December 29, 1979

CHINA IN THE 1980s

This section was written by our foreign editor, Brian Beedham, our China-watcher, Emily MacFarquhar, and our China-business-watcher, Alice Barrass, in that page order.

For the past three years China has been run by a government of radical moderation--''moderation'', because it is consciously pulling back from its predecessors' disastrous extremism; ''radical'', because this has meant digging down to the roots of what went wrong before. These three years of radical moderation follow 17 years of experimental Maoism from 1949 to 1966, with its intermittent foretastes of the horror to come, and then 10 years of all-out Maoism, when the old chairman first unleashed and then lost control of the cultural revolution, with consequences which China and the world are only starting to measure. Can such a government, with such antecedents, find an alternative that China can live with?

The answer will be of historical importance, but any answer today is bound to be tentative. It has to be tentative because anybody who has been to China more than once (as all three members of this team from The Economist now making their report have been) realises with a jerk of dismay just how little of China he or she has been able to see.

Of all China's cities, there are still only about 15 which can be visited by any but the most favoured or most ingenious foreigner, and of these only five or six can be packed into the average two-week trip. In each of those cities only a handful of factories, schools and neighbourhood committees are available for inspection. Outside the cities, of the 50,000 rural communes where four fifths of China's billion people live, a total of perhaps 100 lie on the invisible dotted line which makes up the authorised itinerary for outsiders like ourselves. The Chinese are the kindest and most efficient of hosts, but the practised welcome and well-thumbed notes produced by the reception committees at most of these places (not to mention the wall marked ''WC: Ladies'', in English, at a commune in remote Sichuan province) do make one suspect that one is not exactly the first big-nose to walk along that dotted line.

The result is that making a judgment about China is rather like trying to guess the meaning of a giant jigsaw made up of several thousand pieces, only a few dozen of which are actually on display--and quite a lot of those are the bright blue sky of required official optimism.

Nevertheless, the eventually emerging shape of that jigsaw will be of interest far beyond China itself. The Chinese have lately dropped their former habit of calling the Soviet Union, when they wanted to be rude, a ''revisionist'' regime. This is honest of them but also unavoidable, since everyone can see that the new Chinese government is itself busily revising large chunks of what was regarded in China until 1976 as the true communist faith. The question is whether the Chinese revised version will turn out much the same as the reviled Soviet one; or will produce a fresh, and better, specimen of applied Marxism; or will eventually--it is not impossible--lead to a clean break with Marx.

Chairman Mao, who was better at diagnosing than at curing, saw clearly enough what was wrong with the Marxism-Leninism that emerged from Lenin's fatally distorting fingers 55 years ago. He correctly observed that the idea of a single all-powerful party dominating every aspect of a country's life--Lenin's main contribution to communism--inevitably produced bureaucracy, oppression and stagnation. (Edmund Burke could have warned both of them, but no matter.) But Mao's suggested cure was the bizarre notion that revolution was not just a once-and-for-all event, but something to be enjoyed at regular intervals: he proposed organising a new revolution against bureaucracy, stagnation and the rest of it every generation. Quite apart from the sheer unlikelihood of a one-party system throwing up leaders willing to cast their own party into chaos every generation, the trouble with Mao's proposal was the fact that the first experiment with it--the cultural revolution starting in 1966--proved to be a monumental disaster, a decade of breakdown and brutality. The cure, for most Chinese, was worse than the disease: ask them, and see the remembered fear in their eyes.

Fossilised, anarchised, or . . . ?

So what are China's new revisionists to do about Marxism-Leninism, when the Leninist part has been found defective but its attempted Maoist replacement didn't work either? Leninism fossilises. Maoism anarchises. Can a communist avoid either, without falling into the other?

The ''Eurocommunists'' say they can, by giving up the one-party system and accepting multi-party pluralism; but few people believe them, because accepting the multi-party system is likely to mean abandoning that belief in a complete

transformation of society which makes communists different from other politicians (and which led Lenin to insist on the one-party system in the first place). The Chinese communists are less disingenuous, or perhaps just more genuinely baffled. They have kept their one-party system intact over the past three years. But at the same time they have started to say and do things the consequences of which will not be easy to contain within the framework of a one-party system. There is a genuine intellectual fascination in wondering which will prevail in tomorrow's China--the Leninist straitjacket, or the longing for flexibility which Mao's revolution-a-generation nonsense can no longer satisfy, and is therefore taking other forms.

The first signs the arriving visitor meets are encouraging, but could be misleading. There is an exhilaration in China today that was not there two years ago, when The Economist last had a party of reporters in the country. People talk to you more freely, about present grumbles as well as past cultural revolutionary nightmares. English-speaking students buttonhole you in parks. The astonishing novelty of advertising placards, of girls in perms and lipstick, of young couples nuzzling in public, of films and plays without a political message--well, just a tiny one--is liable to make the new arrival think that all has changed.

But none of these things necessarily has roots. The sparkle in the Chinese air in 1979 may have been China's equivalent of what Russians felt after 1953, when Stalin died and Stalin's political prisoners started coming out of the camps. On that analogy Chairman Hua Guofeng and Mr Deng Xiaoping would be China's equivalent of Bulganin and Khrushchev, harbingers of an apparent liberalisation that never quite became real. Things did get better in Russia, for a time, after Stalin. But then the internal logic of the one-party system asserted itself again, and the Soviet Union settled back into the grey heaviness of the Brezhnev era.

The hope that things will go differently in China rests on the fact that the Chinese are the Chinese. These people, with a culture, a language and a state-structure stretching back more than 2,000 years, are sharper and more self-confident than the Slavs. They may therefore be more adventurous, more willing to take risks with ideological propriety, in the search for a political system that suits their needs. Some of the available pieces of the Chinese jigsaw suggest that this may be happening. Others, alas, do not.

Pushing the party into the future?

Three years after the Hua-Deng government won its civil war against the Gang of Four, there are reasons for thinking that China is moving in a genuinely new direction; other reasons for suspecting that it is not. First, the causes for gloom.

1. The same old party. We were told by the fascinating Mr Zhao (see page 23) that ''in future, not all ministers will be party members'', and that scientists and other non-party people may find their way into the government. But it is highly unlikely that Mr Zhao intends this to mean any dilution of the communist party's control: people who know eastern Europe, after all, remember that there are (reliable) non-party men in the governments of Poland, East Germany and Bulgaria--a lambskin bikini for the wolf. That China's post-Mao rulers feel protective towards their party should be no surprise. Their abomination is the cultural revolution; and the cultural revolution, according to Mao's curious plan, was an assault on the party from within. The dismaying thing is that the Chinese party should be so largely unchanged as to both its role and its membership.

One of the many disadvantages of the single-party system is that, when a government wants to introduce a new policy, it has to ask the same old party machinery to implement it. So far as we could see, the middle-level and grassroots Chinese party officials administering the new anti-cultural-revolution line are pretty well the same ones who administered (if that is the word) the cultural revolution. A few of the worst thugs of the 1966-76 period have been removed, and replaced by old hands who lost their jobs in that upheaval. The vast majority who dutifully did what the cultural revolutionists told them are now expected dutifully to do what the new government tells them: even the propaganda officials at local-branch level are mostly the same people. Result: at best, much confusion, bafflement and foot-dragging; at worst, many pockets of active resistance to the new policy, until a new generation of cadres can be trained in the 1980s.

This is a major problem when it is remembered that virtually every Chinese institution--factory, university, city office, rural production team--has a party unit built into it. The attempt to make industry more efficient, for instance, runs up against the fact that in most factories most major decisions are a matter not only for the management but for the party committee as well. Some of the factories we visited had party committee men directly in charge of operating departments. China's managers may no longer have the albatross of ''revolutionary committees'' around their necks; they still have those party committees.

2. Old party, old attitudes. On our previous visit to China, two years ago, we saw notice-boards in factories on which every worker was obliged to display a hand-written account of his ''class origins''. This time, in Chungking, the notice-board contained every operative's essay on how he intended to be a model worker. ''Dear party branch . . . '' began one such epistle. A young man in Peking, recently home from nine years' cultural-revolutionary exile in the frozen far north, when asked what he thought about it, laid hand on heart and replied: ''The party's wishes are my wishes.''

