BY JOHANNA MCGEARY

A Grimy City Where They Miss Mao

Night is when Shenyang comes alive. Young and old, families and flirting teens swirl around the towering, 35-ft.-tall statue of Mao Zedong. Here Mao lives, a hero still. In his long shadow, fan-twirling line dancers stomp through a traditional peasant rite. Doctors in grubby white coats offer herbal medicines, acupuncture or blood-pressure tests. Vendors proffer savory kabobs or key chains. Children rent old-fashioned roller skates for a few yuan, while their elder brothers play badminton without any nets. The throng does not disperse until the blazing phosphorus lights dim near midnight.

Daylight betrays the real Shenyang, a grimy industrial town northeast of Beijing that is sunk in despair. Once the shining star of Maoist industrial production, the city has lost its way in the changeover to private enterprise. Last night's revelers have been replaced by a handful of dejected men with nothing to do but smoke. More bicycles than cars circle the square as those still toiling in the antiquated state-owned factories that make products no one buys head for their redundant jobs. The reason so many people pack the square at night, says an only nominally employed factory worker we'll call Liang, "is that they don't have to get up early to work."

Liang, at least, is earning money. Not from his official job at the factory making electrical machinery. That decrepit state enterprise hasn't paid him regularly in three years. Like everyone else with any gumption in Shenyang, Liang has turned to moonlighting, with his bosses' eager blessing. There are just three choices for independent entrepreneurs here: restaurants, but that takes capital and there are few customers; street vending, but that requires a product to sell; and driving a cab. Liang chose the cab, a ramshackle Lada he must hot-wire each time he starts it. He rents the car for 194 yuan ($23) a day, and from 5:30 a.m. to 5:30 p.m. he roams the city, picking up enough fares to keep his family alive. He says he takes home about 3,000 yuan ($365) a month, riches compared with his theoretical factory salary of 300 yuan.

Most of Liang's colleagues at the factory are too frightened or too indolent to follow suit. Shenyang is a warning to the government that it cannot easily trade in communism for completely laissez-faire capitalism. There is no national welfare system for workers like Liang. If they leave their work units, they lose their housing, health benefits, education subsidies, pension rights.

Liang has earned enough driving his cab to share purchase of a 10,000-yuan ($1,220) house with his father, a low-ranking city bureaucrat, but he worries constantly about financing his daughter's education now that the factory will not. "That costs me 300 yuan a month," he mutters, "plus extra for the English tutor." Liang is determined that his 11-year-old daughter will "never, never have anything to do with the factories." Somehow he's going to find the 40,000 yuan it will take to put her through high school and training as an accountant. "I was stupid. I wanted to go into the factory because they told us this was the heart of China, the way forward. It would set me up for life. My parents said I'd share in the iron rice bowl. Huh!" he scoffs.

The blighted streets of Shenyang's Tiexi district industrial zone tell the troubling tale of China's ailing state sector. White-elephant plants like these all over northeast China account for less than half of the total economy but still employ two-thirds of the labor force. Beijing insists the national unemployment rate is only 3%, but no one believes that. In Shenyang some guess the real rate is closer to 20%. "China has 1,000 terms for unemployment," notes a Western diplomat. Most of the jobless are said to be "waiting for a new post" or "awaiting retirement" or "relocated for internal digestion."

Bloated work forces are weighing down even potentially profitable enterprises. When the Jinbei minivan plant wanted to acquire land including a brickyard to expand its factory in the late '80s, it had to take on the brickworks' 2,000 employees as well. Nonetheless, five cities in the northeast dismissed or "resettled" more than 420,000 workers last year, and the provincial government in Shenyang has announced it will cut an additional 200,000.

Because of strong family ties in Shenyang, most of the jobless have not joined the floating population of migrants, now at least 100 million strong, who drift around China searching for work. So the city has permitted a handful of carefully controlled labor markets to help employ a few thousand of the laid off. At a grubby park in Tiexi, the city lets job seekers "advertise" their skills for a few cents. At a stranger's approach, they point eagerly at hand-lettered signs identifying them as would-be cooks, maids, nannies, hotel clerks, laborers. But at least half a dozen armed police immediately materialize, discouraging interviews.

The majority of Shenyang's legion of disgruntled workers are invisible, but they pose the most serious threat to China's political stability. The city labors under omnipresent police, armed cops patrolling the streets of the industrial zone, gun-toting guards standing sentry in factory doorways, plainclothesmen nosing into every stranger's business. At any sign of citizen anger, party officials respond quickly to keep the city quiet, fixing water mains or repairing broken heaters. The city's new technocratic mayor has permitted small, regular, controlled demonstrations at city hall to let citizens vent their spleen about unpaid pensions and missing salary checks. But there have also been at least two large, unauthorized protests in Shenyang. Internal memos have circulated among party leaders warning of strikes, police confrontation, widespread outbreaks of crime. But no significant pockets of dissent have formed among the people. "They are not content, but they are not going to get in the government's face," a Western diplomat says. "This is not Gdansk."

