Dealing Again

Peking revives two projects

When China's Communist planners last winter abruptly canceled $2.5 billion worth of industrial development projects with West German and Japanese construction, manufacturing and engineering firms, it looked as if the country's much touted Four Modernizations program, which was launched in 1978, was about to take a Great Leap Sideways. Now it seems that the government is having second thoughts about its hasty budget chopping.

Two weeks ago, China and Japan wrapped up a $1.3 billion financing deal that gives new life to two of the most important of the earlier, canceled projects:

Phase 1 of a $5 billion iron-and steelworks at Baoshan, near Shanghai, and-- a huge petrochemical complex at the Daqing oilfield in Heilongjiang province.

Under the new arrangement, Japan will provide approximately $570 million in a 30-year loan at 3% interest, plus $442 million in export credits at a rate of 7.5%.

To cover the remainder, the Chinese have agreed to seek regular commercial loans at prevailing interest rates, the first time that Peking has done so.

Both sides clearly benefit from the deal. For China, it means a return to work on two showpieces of the modernization drive. The Baoshan complex, to be built by Nippon Steel, was planned as an industrial cornerstone for the country. The Daqing petrochemical project, for which Peking had already imported most of the machinery, is intended to help make China a world-class producer of products ranging from ethylene to synthetic fibers.

For Japan, the deal has obvious attractions. The renewed opportunity in China means the possibility of more orders for a number of engineering and heavy-equipment manufacturers, such as Toyo Construction and Mitsui & Co. At the same time, the extra cost to the Japanese treasury will not be all that high.

Much of the money to help China finance the projects will come from funds already earmarked by Japan for other, less important Sino-Japanese development deals.

Why the sudden turnaround by the Chinese? For one thing, Peking badly underestimated the rancor that the cancellations provoked among international businessmen, who accused the People's Republic of everything from waffling to downright deceit. Says one Peking-based diplomat: "The Chinese just did not expect such a sensation, but when they saw the result they decided to try to repair the damage."

By way of penance, the Chinese agreed to pay some $40 million in compensation to Mitsubishi Heavy Industries for the cancellation of a $420 million hot-rolling steel mill that was to form part of a second phase at Baoshan. Peking also belatedly agreed to import and pay for all of the petrochemical equipment and technology that it had originally signed for with Japanese and West German firms, a commitment that could total as much as $1.5 billion. Industrial development in the People's Republic still faces serious obstacles. Not only must the country be able to train the millions of skilled workers and technicians who will be needed in its plants and factories, but it must also be able to meet its loan obligations over the long term. That may not be easy. In spite of a commitment to a balanced budget for 1981, the country is expected to wind up with a deficit of perhaps as much as $3 billion by year's end. Though China's oil reserves are thought to be enormous, production capacity is already severely strained, and to feed domestic needs China is, among other things, planning to cut petroleum deliveries to Japan next year by 45%, to 8.3 million tons. That would hardly seem to bode well for a major petrochemical expansion of the sort envisioned for Daqing.

On the other hand, China's difficulties are a good reason to stop worrying about where the money will come from, and start investing in the wealth-producing plants and factories that are needed for any country to be truly self-reliant over the long haul. China's renewed, albeit cautious, interest in industrial development seems to indicate that the message is once again beginning to be appreciated by Peking's economic planners.

This file is automatically generated by a robot program, so viewer discretion is required.