There were many other examples of such unchanged attitudes at the middle and lower levels of the party. The New China News Agency, announcing the opening of the trial in October of the dissident Wei Jingsheng, briskly pre-judged him as ''the counter-revolutionary Wei''. (It was subsequently explained to us that this merely ''reflected the wishes of the people''.) A judge in Shanghai, invited to tell us why Wei had been kept in detention before his trial longer than the regulations permit, replied that ''these are the existing regulations. Next year we shall observe them strictly''.

The reluctance to break away from old habits of mind is also evident in industry. Factories are now supposed to be able to lay off workers who will not work. Yet in the Chengdu textile factory we visited only two men had been so penalised, although it was admitted that working standards had been appalling; in the Chungking machine-tool works, only one; in the Peking porcelain factory, none at all.

3. The abyss so close behind. It is hard enough for the leaders in Peking to revitalise China when this means urging a policy of experiment, competition and risk-taking on a party apparatus most of which does not like, indeed barely understands, what those words mean. It becomes even harder when it is realised that the success of that policy will mean some Chinese getting a lot richer than others--and when it is remembered how many Chinese still stand on the brink of absolute poverty.

The economic policies of the Hua-Deng government (see pages 26-30) rest on a willingness to accept a certain amount of de-equalisation of incomes, a move away from the paralysing egalitarianism of the past 30 years. Some of the leaders, including the redoubtable Mr Zhao, are willing to face up to this: ''Competition means that some run well, others run worse'', said Mr Zhao. The inefficient, and the plain unlucky, will have to fall back on the social security system. But it takes a lot of courage to push a policy like that when many Chinese, on the evidence now starting to emerge, have still not escaped from the intermittent threat of hunger.

A recent article by two Americans, Miriam and Ivan London, stitches together evidence from Chinese newspapers and radio stations, Hongkong reports and the stories of refugees to argue that in many parts of China a combination of bad weather, inefficiency and lack of proper storage and transport still regularly adds up to too little food, sometimes even to local famine. This should be no revelation. China's grain production, since the years just after the communist victory in 1949, seems to have risen only a little faster than the number of mouths it has to feed; even more fairly shared out, as it undoubtedly is, that is not enough to abolish entirely the hunger of the pre-1949 years. (It is said that the grain-production figures may be an underestimate, if cunning peasants hide part of what they grow; but it is equally possible that they overestimate the truth, because the authorities want to hear high figures and unscrupulously ambitious officials provide those figures.)

There is also the evidence of the eye, now that more foreigners can penetrate a little deeper into China. Tourists in provincial cities have lately reported seeing beggars, and having food snatched from plates in restaurants. We saw two small boys, begging in the main street of Chengdu. Even on the outskirts of the towns, there is the testimony of those skin-and-bone peasants humping and hauling huge burdens from morning till night. What more might one see, if one could get into the real depths of the countryside?

This is not to deny that there have been vast improvements since 1949: one no longer, after all, sees people dead of starvation in the gutter. It is merely to report what ought to be obvious: that much of China lives on the margin. This is the brake dragging on the instincts of leaders who believe--entirely correctly--that faster growth requires more competition, even though competition means more inequality. After 30 years of sacred egalitarianism, with Mao's ghost looking over their shoulder, dare they risk explaining to desperately thin Chinese that progress involves letting other Chinese get fatter?

Look at the brighter side

These are the main reasons for wondering whether the men now running China can push their desire for change through the obstacles in their path. If that were the whole story, a visit to China would be a melancholy business, and the answer to this article's question--Leninism or a new flexibility?--would have to be: victory for the Leninist straitjacket, a China of tomorrow more or less like the Russia of today. Fortunately, there are other signs which point in a more cheerful direction. Second, therefore, the reasons for optimism.

A. Putting pragmatism on a pedestal. The double-barrelled slogan that China's leaders have coined to sum up their message to their people is ''Find truth from facts'' or, in its slightly more sophisticated form, ''Practice is the only test of truth''. The Chinese communists are prolific slogan-makers (two years ago the theme-phrase was ''Bring great order across the land''). This prodigality with slogans may explain why it has taken so long to grasp just how revolutionary the latest slogan is.

To say that the only way of telling whether an idea is true or false is to put it to the test of experience is dangerous stuff for communists. The good Marxist believes that Marxism is a science, and that he can propound solutions to problems with something close to scientific certainty. That is why the good Leninist is willing to entrust the implementation of those solutions to a single-party system: it is no riskier, he thinks, than giving the laboratory man the formula which will produce the predicted result. To be told that you cannot really know whether a policy is right or wrong, workable or unworkable, until you have tried it out must make the average apparatchik feel as if he had stepped on to thin air. ''Practice is the only test of truth'' is a revolutionary slogan in a communist country because it challenges certainty and authority. It is an appeal to doubt; and doubt is the philosophical basis for the pluralist theory of politics. (''I beseech you, in the bowels of Christ, think it possible you may be mistaken'', said Cromwell to the churchmen.) Chairman Hua and Mr Deng, welcome to pragmatism.

B. The first shoots of a new honesty. If that slogan were merely a slogan, it would doubtless go the way of other slogans. But in the things that reflect decisions taken at the top of the party (as distinct from the bemused lower ranks, still clutching at old habits of thought), there are signs in China of a new objectivity, which suggests that the slogan is meant seriously.

The new museum of party history in Peking has restored to their due places in the factual record both Lin Biao (one of the prime movers of the cultural revolution, and therefore anathema to the present government) and Liu Shaochi (one of Lin Biao's main victims). To make non-persons into persons again is an act of more than academic interest: the museum was thronged, the day we visited it, with young people busily taking notes at just such fascinating places in the display. Moreover, the Chinese officials one talks to in Peking, and to some extent even in the provinces, show a growing willingness to venture outside the computerspeak which used to make any real exchange of ideas so difficult.

This goes with a greater readiness to admit mistakes. The Chinese press has become a good deal franker in the past two years about China's shortcomings and about its own previous failure to notice those shortcomings. (The new frankness is one reason why we now know more about the difficulty of keeping China's people properly fed.) The People's Daily in Peking and the Liberation Daily in Shanghai both keep large departments which specialise in checking readers' complaints about officialdom; so far as we could tell from a talk with two earnest young people from the Shanghai paper, which handles 9,000 complaints a month, the job is tackled seriously and often gets things put right.

The film industry, too, has liberalised itself in a big way. We saw previews of several new films, one of which was virtually a paean to the delights of the consumer society and another a slashing attack on the brutality of the cultural revolution. (All right, an attack on the disowned past; but it made the recent Polish film ''Man of Marble'', about the Stalinist period in Poland 30 years ago, seem positively bland by comparison.)

There is also, thank heavens, less exhortation. Three years ago it was common for factory workers to be obliged to spend two hours a day in compulsory ''political studies''. In the factories where we checked on this visit, it was down to one hour a week. At Nankai university in Tientsin, apart from the ordinary courses in politics, the students now have to turn up at no more than a Saturday-afternoon chat about current affairs, and even that is not compulsory (though ''they know it is better'' to attend). At one factory in Sichuan, to be sure, a loudspeaker was bleating out a pep-talk about productivity on a cracked record while we tried to have a discussion with the managers. ''Does anybody listen?'', we asked. ''It is not compulsory'', said our host with only a small twitch of the mouth.

C. Pragmatism plus honesty equals a new chance? These are small things, but they help to create a climate in which the economic policy of the Hua-Deng government has a chance of taking root. This economic policy--more details on the following pages--is an attempt by half-repentant Leninists to take a certain amount of decision-making power away from the bureaucrats and give it to the people nearer the economic front line (factory managers, sub-units of rural production teams), along with the financial incentives that will encourage them to use their new power. It is not the first time a communist country has tried to loosen the central planners' grip and, so far, the Chinese experiment is not particularly radical: it does not give the front-line people any real control over the two big economic weapons--the power to fix prices and to make investment decisions. It goes somewhat further than most east European countries have gone (and a lot further than Russia itself) but not as far as either Hungary or Jugoslavia. Not yet, anyway.

The reasons for adding that hopeful ''not yet'' are, first, the suddenness with which the pendulum has even half-swung (until two years ago, China was in many ways the most centralised country in the whole communist world); second, the signs that the Chinese may intend to be unexpectedly liberal about letting in private investment from abroad; and third, and most important, the fact that the experimenters in Peking do not have to worry all the time how far Big Soviet Brother will let them go.

