China's hidden timebomb

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China's hidden timebomb

Behind the thriving anarchy of China's coastline there's an industrial hinterland that is depressed, debt-ridden and still largely state-controlled. Few bosses of the state-owned enterprises there have the power to cut their workforce or pay bonuses. Even if they do, the state-owned banks are keeping them and the competition on life-support. Overcapacity, pollution and poverty are omnipresent, part-mitigated by the huge Three Gorges Dam project, which employs 25,000 people and will displace two million. Euromoney's Steven Irvine followed investment scout Richard Tsiang into the interior to see China's true economic heartland - a textile company that raise pigs, a salt plant with its eyes on a broadcast-equipment producer and a television factory that wants to give away its products

Twelve men on bicycles pedal across the runway to our plane and start to remove our bags - the first evidence of the non-capital intensive, low-cost enterprise we have heard so much about.

This is Chengdu, capital of Sichuan, a south-western province more populous than Germany and which 2,200 years ago propelled China towards unification.

However, with 36,000 state-owned enterprises (SOEs) - more than in any other province - it is at the centre of the greatest problem besetting China's leaders - how to reform these enterprises without destroying the social fabric.

"It's all starting to unravel," says Euromoney's travelling companion, Richard Tsiang. He isn't heartened by a research report he's read on the plane: textile exports from China fell in the first 10 months of 1998 - which is unprecedented - and electricity production rose by only 2%, a strange thing in an economy supposedly growing at 8% a year. Moreover retail prices fell 0.8%.

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Tsiang, a partner with Hong Kong-based fund manager Allard Partners, is a hybrid in many ways - an Australian-born Mandarin-speaker, he's an asset manager who also advises Fortune 500 companies on acquisitions.

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