Chinese Firms Run by State Mired in Debt : Economics: Many factories have formed ‘begging-for-repayment armies’ of 40, 50 or more staff members.

SHENYANG, China — Zhang Zhuli sat puffy-eyed inside the offices of a chemical plant in Yichang, Hubei Province, begging officials to repay the debt owed her company.

The Chinese nurse had traveled more than 1,000 miles from her post at the Shenyang Gas Compressor Factory to collect the debt, only to find her tears ignored. Desperate, she staged a hunger strike and finally recouped $11,000.

China’s state-owned factories are so entangled in debt that many have formed permanent “begging-for-repayment armies” of 40, 50 or more staff members. The groups are roaming the country using bribes, flattery, seduction and other antics to extract payments, according to official press reports.

Some factories have resorted to more drastic methods. Kidnapings, abductions, and torture cases linked to debt collection have risen dramatically here in China’s northeastern province of Liaoning, police say.

Still, many debtors deny that they owe a cent. “Whoever is honest will lose out,” the current saying goes.

“This is extremely abnormal. Actually, the problem of begging for repayment shouldn’t exist,” says Zheng Ping, the harried director of the Shenyang compressor factory. He has a dunning team of 40 workers ranging from nurses to Communist Party cadres.

Adding to the absurdity, many of China’s antiquated state-run firms are borrowing to churn out unmarketable goods, finance overambitious expansions that they cannot afford or just keep workers on the job.

“They don’t make what people want, and they make too much of what people don’t want,” says Song Zhenying, a bank economist in Shenyang. By September, $43 billion worth of products were stockpiled in warehouses collecting dust, according to official figures. The result is a vast “chain of debt” estimated at $30 billion to $50 billion that has the state sector in a virtual stranglehold.

The problem illustrates how a decade after Chinese leader Deng Xiaoping lifted a ban on private enterprise, China’s huge but ossified state factories are crumbling before the competition of millions of smaller, market-driven firms.

In recent years, private and collective businesses have filled China’s markets with an unprecedented variety and abundance of goods, ending chronic shortages and breaking the monopolies of state-owned firms.

As a result, nearly 40% of state enterprises are operating in the red. Burdened with bloated work forces, 1950s-vintage Soviet machinery, rigid government quotas and controls, they are no match for their nimble competitors.

“How can they (state-run firms) survive in a market economy that is growing bigger and bigger? They have no vigor!” a Beijing economist says. “When the market shifts, they fall apart.”

The decline of state enterprises is the focus of a pivotal debate between China’s conservative and reform-minded leaders: whether to continue propping up the ailing firms or gradually wean them from government support, letting the worst go bankrupt.

Communist Party reformers argue that if Beijing continues pouring its limited financial resources into what Chinese newspapers call the “black hole” of debt-ridden state firms, the whole economy will suffer.

This fall, reformers represented by Vice Premier Zhu Rongji lobbied for implementing the controversial 1988 Enterprise Law, which guarantees more autonomy for state firms.

Zhu also revived bankruptcy experiments. In October, the State Council demanded that every province close down 10 state enterprises by cutting off electricity, loans and raw materials if necessary. More than 30 firms producing “unmarketable” goods in Liaoning and other provinces have been ordered to close.