The Soviet Union missed its chance of economic reform in the mid-1960s, when Mr Brezhnev squashed Professor Liberman's decentralising proposals rather than run any risk of weakening the power of the ruling party. Ever since then, would-be economic reformers in the smaller east European countries have had to measure their reforms to fit not only what their own local party will accept but also what that watchful Soviet eye over the border thinks the local party ought to accept. The Chinese, having made their break from Russia, do not suffer from that crippling second constraint. The only question is how much of a risk their own party is prepared to run with its own power to get the economy moving.

Good luck, old men

It is against this background that ''Practice is the only test of truth'' looks so pregnant a slogan. If Mr Deng and the innovators around him mean what that phrase seems to say, the changes they have introduced in the past couple of years may not be the last. If those changes work--meaning if they produce more food from the farms and more and better goods from the factories entrusted with the new experiments--the courage of confirmed convictions could carry the Dengists on to the next step in the process. This next step might include giving industrial managers more control over price and investment decisions; giving small groups of farmers with bright ideas the right to co-operate with other such groups across commune borders (see page 23); and giving provinces with growth potential the freedom to exploit it. If those things happened, the Leninist straitjacket would be giving at the seams.

China is a country in need of change, led by old men in a hurry for change, but hampered by a party much of which mistrusts change. To forecast the outcome, as the 1980s open, is like prophesying the weather from the straws that blow and twirl where the winds meet. The 75-year-old Mr Deng may not live long enough to see his reforms through to their logical conclusion; he may himself flinch back from that logic; he may have flinching imposed on him by his more nervously conservative colleagues. But the Chinese have already shown that they have the self-confidence, backed by the sheer power of numbers and geographical size, to do things differently from other communists. If any country that has fallen under Lenin's cold grip can shake it off, China has a chance.

Mao's unfilial heirs have stayed true to his heritage in at least one important respect. They are staking their all on as bold a break with China's immediate past as the old great leaper himself ever attempted. Bolder even, considering that they start without the security of a godlike leader and a rocklike faith.

Like Mao in the 1958 Great Leap Forward, they aim to put China among the economic superpowers, mainly by mobilising its human resources. And, like Mao in the 1966 cultural revolution, they are releasing forces which could well veer out of control. At worst, China could become ungovernable. At best, it could develop into a supersized Singapore.

One great difference between Mao's leaps toward utopia and the ''new long march'' is that today's risks are both better calculated and better attuned to the popular mood. Where Mao offered spiritual food and asked for superhuman effort, Hua Guofeng and Deng Xiaoping are providing bonuses, television sets and foreign films in return for a good day's work. Walk down the main street of Peking, Shanghai or even far-off Chengdu and the material benefits of the new dispensations are everywhere visible.

So are some of the new freedoms: freedom for private shoe repairers and pedlars to ply their trade along the pavements; freedom for neighbourhood groups to set up wine bars and streetside tailor shops; freedom for some people, some of the time, to express some of what they think. Freedom, like other incentives, is portioned out on a scale of utility which is determined by the priorities of the regime. Top of the list are the four modernisations--the code words for economic growth.

The leeway for economic activity is expanding every day, though it is still more potential than actual (see page 26). In every sector reforms have to be accommodated within a system that is hidebound by hangovers from the commandist past.

But the Chinese have already moved faster than anyone would have dreamed possible only two years ago to expand the scope of private and collective enterprises; to facilitate the introduction of foreign technology and investment (see page 29); and to widen the availability of consumer goods.

First you catch your television

The newly liberal import policy which has put Omega watches and Sony tape recorders into department stores, along with cheaper but improving domestic versions, has encouraged both consumption and consumerism. Television sets, even at seven times the average monthly wage, have to be allocated by coupon. Angry customers have been returning the locally made models, some of which, the New China News Agency tells us, ''need to be knocked constantly and give neither sound nor picture but burn and smoke''. The news agency rejected the manufacturers' claim that the quality of the sets met the ministry's standards: ''Consumer satisfaction is the standard that manufacturers should aim at.''

Consumer demand has now been recognised as a legitimate market force. The economy of relative abundance is still too new to tell whether the mostly hideous new clothing designs, from orange wetlook jackets to gaudy satin chongsams, are what Chinese, emerging from years of blue anthood, really want or merely what is on offer. Very few of the more extreme styles can actually be seen on people's backs, perhaps because they are still regarded as risky investments. The most widely adopted of the new fashions is also the cheapest--the permanent wave. Even the streetsweepers of Chengdu have taken to curls.

Grey-haired veterans of China's puritan era are already shaking their heads at the materialist values which are replacing decades of enforced austerity. ''Perhaps we are going too fast in encouraging people to dress up more'', remarked a Shanghai official, elegant in his finely tailored Mao suit--though he went on to insist that if luxuries were to be made available, Shanghai deserved more of them than anywhere else. But the uses of the consumer boom are obvious and overweening: to enhance the incentive effect of increased earnings after years when there was more money than goods to spend it on; and to provide an outlet for accumulated frustration and deprivation, especially among the young.

The hunger for things fashionable and foreign has not stayed wholly within tolerable bounds. Blackmarketeering, smuggling and prostitution are playing a part in the trade in luxury goods. These illegal fringes are stamped on hard--not notably successfully so far--but there has been no other attempt to restrict the consumer market. Not so the non-material incentives like freer speech.

A sort-of, sometime democracy

The closing of Peking's Democracy Wall in early December amounted to an admission by Deng Xiaoping that one of his gambles had failed. Like Mao in the 1957 ''hundred flowers'' interlude, he underestimated the degree of discontent that would bubble up when the lid was lifted. Mr Deng had authorised the so-called democracy movement in the autumn of 1978, much as he sanctioned permanent waves--not as a value in itself but as a safety valve and a means of winning support for his modernisation drive. In the exuberant early months the poster-writers also served Mr Deng's political purposes by intimidating his Maoist opponents on the politburo.

But the street debate would not stay within the appointed geographical and political confines. Young dissidents broke through both barriers--by distributing their poster tracts in underground newspapers and by questioning the sacred principle of party leadership. At this point free speech came in conflict with a much higher priority of the regime--preserving the authority of the Communist party. So Mr Deng gave in to pressure to silence the dissenting voices, first last spring and again, after a second shorter open season, this autumn.

The notion that the cyclostyled writings of young theorists, posted on a Peking wall and distributed to a few thousand readers, could pose a genuine threat to an authoritarian regime may be ludicrous. But in China in 1979 these poster tracts touched off more than just the knee-jerk response of communists to criticism. Although it claims to welcome new ideas, the Dengist leadership is highly sensitive to ideological challenges--both because of the vacuum left by its own disavowal of much of Maoism, and because of the ravages inflicted on the party and the system by the cultural revolution.

Mr Deng returned from his own years in purgatory with the mission of restoring the shattered confidence of the party and of his own generation--mainly veteran party officials like himself, but also elderly ''rightists'' and intellectuals. Old men have old men's perspectives. Over the past year, however, he and his colleagues have had the realisation forced on them that the generation most in need of rehabilitation is the young.

By any rational standard, political assertiveness should be the least of the government's worries about its young people. The most alarming symptom of disaffection is the crime wave which has been sweeping China's cities. The Chinese have never before published crime reports, much less crime rates, so it is impossible to tell to what extent lawlessness has actually increased. The image of China as a crime-free society, in which a tourists' discarded pyjamas would follow him relentlessly from city to city, was always a myth. The ranks of securely locked and guarded bicyles in every town belied it. But the fact that the army has now been called out to patrol the streets in the main cities and clear them of rapists, muggers, arsonists and thieves confirms that China must be suffering from a severe attack of the modern urban disease.

Crimes such as currency speculation and illegal trading can be linked to the new materialism and the freer contacts with foreigners, especially overseas Chinese. Armed robbery too, as a violent variation on profiteering, is presumably inspired by similar motives. But murder, rape, gang warfare and assaults involving neither money nor goods are also rampant and demand another explanation.

The idle poor

The Gang of Four? Like everything else that is wrong with China, the crime wave has been blamed on the legacy of the write-off decade. With some justification: habits of violence, factional loyalties and a loss of moral moorings left over from that free-wheeling time have persisted. But a more obvious cause lies in the familiar breeding ground for crime--unemployment. The Chinese are now admitting to 10m unemployed (out of an urban labour force of 100m), although a politburo member put it at 20m in a closed meeting last June. A high proportion of this total are ''young'', which probably means under 30.

