press reported
that, although most delegates agreed that factory
managers must have the final say over production
decisions, they disagreed on the appropriate role and
authority of party secretaries. Similarly, efforts to use
a new Ministry of Supervision-agreed upon at the
November 1986 NPC session-to oversee government
policy implementation also will proceed more slowly.
According to US Embassy reporting, this ministry
was intended to shield factory managers from govern-
ment interference.
Meanwhile, the debate will probably cause party
officials to be even more recalcitrant about following
reforms, and managers to be more hesitant about
implementing them. Since January, factory party
leaders have been delegated to run in-factory propa-
ganda campaigns to oppose "bourgeois liberalism"-
China's catchword for excessive Western influences;
at least some factory directors undoubtedly will seize
the opportunity to go beyond educational activities to
more direct involvement in the work of managers.
most
factories in Beijing and Shanghai are again holding
political party meetings that both workers and man-
agers must attend. Party functionaries also are report-
edly being added to the staffs in those cities.
Many of the macroeconomic reforms that are essen-
tial to factory modernization and management reform
will probably be slowed or postponed. For example,
the reformers have already suspended their plans to
move forward in controversial areas such as price
reform, which will limit the ability of factory manag-
ers to improve enterprise performance (see appendix).
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In addition to political obstacles, the sheer enormity
of the task dictates that improving management in
China's nearly one-half million industrial enterprises
will take a great deal of time. Training is reaching
only a fraction of China's managers. The US pro-
gram, for example, has taught both short and longer
term courses to only about a thousand Chinese policy-
makers and industrial managers in five years; the
Sino-Japanese management center is intended for 150
students a year. Domestic programs are more numer-
ous but start small as well. Provincial economic
management institutes, according to a 1987 press
report, were designed to train 100,000 managers
annually-a figure we believe to be greatly inflated.
Experienced teachers of management also are in short
supply. In addition, China must train personnel such
as auditors and statisticians to help implement mod-
ern management within the factory.
regardless of training, most 25X1
Chinese managers are slow to grasp the need to be
results oriented, and are reluctant to make indepen-
dent decisions and assume responsibility for their
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Appendix
Macroeconomic Reforms and
Their Impact on Management
A number of macroeconomic reforms are essential to
the success of management modernization.
Bankruptcy Legislation. The Standing Committee of
the National People's Congress advanced the effort to
make enterprises responsible for their performance
and reduce state subsidies in November 1986 by
passing China's first bankruptcy law. According to
US Embassy reporting, the bill's adoption was de-
layed until its opponents were assured that it con-
tained: guarantees that workers would receive unem-
ployment benefits and, eventually, new jobs;
administrative penalties for managers and bureau-
crats whose management decisions result in enterprise
indebtedness; and provisions for complementary laws
and reforms that place real authority for enterprise
management decisions in the hands of the managers.
Formal implementation of the bankruptcy law-origi-
nally scheduled to occur in June 1987, three months
after passage of the related state enterprise law-
apparently has been delayed by the March 1987
decision of the National People's Congress Standing
Committee to postpone a decision on the enterprise
law, although experiments in applying the bankruptcy
law are under way. The new law is limited in applica-
tion and retains a significant role for the state-assets
of closed enterprises will remain state property, and
the government will play a major role in relocating
workers-but it will probably help Beijing to compel
factories to improve operations and accept further
reforms.
Price Reform. State control of prices for raw materi-
als and finished goods continues to hamstring manag-
ers. For example, companies that relied solely on the
state for the provision of materials-especially scarce
ones-now must often pay higher prices because
subsidies inherent in the state-supply system are
ending; but the firms have little or no power to pass
higher production costs on to the consumer. Limits on
the ability to adjust product prices also reduce the
incentive for managers to improve the product be-
cause a better product earns no additional income.
Beijing has lifted price controls for some consumer
goods, overplan production, and out-of-plan produc-
tion. It had planned to continue price reform for
selected goods in 1987 but now has postponed such
measures.
Human Resources. Lack of job mobility and the
limited supply of skilled workers prevent enterprises
from acquiring needed managerial and technical
skills. Even if a factory director recognizes an oppor-
tunity to change operations, products, or quality,
finding the personnel qualified to implement the
changes remains a stumblingblock. For example, a
Chinese factory wishing to upgrade its product by
adding electronics would often be unable to hire the
engineers needed. Beijing has issued regulations in
recent years giving skilled personnel the freedom to go
where their talents are needed, and some moves have
occurred. barriers 25X1
to personnel mobility, such as factory ownership of
housing, remain strong.
Labor Reform. A manager trying to improve labor
productivity and efficiency is hampered by restric-
tions on the hiring and firing of workers, and on
adjusting the size and composition of the work force.
Beijing took an important first step toward reforming
labor practices in October 1986, when it adopted a
labor reform package eliminating guaranteed lifetime
employment for new workers in state factories and
giving managers additional authority to fire employ- 25X1
ees. The reforms also create national retirement and
unemployment systems. According to press reports,
Beijing will allow enterprises to hire an increased
share of workers under fixed-term contracts-making
it easier for factory managers to adjust the size of the
work force according to production needs. Enterprises
also are experimenting with additional measures link-
ing salaries and incentives to worker productivity.
Implementation of labor reforms, however, will be
slow.
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Financial Reform. A decrease in state allocations of
working and investment capital is forcing enterprise
leaders to search elsewhere for funds. As a result of
changes in China's banking system, bank loans have
become an increasingly important source of financ-
ing.' Beijing also is allowing experiments with issu-
ance of shares and bonds. In Guangdong, approxi-
mately 850 enterprises had raised more than 500
million yuan through securities by the end of 1985. In
addition, 25 banks in the Shanghai Economic Zone
set up a short-term capital market and a long-term
securities market. Controls on foreign exchange re-
main a problem for many managers, however. Factory
directors in Sichuan told visiting US officials that
access to foreign exchange to import technologically
advanced equipment is their most urgent need.
Bureaucratic Reforms. Although the state has given
up some of its direct involvement in industry, manag-
ers remain constrained by the continued need to seek
approval from higher authorities for a variety of
decisions, from technology purchases-especially im-
ports-to construction projects:
? A June 1986 survey of almost 1,600 senior execu-
tives in Beijing and Tianjin showed that only 103
had the authority to install a personal computer or a
microcomputer; only 50 could approve the purchase
of other office products, such as copiers.
? In 1981 a Hunan factory applied for permits to
begin construction of a beverage bottling plant and
to import automated equipment. During the next
five years, the proposal was revised three times,
reviewed by 60 separate government offices, which
affixed more than 200 signatures to 200 documents,
but the proposal was not disapproved or approved.
An important goal of the "political structural re-
forms" originally slated to occur during the next
several years is streamlining China's bloated and
overlapping bureaucracy, but the reforms also have
been postponed as a result of the ongoing debate over
political and economic issues
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Secret
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