In fact, workers like Liang look back with misguided longing to the days of Mao for their salvation. If they had their choice, they'd retreat to 1955 rather than grapple with today's complicated reforms. "We respect Mao, not Deng," says Liang. "Deng forgot about us." The people of Shenyang resent the way the city has been left behind by the capitalist advances in Shanghai and Guangzhou. At Liang's old workplace, his friends sit around all day grousing, drinking tea and reading the papers until the shift whistle blows. "We call it the nonworking day," he says. "The managers are screwing things up, and they have to leave. It's not our fault there's nothing to do." During Mao's time, he says, "we would work hard because the factory would take care of us. Now if they do not pay us, we have nothing at all." Before, says Liang, "social welfare came first. Now, as long as you make money, that's all that counts."

Under Mao, he says, "who dared be corrupt?" Shenyang's workers complain angrily that bosses are pocketing all the wealth through bribery, kickbacks and payoffs. That bothers them even more than their own low salaries. "If you were corrupt under Mao," Liang says, "you'd be purged. Now they just tolerate it." Shenyang's citizens "loved" Beijing's recent Strike Hard crackdown on crime and corruption. When U.S. officials noted that some innocent people were jailed during the ruthless campaign, Shenyang applauded. "They said only bad people got caught," says a Western diplomat.

China's leaders have been paralyzed by the conundrum of Shenyang. Failure to stop the spiraling losses of the state factories could destroy China's economic miracle, yet the cure is an exceedingly bitter one: the dismantling of the system that guaranteed workers lifelong employment and social benefits. Pushing ahead with reform depends on how much pain and suffering people will take before they resort to rebellion. In March, Finance Minister Liu Zhongli acknowledged that reform of the enterprises was "important for the destiny" of the nation, but President Jiang Zemin has been moving ahead very cautiously. He seems to hope half measures like increasing worker shareholding or small-scale mergers can bail out basket cases like Shenyang.

Desperate times demand desperate measures, however, and a few adventurers in Shenyang are forging reforms, even some that may be technically illegal. In many cases, the government looks the other way or even endorses such improvised solutions. What Zhang Hongwei is doing at the state-owned Jinbei minivan factory would hardly shock a Guangdong businessman, but his ways are considered dangerously radical here.

Zhang is no foreign import but a 30-year veteran of the state factory system, a lifelong auto man who runs one of the few profitable heavy industries in Shenyang. When the plant, burdened with 7,000 workers making shoddy cars no one could afford, foundered in the early '90s, the Hong Kong conglomerate Huachen wheedled a 51% share as a joint venture. It went out looking for a mainland general manager and found Zhang.

"Management is the key," he says. Subject only to his board of directors, he can make all decisions himself: "I don't always have to listen to the government." Zhang reduced the work force to 6,400, then farmed out an additional 1,000 workers to small related industries like repair shops. He started a plastics plant to absorb 2,000 more. "Here it is illegal to lay off workers," he says, "unless I can find them other jobs."

Zhang, 51, has wrought a revolution with the workers who remain. The hardest concept for them to grasp was that they would be rewarded according to their performance and that every single screw had to be made right if the whole product was to be good. "I can demote people who fail to produce," he says. Workers were in shock when he downgraded the first lazy mechanic. Zhang warned them, "If you don't work hard enough here, then you will work hard at finding work." He bases all salaries on productivity and pays bonuses for top-notch performance. He holds quality-control workshops, and when workers make mistakes, he does not fine them but teaches them how to do better. The company has been in the black since 1993, turning out 100 Toyota-style vans a day under contract to bus lines and police units. "We could make twice as many, but Toyota won't give us the parts," he says.

It will take time, he says, but his workers are beginning to change their outmoded thinking. "When they see the success of the factory, they are willing to go along with my ideas," he says. His managers too have had to shape up, learning to lead by example. He has sent 200 overseas to study modern management techniques at Toyota plants. He gives his workers a week's paid vacation and shuts down the whole factory for nine days in July. He bought a soccer team to carry the vehicle's name, Haishi, onto the field. He even holds dances for the workers. "I want them to love the factory," he says. "If the workers are afraid of management, they won't do good work."

Despite modernized management, corruption still plagues the Jinbei plant, but Zhang says he is determined to stamp it out. "If I hear of it, I fire them," he says, "no matter if they are a party member or whoever." When a middle manager persisted in taking suppliers to lavish dinners after repeated warnings to stop, Zhang sacked him. "The highest cadres can't be corrupt because if they are, the rest are," he says. Although Zhang is a party member, he says there is no party secretary--except in name--involved in factory affairs. "Our work has no relation to all that," he says.

Jinbei's success has not been much emulated in Shenyang. For most of the city's despairing residents, attention is fixed on the next meal. They have no time to think about larger concepts. "I don't know how anyone will improve things," says a taxi driver who has waited at the airport for five hours in hopes of a fare. "Even when we work hard, we live bitterly."

--With reporting by Jaime A. Florcruz/ Beijing and Mia Turner/shenyang