Like crime, unemployment has been an unmentionable fact of life in China for decades. In 1957, the last ''normal'' year before everyone was drafted into the Great Leap Forward, unemployment among adult males in Shanghai was estimated at nearly 25%. It was in this same period that the government started dealing with the shortage of jobs for young people by sending school-leavers from the cities into the countryside. By 1966, 1.2m youngsters had been despatched, for varying terms, in this way. After a pause for making revolution, the exodus was revived and accelerated as a means of winding down the Red Guard movement. Some 12m young people left the cities between 1968 and 1975, of whom 5m still remain on the farms.

From these involuntary exiles have come many of the dissidents and criminals of today. The riots in Shanghai, Hangzhou and other cities last winter were led by ''rusticated'' young urbanites demanding the right to return to their homes. Many have succeeded: in Shanghai, out of 1.1m sent out, 400,000 are entitled to return, and most of them have done so. In theory, the only grounds for returning or being exempted from rural service are chronic health problems, family economic difficulties or rare skills, but the categories are clearly elastic: every ex-exile we met in Peking testified to an invisible ailment.

A choice of risks

The government has promised that the rustication programme will gradually be phased out. But first it will have to weigh the dangers of keeping malcontents down on the farm against allowing them back into the cities, where their mischief-making potential is much greater. There is no end in sight to the surplus of school-leavers over jobs. The official reckoning is that 3m middle-school graduates come on to the labour market every year, of whom only 2m can be employed in the cities. The prospect is that a good part of the remaining million will find themselves tilling the soil.

Now the government is proposing to appease the transplanted urban youth by pulling them out of the communes and segregating them in their own collective farms, where they will earn twice as much as ordinary peasants. This is not calculated to endear them to their country cousins, but then the Maoist theory that students and peasants would learn to love each other never worked anyway. More than 1m young people have already been transferred to new collective farms, where they are earning 200-500 yuan ($130-$325 in cash) a year. The bottom figure is equivalent to the lowest wage grade in a factory; the top one is below the average worker's wage of 700. But, with cheap food and free housing, living standards are said to be almost as high as in the cities.

This, of course, is only part of the point. With the traditional lure of the bright lights enhanced now by glittering shop windows and cinemas showing foreign films, it will take continuing strict controls over population movement as well as higher pay to keep young people down on the farm.

Denting the iron rice bowl

Apart from university graduates, who are in a separate, fully-employed category, the dream of every city-bred youngster is a job in a state factory or bureaucracy. This is mainly because of the fringe benefits, which up to now have included lifetime job security and automatic promotion by seniority (though not automatic wage rises). This ''iron rice bowl'' has recently come under attack as an obstacle to economic growth. But so far the government has dared to make only a small, nepotic dent in the system to widen the way for young people.

An early retirement plan now allows parents to stop work 10 years before the normal retiring age--at 50 for men and 45 for women--in order to turn their jobs over to their children. In a Tientsin textile factory of 4,500 employees, 700 had taken this option in the past year, more than half of them men. The sweetener is a fairly generous pension scheme which provides 70% of wages after 20 years at work, 80% after 30 years and 90% after 34 years. The plan is not on offer everywhere, however, and is intended to be no more than a temporary palliative on the way to universalising competitive entrance examinations for factory work.

But there is another retirement plan in the wind which could have much more far-reaching effects on career prospects for the young. This is the decision, leaked to us by Zhao Ziyang (see next article), to begin making room for more young and middle-aged officials (under-seventies?) in the state bureaucracy by gently escorting golden oldies upstairs into honourable sinecures as consultants or advisers. Sichuan province is giving a lead by pledging to install a non-elderly functionary in one of the top three jobs in every unit above county level within three years.

A lucky minority of young people will secure an iron rice bowl in one of these ways. For the rest, the only present alternative to unemployment or crime is ''temporary but long-term'' work in collective enterprises. The collective sector--which means everything not owned by the state, from communes to urban neighbourhood workshops--has long been an economic stepchild in the cities, fit for secondary tasks like providing pin-money for housewives. But in the past year it has expanded dramatically as part of a job-creation campaign.

How to make jobs and money

The street stalls, pavement tailors, old ladies with weighing machines are all new services, set up by neighbourhood groups on a profit-sharing basis and manned largely by the young and the old. In Peking 3,000 such enterprises have been set up this year, employing 120,000 young people. Squatting among them are the few private repairmen and craftsmen--300 in Peking--who have got their licences back after 13 years. Illegal traders flit between. One way of winkling out who is who is by turning a camera at them: the illegals turn angrily away.

The most dynamic part of the new collective sector does not operate on the street: it consists of go-getters like some young people in Shanghai who did market research to discover what was lacking in the local shops and then set up workshops to manufacture fans and refrigerators. The only limit on entrepreneurship, according to a Shanghai official, is that money must not be turned into capital. Short of that, ''no hard and fast rules''.

Young people are still reluctant to take up collective work because it lacks the prestige and the fringe benefits of public-sector jobs; they have been lured into it only by economic necessity and by promises that they can move on when something better comes along. But some of the service workers are already earning more than their friends in factories. And one of these days, when their innovative projects turn profitable, the envy may be on the other side.

A lot is riding on their success. If the assorted shoestring operations now going on in China's back alleys and on street corners are allowed to prosper without bureaucratic interference--a gigantic if--then at least one of Mr Deng's risks will be redeemed. Chinese consumers will gain goods and services; young people will gain a market for their labour; the regime will gain a breathing space. Money in young pockets might ease generational tensions just enough to allow other safety valves a chance to work--including China's nearly smothered infant democracy. Too much to pin on inbuilt entrepreneurial instincts? Tell that to Hongkong and Singapore.

As Sichuan goes

In ancient times the fertile basin in south-west China known as Sichuan (Four Rivers) called itself ''the best kingdom under heaven''. Today China's most populous (97m) and potentially richest province is showing similar self-confidence as the country's chief laboratory for economic and social change. It was selected for this role not only because the man who is running China, Mr Deng Xiaoping, is a peppery Sichuanese, but because the man he installed to run Sichuan, Mr Zhao Ziyang, is an innovative Dengist. As one of the ablest of China's ''younger generation'', 60-year-old Mr Zhao was recently promoted to the politburo, which puts him on the shortlist of potential successors to his patron in Peking.

As Mr Deng's reform programme got into top gear, Mr Zhao emerged as the model leader of the model province. When Zhao speaks, China listens. Where Sichuan goes, China is expected to follow: in raising industrial production by enlarging the prerogatives of factory managers (see page 26); in cutting the population growth rate to a scarcely credible 0.6% (see page 24); in experimenting with wholly new models of agricultural organisation (see below).

In a speech to his provincial party leaders in late October, Mr Zhao provided a neat pocket definition of the two essential hallmarks of Chinese socialism: public ownership of the main (but not all) means of production; and payment ''to each according to his work''. ''As long as we adhere to these two conditions, we should accept any structure, system, policy and measure that can promote the development of productive forces.''

Beyond these minimum requirements, everything is possible and nothing is sacred. Not even that holy relic of Mao's Great Leap Forward, the commune system, as Mr Zhao explained to an astonished Economist delegation during a break in his Chengdu conference.

Travel broadens

Mr Zhao came to Europe last summer and went back inspired by the efficient small-scale professionalised agriculture he saw in France and Britain. He concluded that one way of boosting farm productivity and preserving employment in China's countryside would be to encourage the smallest agricultural units, the 30-50-family production teams, to join forces within and across commune borders for specialised common purposes, such as food processing and animal husbandry. The resulting organisations, modelled on Europe's co-operatives, could be bigger or smaller than the present communes, and each team could belong to one or several of them, much as European farmers do. Rural industry--manufacturing farm tools, for example--could be developed in a similar way.

A few months after his return from Europe Mr Zhao had already put his ideas into experimental practice. He had also accepted the heretical implications of his scheme: that the communes, as economic units, might wither away. ''If the links between the production teams succeed, then the transition to modern agriculture will not have to take the current form''.

Mr Zhao insisted that these ideas were his own, merely illustrating the range of China's options. Indeed, the usually fluent interpreter groped for words to fit concepts she had never heard before. Zhao spoke with the confidence of a man who can afford to deviate from the standard text. But his themes clearly reflect a new line of official thinking, for less than two weeks after his interview doubts about the commune system began to surface in the press.

Peking's Guangming Daily, which often floats new Dengist ideas, criticised the remoteness of commune managers from the economic problems they were meant to be solving. ''Many years of practice have proved that combining government administration with commune management in the people's communes has more drawbacks than advantages.'' The logical conclusion of this analysis, compatible with Zhao's proposals, would be for the commune to be stripped of its economic functions and revert to serving as the lowest level of government administration, like its pre-great-leap counterpart, the hsiang or township.

The central problem of collectivised farming, as Mr Zhao sees it, is linking the interest of the individual with that of the collective. He concedes that the tiny remnant of private agriculture--the private plots--is far more productive than the collective part. Even on a show commune outside Chengdu, the income from private plots and authorised private ''sidelines'' like pig-raising will amount this year to a third of a family's cash earnings. This figure is said to have increased by a third since 1976, as a result of lifting official restrictions.

Mr Zhao argues against any major redistribution of land to individual tillers, not on ideological grounds but on practical ones, based on China's experience in the initial stages of the land reform movement. In 1953 and 1954, families with more and better labour power maximised their land use and prospered. But, Zhao claims, because of variations among families, the overall productivity of a village--now a production team--was not high.

He concedes that private plots could be expanded--perhaps from 7% to 10% of cultivated land. This will anyway be necessary if every commune member is to be given the tenth of a mou of land--a handkerchief of a sixtieth of an acre--to which he is entitled (no new private plots have been distributed in Sichuan since 1961, and the size of plots has been frozen since 1965). But, he insists, expansion cannot be unlimited. ''How to find exactly the right proportion of private plots is an important question for us to discuss''.

Piece-work is profitable

Sichuan is now experimenting with other modifications in agricultural organisation, also aimed at solving the incentive problem. One, which is being tried in other provinces as well, is to subdivide production teams into two or three specialised work groups of a few dozen people, each group with responsibility for a fixed output at a fixed rate of pay. Mr Zhao commends this scheme for ''bringing individual initiative into full play''.

Earlier this year production teams in other provinces were criticised for taking this idea a stage further and breaking work groups down to individual families. But Mr Zhao is ready to risk it. He endorsed setting family quotas for certain tasks such as raising silkworms, pigs and fish, on condition that the animal remain the property of the collective. ''In this way collective ownership can be integrated with private interest''.

Where production teams in Sichuan have not adopted the new system of a fixed rate for a fixed job, they have nonetheless abandoned the old method of awarding work points to individuals at a daily rate which would remain unchanged for three to six months until the next evaluation session. Now, in some Sichuan communes, work points are evaluated daily. But provincial planners consider the flat-rate system the more effective.

Suppose that after trying out a gamut of schemes for tapping peasant initiative, Sichuan decided that the Zhao proposal for multi-team co-operatives is a winner. Can it then go ahead and implement it on a province-wide scale, regardless of the preferences of other provinces and Peking? No, provincial autonomy does not look like stretching that far. Once the experimental period is over, Peking will give its blessing to a few approved methods which will then become the national norms. What's good for Sichuan may turn out to be good for the country. But even the redoubtable Mr Zhao will have to play by Peking's rules.

Sichuan is a made-to-order model for China's strictest-ever birth control drive. If the most populous province can come close to meeting an ambitious low-growth target five years early, then why shouldn't everywhere else do the same? The trouble is that Sichuan's population figures raise another question: has China really stopped cooking its books?

As Sichuan tells it, this overwhelmingly rural province of 97m people--10% of China's 970m--belongs in a family-planning class with China's largest and most sophisticated city. Sichuan's population growth rate last year is reported to have been 6 per 1,000, compared with 5 per 1,000 for Shanghai and 12 per 1,000 for all China. The drop in Sichuan's birthrate, from 40 per 1,000 in 1970 to 12 per 1,000 last year, is the sharpest ever recorded anywhere.

There are other anomalies. Sichuan's countryside was so seriously dislocated under the Gang of Four that it ceased its traditional exports of rice to other parts of the country and, in 1976, started importing it. Yet it was in these same rural areas in these same years that family planning is said to have gone full steam ahead.

Until this year Sichuan's techniques of delivering the birth-control message were no different from those of other provinces: the usual combination of social pressure (which in some places means assigning birth quotas), propaganda and door-to-door salesmanship, backed up by a wide range of free and freely available contraceptives. Abortion is the accepted answer to accidents. Last year Sichuan had 400,000--approximately double the rate in Britain.

Sichuan's explanation of its own success sounds simplistically political: family planning has had the personal attention of party first secretaries and, in particular, the first secretary of them all, Zhao Ziyang. This could mean that the push for results led to doctoring of figures all along the line. But it may in fact be the real story: that high-level political support for a high-pressure drive produced a sharp though unsustainable drop in a birthrate which anyway started out abnormally high.

Planners in Sichuan admit that by the time the rest of the country is supposed to drop to the 5 per 1,000 growth rate target in 1985, Sichuan will then be reaping the result of earlier baby booms and be growing again at twice that rate. In a commune near Chengdu, where the number of births was said to have been cut from an astronomic 1,927 a year in 1969 to an unbelievable 261 last year, for a growth rate of 4.5 per 1,000, the rate has already started rising again because 300 additional young couples are coming on to the baby market every year.

Still, in a way the numbers game matters less than what Sichuan is meant to be proving: that given strong political will, rural areas as well as cities can reduce the rocketing birthrate which has absorbed all but a fraction of China's hard-earned 100% increase in grain output over the past 30 years.

This is the kind of economic argument China is using now to put across its new one-child norm, expressed in the slogan, ''One is best, two is most''. Cost-benefit analyses are trotted out to convince prospective parents that they, as well as the country, will suffer from uncontrolled population growth. Grain shortages in the mid-1970s brought the same point home more directly.

Chen Muhua, the only woman on the politburo, now assigned by sexual ascription to population work, recently blamed China's growth rate, averaging 20 per 1,000 since 1950, for restricting educational opportunities (6% of Chinese children still cannot attend school); for creating unemployment; and for keeping the increase in grain output per head to only 44 kilogrammes in 30 years. She calculates that 30% of births are still in the prohibited category of third, fourth or umpteenth children. If nobody has a third child, 5m fewer babies will be born every year and population growth will come down to 7 per 1,000. China's ultimate aim is zero growth by the end of the century.

If statistics do not persuade, sanctions should. Ms Chen indicated that the whole country is now expected to follow Sichuan and the other vanguard provinces which began in January this year to reinforce their birth-control programmes with a schedule of rewards and punishments. These vary from place to place but are universally directed at promoting the one-child norm.

In Sichuan, parents who make a formal pledge to stick at one child are given an allowance of 5 yuan ($3.25) a month--or 30 work points--until the child is 14. Some places offer an additional one-off award of 50 yuan. One-child families also get priority for housing, jobs, medical treatment and schooling. In the countryside, a single child gets an adult's grain ration as well as a private plot 50% bigger than the standard. Retired parents of single children get a bonus on their pensions. Childlessness is evidently considered too deviant to reward, but at retirement childless couples are granted an additional living allowance.

If a one-child family breaks its pledge and has a second child, by accident or not, all these benefits must be paid back. Contraceptive failure is not an acceptable excuse. In October Sichuan was claiming that 1m couples had registered as permanent one-child families in the previous nine months. In the model commune mentioned above, 907 out of 981 one-child families had signed up. Such families in Sichuan are not asked to seal their pledge with sterilisation, but in Shanghai sterilised parents get their benefits earlier. At least one province, Hunan, has reported instances of compulsory sterilisation.

A two-child family gets neither rewards nor penalties, except for pledge-breakers. But with the third pregnancy, the sanctions start. First, there is pressure to abort. Then wages are docked during maternity leave. The third child gets no private plot, no extra housing space, no free medical care, and must pay a 50% premium for grain. Peking, Shanghai and some other provinces also deduct 10% from the parents' wages or work points as a ''large-family fee'' until the offending child is 16.

The carrot-and-stick system is still too new for results to be known. The city of Peking began applying it only in November. But Peking's statistics suggest that compliance will have to be near total for the target to be reached: only if nobody produces a third child and 90% of wage-earners and 70% of peasants stop at one child can growth be brought down to 5 per 1,000 by 1985.

Chen Muhua acknowledges the basic demographic difficulty: with half of China's population under 21, prospective parents are a growth sector. Furthermore, the disruptions of the 1960s produced two big baby bulges which will become parent bulges just when China is hoping to cross the low-growth frontier. So the rest of China may well follow the Sichuan pattern and stage a spectacular one-time slump in baby production.

This correspondent, back in China for the first time in seven years, was startled to see ordinary Chinese queuing up to buy such frivolities as phoenix-embroidered sheets. Up to a point, the authorities themselves are encouraging this nascent materialism. While we were in China, a fully fledged advertising agency started up in Peking. So did an official weekly paper called ''Market'' which is stuffed with ads for finery and gadgetry, as well as nuggets of detailed information and--another surprise--even individual ''job-wanted'' notices.

But the trend also worries the men responsible for it. One worry is political. Maoist precepts of egalitarianism may die hard--especially among the losers in the competitive stakes. The other worry is economic. There is the obvious danger that unleashed purchasing power will outrun the supply of goods to satisfy it.

To a degree, that is already happening. One consequence: China is having to use some precious foreign exchange on imports of consumer goods. Another (seamier) consequence: in Canton, in particular, there has been a thriving black market in consumer durables, like television sets, brought in as gifts by overseas Chinese friends and relatives--despite (partly successful) attempts to crack down at border crossings.

As yet, the pressures have not spilled over into overt inflation. Well, not alarmingly. The authorities simply cannot afford to let prices get out of hand: it would make a mockery of their promise of modest but assured increases in living standards. Witness their pains to offset the impact of their recent increases in state purchasing prices for agricultural produce by subsidies and cost-of-living allowances for urban workers.

Headaches are also being caused by competitiveness at the provincial level for export contracts and foreign capital. Again up to a point, the provinces are being encouraged: special powers have been extended to those magnets next door to Taiwan and Hongkong, Fujian and Guangdong, to attract projects. And yet . . . .

The Bank of China is unhappy about the eclecticism some of its branch managers are displaying in writing loan guarantees. Planning authorities in Peking must wonder if they know what is going on at all. Other provinces and municipalities would like to play Fujian's and Guangdong's independent game--and sometimes resort to hole-and-corner stratagems to do so:

One example: a provincial planner approached a financial journalist in our group to ask advice on getting foreign partners for resource development--could the journalist make enquiries back home and put him in touch?

Another example: a provincial cadre, attached to a straightforward trade delegation to London, went off on his own bat to chat up a merchant bank about possible financing of a provincial project--and was smartly rapped over the knuckles when Peking found out.

That is the snag with experimentation. It is untidy.

The Chinese are groping for a formula for the enterprising state. Their open doubts about the effectiveness of their orthodox approach to running the countryside are even more sharply expressed when it comes to industry.

The new respectability of China's tiny entrepreneurial sector--so-called collectively owned enterprises and individual traders--is indicative. This (previously neglected) sector has long had to live on its wits: to make the most of what inputs it has been able to scrounge, to respond to market demand and to generate profits for the wherewithal to pay its employees. The trick now is somehow to inject these virtues into the (previously cosseted) state-owned sector--without losing central control over the broad pattern of output and investment.

State-owned enterprises, after all, account for some four fifths of China's total industrial output. Urban collectives loom large only in simple consumer goods. Commune enterprises produce mostly local agricultural inputs and, again, some consumer goods: in rural Sichuan, we were told they account for only 10% of industrial production.

Shaking more efficiency into the dominant state-owned enterprises is what the experiments in ''self management'' in Sichuan and elsewhere are all about. It is anyone's guess what balance will be struck in the end betweeen central control and local initiative, between planning fiats and market levers. One year on, the Chinese themselves are still feeling their way. Measurable successes--higher output and profits--are much trumpeted in the press. But the process is untidy and creating headaches of its own (see box on next page).

The experimentation is taking place against a backdrop of retrenchment, a three-year exercise, through 1981, in ''readjustment''. The leadership's decision to abandon its earlier growth targets was largely a forced retreat.

Hence the present accent on overcoming the sheer physical constraints on expansion at home: shortages of fuel and power, a creaky transport network, imbalances between agriculture, light and heavy industry (which have themselves created shortages) and the waste of haste entailed in a proliferation of often ill-conceived and overlapping contruction projects.

Hence the reassessment of China's capacity to absorb--and pay for--im-ports of foreign technology; the more sober view of the country's ability to expand its exports in a period of world stagflation and rising protectionism; and the new willingness to explore heretical routes of financing (aid funds, foreign venture capital).

Hence the coincidence of retrenchment and experimentation. The woeful inefficiency of much of its industry is a luxury China can no longer afford. The Dengists are determined to inject a combination of risk and reward into the system: to force management cadres to learn to manage and to give workers a direct stake in higher productivity.

The broad lines of this response had become clear before the Economist team went to China. What we hoped to do on the spot was to flesh out the skeleton. In particular, we wanted to explore the answers to the following questions:

What kind of growth rates do the leaders hope industry will achieve during the readjustment period?

How have the experiments in self-management in state enterprises actually been faring?

What has been the shopfloor response to various wage bonus schemes?

What are the ground rules governing central and local initiatives towards foreign companies in the hunt for export contracts and foreign venture capital?

The answer to the first question can be given briefly. China's leaders are reconciled to three years of below-trend growth in industry--perhaps 8% a year, as against (on Chinese figures) an average of 11% during 1952-78. Preliminary statistics point to such a downturn in growth this year. Queried in Peking, a vice-premier, Gu Mu, admitted that industrial growth could be below 8% in 1980.

The answers to the other questions are not so straightforward. For our impressions, read on.

Who manages what

Begin with the experiments in self-management: the testing-ground is big enough. Although accounting for only 2-3% of the total number of state firms, some 2,000 enterprises are involved to some extent, over 1,200 of them with the specific blessing of Peking. And much is expected of them--anyway by convinced Dengists like Sichuan's Zhao Ziyang.

The ambitiousness of the objectives is clear both from public and from private discussions. Take the comments of the People's Daily this summer:

This is a major policy that must be implemented. In so doing, we shall be able to link together more effectively the interests of the state, the enterprises and the workers and staff . . . and solve the current problem in many enterprises: that it makes no difference whether one does more work or less, whether one does a good job or a poor one, and whether one realises a profit or incurs a loss.

Mr Zhao goes further. Reduce the role of authorities at all levels in the direct management of enterprises and it will be relatively easy to solve the other issues involved in striking an acceptable balance of power between the centre and the provinces, he told the Economist group.

The targets are bold. Unfortunately, the experiments themselves are not: either in conception or, so far as we could judge, in execution. In effect, the experiments stand on two legs. One is bonus incentives for the shopfloor: these do look promising (see next article). The other is the greater leeway being given to managements to organise their own production, personnel and marketing. This is the weak leg.

Gu Mu's own summing-up of the powers now being given to experimental enterprises provides one clue (see page 29). The central planners are loosening their reins only very cautiously. The second weakness of the experimentation is perhaps even more fundamental: the human resources on which it has to rely.

Too many factory officials either lack the experience or the training to make competent management decisions or have learned (sometimes the hard way) that political fashions can change abruptly in China and so lack the taste for individual responsiblity. Some (''only a few'') flatly oppose the current flirtation with ''capitalist'' incentives and techniques.

Who manages

Party men, not technicians, still hold most of the levers of management. Certainly this was true of the factories we visited--including two of Sichuan's model experimental enterprises. For example, at the Chungking machine-tool factory not only is the director of the factory the secretary of its party committee, but all eight vice-directors are also party men (although only three are on the party's key seven-man standing committee).

Moreover, it is the party committee that formulates proposals on major matters such as the use to which retained profits should be put. Not that it always gets its way. A Chengdu plant told us that the (mandatory) workers' congress called to discuss its committee's proposals ''improved'' them. The improvement amounted to trimming down the proportion of the profits earmarked for productive use in favour of more money for workers' housing. Oops.

Arguably, it is possible to be both red and expert: some of the officials with whom we spoke undoubtedly were. But, on the whole, we got the impression that happy coincidence--rather than any ruthless weeding out of incompetents--was the major mechanism. Nor is that our impression only. While we were in China a Workers' Daily article complained:

Of leading cadres of enterprises at and above the county level, less than a third are familiar with their professions, technology and management; of leading cadres at the bureau level . . . in some provinces, only 20% are professionally competent. That is the harsh reality.

In factory after factory, we asked whether anybody had been fired or demoted in management shake-ups. The standard answer was no. For example, at a textile factory in Chengdu we were told that some managers had been moved but generally sideways: nobody had faced a salary cut.

There is a corollary to this lack of mobility in the management chain. The officials now being asked to repudiate the ''bad old'' policies of the days of the Gang of Four and the cultural revolution are often the same men in the same positions (albeit with different titles) who pushed through those policies at the time. In our experience, new blood was something of an exception. Even in Sichuan.

What they manage

Even experimental factories still have to meet a bevy of state quotas (our Sichuan factories listed eight planning benchmarks; experimental enterprises in Guangdong have ''five things fixed'' for them). Nor are they free to undertake major new investment projects without approval. Freedom (and the wherewithal) to exercise their own judgment about output and minor improvements to workshop facilities begins after state quotas are met.

One grey area was the right of enterprises to deal directly with customers. We were aware of some moves to cut out the middleman in China: for example, since the summer, some 5% of Peking's total textile output has been marketed directly by the mills (although the main purpose of the exercise seems to be to provide indicators of consumer tastes to watchful planners in Peking's municipal textile bureau). Could experimental enterprises producing for export deal directly with foreign customers?

In Sichuan, the answer was yes--but only in tandem with the relevant authorities, whether provincial or (even now, on occasion) central. For example, a contract to supply gear-hobbing machines to a British customer was discussed on the spot at a Chungking factory but officials of both the central machinery import and export organisation and the provincial foreign trade corporation were involved in the negotiations and the contract was signed in Peking.

Hiring and firing

Overmanning is still the rule in Chinese enterprises. Fair enough, perhaps, in a country where labour is cheap and the authorities under intense pressure to find jobs to mop up overt unemployment.

When The Economist last visited China, in 1977, overmanning was coupled with a breakdown in shopfloor discipline. This time round, there were still people standing about. But, on the whole, this seemed to be due to too many hands and poor management planning rather than bolshiness on the shopfloor. For example, in a Tientsin textile mill (not an experimental one), four out of five British-made knitting machines were idle because, it turned out, the management had not ordered replacements for needles until (towards the end of their expected two-year life) they duly began breaking.

If, at this stage, the authorities do not want to tackle overmanning, they are keen to improve the quality of shopfloor labour. That, after all, is the rationale behind giving experimental enterprises the right to reward or penalise workers according to their performance. We were keen to assess just how far management could go in two particularly sensitive areas: choosing which workers they would hire in the first place and dealing with workers who proved to be duds.

The short answer is not very far. There has been some loosening up on hiring. Individual enterprises still do not have the final say on the numbers of new workers they will hire--although some we visited said that the authorities are now more responsive to their own estimates of need. However, whereas in the past enterprises had to accept each and every worker assigned to them, they can now exercise some powers of selection.

This usually amounts to the right to reject clearly unsuitable candidates. The Chungking machine-tool factory, for example, insists that would-be employees pass a basic examination for competence (the factory has its own technical school). A Peking factory which was sent only women to fill its 45 places successfully argued that it needed some men for heavy work. In the end, it selected its workers from a total of 100 candidates.

What about bad apples already in the factory barrel? No factory we visited had ever fired anyone. Although insisting that the ultimate penalty was available to them, the managers with whom we spoke clearly found the idea of breaking someone's rice bowl both foreign and frightening. The normal way of handling a bad apple, they said, would be to put him on probation, in the factory, for re-education, at a reduced rate of pay. (For example, at one textile mill, where the average wage is 48 yuan a month, a suspended worker would get 20 yuan a month.)

But this penalty is used exceedingly sparingly. The experimental factory in Chengdu had applied it only once; that in Chungking twice. In motivating workers, carrots are preferred to sticks.

Initial successes

Despite all their limitations, the Chinese say the experiments in self-management are beginning to show results. On average, they claim, model factories are chalking up output and profit gains half again as large as those of non-experimental enterprises and are also broadening and improving their product ranges.

These initial successes are no doubt real. And the new brooms in Peking have every reason to publicise them in the press: they are relying heavily on education, time and the fruits of initial success to get the grassroots backing they need for their policies. None the less, caution is needed in interpreting these early results.

It is needed in trying to evaluate to what extent the success stories are due to better decision-making by management, to incentives on the shopfloor, or to the sheer intoxication (and back-up) that comes from being singled out as a model for others in China. Caution is needed, too, in reckoning how well the present formula would work if generalised. The participating enterprises were chosen with care: as a New China News Agency report on Sichuan's experimental factories put it, ''On the whole, they were advanced units . . . had strong leading groups and were internally united''.

Still, the real strength of the experiments is precisely that they are experiments--trials to be learned from, not final answers. Now for what struck us as the single most successful leg of the experiments: bonuses for workers.

Work pays

Bonus schemes as such are not new in China--although they were, of course, utterly out of fashion during the days of the cultural revolution and the Gang of Four. But, on the whole, earlier schemes were relatively inflexible, geared to the group and awarded brownie points as much for ''correct attitude'' as for hard work. The Dengists are pushing schemes that are more closely geared to individual effort and use ''objective'' criteria (rather than potentially acrimonious group discussions) to rate performance.

Enterprises may, and do, use whatever method seems to suit them best. Some divide bonuses into three grades and still use the discussion method (albeit among small groups) to decide which worker should get which bonus. Others use variations of piece-work criteria or more elaborate point systems. Some combine features of these different approaches.

Still, there is a discernible trend emerging. Piecing together the information we were given, this is the way the ''model'' bonus scheme works:

To ensure that workers are not penalised for the sins of management or other factors beyond their control, there are two separate sources of cash for bonuses. Up to an average of 8.50 yuan a month per worker can be financed (like the wage bill proper) from the funds earmarked by the state to cover an enterprise's production costs. Call that 8.50 yuan the ''basic'' bonus. Additional bonus payments must be financed from excess profits (in general, some 10-15% of above-target profits are put to this purpose). Call these payments ''profit-related'' bonuses.

Basic bonuses are paid, like wages in China, monthly. Profit-related bonuses tend to be calculated once a year.

Although the actual amount of basic bonus earned by individual workers can vary a lot around the average, there is often an upper limit (at one Sichuan factory, 24 yuan a month--equivalent to half the average monthly wage there). The lower limit, obviously, is zero: a worker who caused an accident or took off too many days might forfeit his bonus. In practice, most workers earn bonus money every month.

Ideally, bonuses are calculated on a points system, covering a wide range of performance criteria. For example, one Chengdu textile factory awards (or deducts) points under 11 different heads--chalked up on large blackboards on the factory floor. These include everything from quantity, quality and economising of materials to Sichuan's speciality (see page 24), family planning.

To simplify the system somewhat, in this factory basic bonuses are divided into three grades: workers who score fewer than 85 out of 100 possible points get the lowest bonus; those who score 85-95 get the grade-two bonus; and those who score more the highest bonus.

Once the amount of money available is known, profits-related bonuses can be doled out on the same basis. However, some enterprises use the extra funds for special awards: eg, to ''model'' workers or those responsible for innovations.

One curiosity should be noted. Merit pay schemes (like earlier wage increases in China) do not apply equally to production workers, on the one hand, and to technical and administrative staff on the other. At one of the factories we visited, for example, technical and administrative people get only a 8.50 yuan a month basic bonus; the chief engineer had not had a wage rise since 1962 (although his responsibilities had increased) and was earning less than top shopfloor workers.

If China's bureaucrats are to be shoved into active management, this may be a mistake. Interestingly, in its own expanded self-management experiment, Guangdong province intends to reward (or penalise) leading officials, too, according to their performance. Poor managers will suffer ''suitable'' deductions from their salaries; the successful will be able to receive bonuses higher than those of ordinary workers.

One point is clear. Bonuses can add very significantly to a worker's pay packet. Judging from average wages and bonuses in the factories we visited, in Peking, Tientsin and Sichuan, the boost can approach 30%. These factories may not be typical. Moreover, it is anybody's guess how many workers will continue to rack up bonuses as the minimum targets they must fulfil to qualify are jacked up.

Even so, there is no doubt whatever that more work, more pay is becoming a reality. China's total bill for wages and bonuses--for workers and staff alike--went up nearly 9% in the first nine months of 1979 alone, and the decision to promote 40% of workers to higher wage grades in November will add almost 5% more to the bill in a full year. Allow for low-wage newcomers to the workforce and the stickiness of officials' pay, and that adds up to a sizeable gain for most workers. (A real gain. The figures do not include the 5 yuan a month cost-of-living allowance recently given to urban workers, to offset increased food prices.)

Nor is there any doubt that bonuses are producing results on the shopfloor. Rates of sickness and absenteeism have dropped dramatically now that workers have something to lose in not showing up for work. In a Tientsin textile mill, where (pre-bonus) absenteeism was as awful as in some Swedish factories, we were told the number of workers reporting daily to the clinic has dropped from as many as 1,000 (a fifth of the labour force) to between 300 and 400. Even in one of Sichuan's model enterprises (whose starting record was much better), workers reporting sick have dropped from 500 to 100 a day.

On occasion, the principle of more work, more pay awakens an off-the-shopfloor entrepreneurial spirit. One worker with whom we spoke in Tientsin, an electrician, was ploughing a good deal of his bonus money into tools and parts to repair and assemble television sets at home. Only for friends, not for cash, he insisted. Perhaps.

Unfortunately, the authorities in China are not yet at ease with the notion of individual entrepreneurship. It is allowed--even licensed--as a job-creation measure. But most municipalities, explicitly or implicitly, frown on such sideline ventures by people who already have ''proper'' jobs.

Foreign venturers

If home-grown entrepreneurs are still viewed with some suspicion, China is wooing foreign ones. Provided they produce foreign exchange--quickly.

Peking has no choice but to go into debt to develop certain priority sectors for which it needs inputs--equipment or knowhow--from abroad: such as power, transport and resource development. And it has already arranged large credit lines. In other sectors, however, the aim is to link, as tightly as possible, foreign inputs with increased exports or (eg, steel and television sets) import savings.

This linkage is certainly now the rule when it comes to the industries in which China ought to enjoy its biggest comparative advantage--labour-intensive ones such as toys and textiles and those producing standardised items such as containers. The open question is which is the best way to go about it: compensation trade deals or straight joint ventures with foreign partners.

To date, compensation deals have been making the running. Top of the league have been overseas Chinese interests. Hongkong alone now has between 400 and 500 manufacturing projects in China--mostly small ones. Japanese companies are becoming more active, too, and--since the push really began in mid-1978--companies from a handful of other western countries have also nibbled.

From the Chinese point of view, compensation deals have these advantages:

Built-in export markets. They not only bring inputs of foreign equipment and knowhow (the Chinese side providing a site, labour, power and some raw materials), they also solve the headache of marketing. The Chinese themselves do not have to work out what will suit which market--a skill which they lack.

Training. Many compensation deals include provision for the training of Chinese technicians and management cadres. For good reason: quality control, the planning of materials and work flow and maintenance standards in many Chinese enterprises are not up to scratch. The Chinese are delighted to release people to do a stint in the home plants of foreign partners. (One snag: they sometimes pinch them to run factories elsewhere in China when they return.)

Flexibility. Almost no two deals are exactly alike. There is leeway for trial and error. An initial contract can be struck for a limited period of time and then either be extended or allowed to lapse. Note: the possibility of getting out without fuss is an advantage for the foreign partner.

Minimal budget burdens. The key point here is that no foreign exchange has to be ladled out by the Chinese side to get the project going. The Chinese repay the foreign partner for his inputs by reducing the processing fees (or product prices) charged over a specified period.

Peking also favours projects that do not require an infusion of investment funds from the central budget. Local authorities which observe this rule are welcome to chase up and conclude deals of their own. And have done so.

Indeed, the itch to act without reference to Peking is itself one reason for the accent on compensation deals. Except in the case of Guangdong and Fujian, nothing like the same degree of autonomy exists when it comes to joint equity ventures with foreign partners.

Joint ventures have yet to get off the ground. One obvious reason is that Peking has yet to clear up its law on the subject. The framework rules promulgated this summer left many basic issues wide open. So, like other visitors to Peking in recent months, The Economist trotted around the established corridors of power and visited the (impressive) new marriage brokers at the China International Trust and Investment Corporation (Citic) in the quest for more information.

Like other visitors, we found there were few specific, detailed answers to questions about the law as such. Not because the wordly-wise men at Citic do not know what answers would satisfy foreign businessmen. When asked about matters like wage rates, taxes and profits, their response was essentially: we know that they have to be attractive--that is, competitive.

Nor is there much doubt that the Citic is in a position to get that message to the top in Peking: it reports directly to the State Council. So why the long delay in fleshing out the position?

Possibly the Chinese think they they can afford to feel their way. Despite the fuzziness of the present legal framework, a number of companies are already negotiating seriously for joint ventures on Chinese soil. These negotiations will allow the Chinese to test the waters. So will their new arrangements with western banks keen to peddle advice and contacts with potential foreign partners.

The present looseness of the law seems to suit the Chinese; they prefer to leave as many things as possible to be negotiated case by case. Not least because they want to apply tighter rules to westerners than they feel necessary in dealing with overseas Chinese. In the end, they may well decide to ''explain'' relatively few points (taxes, exchange controls?) in detailed codes.

One particularly sensitive area that is likely to be left grey is the powers of the Chinese-appointed chairman of the board of joint ventures. In conversation, Citic officials pooh-pooh the fear that he would exercise veto powers. And at least one American company is willing to gamble on that assurance--on the assumption that the Chinese will not risk having a joint venture go sour. And yet . . . what will happen, for example, if one day a foreign partner decides he wants to sack an activist ''trouble-maker''?

Another awkward point is the calculation of labour costs. The Chinese are sure to squeeze as much as possible for labour. Not that the workers themselves will necessarily benefit much. The Citic told us that, although wages in joint ventures would be pitched well above the going rates in state-owned enterprises, the differential would probably be creamed off by the state as a form of tax.

One element behind this approach, incidentally, may be sheer caution. In the export processing zone being developed at Shumchun Town (next to Hongkong) workers on piece rates in factories involved in compensation deals are earning as much as three times the average Chinese wage. Differentials that big are a potential source of trouble.

To what extent the Chinese can jack up wage (and welfare) charges in practice is another matter. To remain competitive, wage rates will have to be held low enough to compensate for the low productivity of most Chinese workers. As the Chinese well know. Especially when they insist on overmanning: one Hongkong-based company setting up a compensation trade deal in Shanghai had to accept 5,000 operatives for machines it reckoned needed only 3,000. In fact Hongkong companies reckon that real labour costs in the Chinese projects in which they are involved are only 10-15% lower than those in the colony.

The foreign company interested in producing in China needs to do two things. First shop around for a really suitable (that is, relatively efficient) Chinese partner: it is no good assuming you will work wonders on the spot once a deal is signed, whatever the label it parades under. Second, weigh carefully the risks and benefits involved in the choice between a fully fledged joint venture and a more modest compensation deal. At this early stage, there is a lot to be said for the second option. As a trial run, anyway.

In a long interview in Peking, the vice-premier responsible for investment, imports and exports and capital investment, Mr Gu Mu, spelled out for The Economist the new powers being exercised by state enterprises participating in the self-management experiments blessed by the central authorities. His exposition follows (with our comments in parentheses).

If an enterprise over-fulfils the profit quota set for it by the planning authorities, it can keep a certain percentage of the excess profits. (In Sichuan, enterprises may retain 5% of planned profits and 20% of additional profits.)

Such retained profits may be used to increase output, for welfare projects and for bonuses. Welfare and bonus schemes must be discussed with workers. (In practice, the workforce is consulted on the package as a whole, including the slice to be earmarked for output increases.) Asked whether measures to increase output could include new investment, Mr Gu said no--although they might include outlays on technical innovation.

Enterprises have the right to use different types of funds from the state however they think best in order to increase production and tap their potential for technical innovation. Funds for repairs, renovation, technical innovation and general production are no longer separately earmarked. (One factory we visited had diverted repair funds to bonuses. Aha.)

If an enterprise manages to meet its planned output quota with fewer inputs of raw material than allocated to it, it may use the materials saved to increase production. The extra output is entirely at its disposal--to sell itself or to arrange to be sold by others.

A larger percentage of depreciation funds can be retained by the enterprise for use for technical improvements and newer equipment. (Mr Gu mentioned a figure of 70%. In practice, the proportion varies: eg, a machine tool factory in Chungking told us that it can now retain 60% of its depreciation funds, as against 40% before. The balance goes to the state.)

If an enterprise exports, it can retain a percentage of its foreign-exchange earnings. (A mere 10% seems to be the norm.)

If an enterprise has fixed property that it cannot use for productive purposes itself, it can transfer or lease it to others.

Enterprises have the right to reward--or punish--individual workers according to their performance, and can decide for themselves what kind of bonus scheme they want.