Blog

Twenty minutes later and Li Jianfeng would have been dead, killed by a zombie company.

As blood poured from his eyes and nose and his blood pressure surged, the corporate administrator

was struggling with dangerous physical fallout from trying to get a moribund state-owned chemical company on the edge of the Gobi Desert to turn a profit.

Employee resistance, a government investigation and a punishing work schedule had all taken their toll and, as Li gasped for breath, any delay by the ambulance would have been the end of him.

That moment of crisis nearly four years ago is detailed in a landmark Chinese documentary by an unlikely source – a retired official from the state enterprise watchdog. Zhou Fangsheng’s A Harsh Transition gives a rare inside look at the monumental task of turning stagnant state firms into market-oriented businesses. It’s the first of its kind to capture people in the restructuring trenches and their exhaustive efforts to transform their operations into profitable companies.

Li, a businessman from Wuxi in Jiangsu province, never thought his attempts to resuscitate chemical firm CNNC Huayuan Titanium Dioxide would culminate in his own life-and-death battle. The firm, based in Jiayuguan in northwest China, was previously owned by China National Nuclear Corporation but suspended production in 2008 as it was on the verge of bankruptcy. Li was brought in to restructure it, beating out dozens of other candidates for the job.

READ MORE: Chinese zombie firms’ debt risks ‘may come to life’ as economy slows in 2015

Zhou tracks the three toughest years of this process, using interviews with workers, executives, Li and his family, former controlling shareholders, stock investors, debtors, bankruptcy lawyers and regulatory officials to tell the story of the first case of bankruptcy restructuring in Gansu.

The first thing Li does in his new job is to raise the pay of the plant’s roughly 1,200 workers by 500 yuan (HK$592). It should have marked a positive start but it was not enough to dispel mistrust about the businessman among the staff, who missed the security of the cradle-to-grave planned economy.

One of Li’s competitors made allegations about Li to the Gansu government, prompting the authorities to send inspectors to the factory and his hometown in Wuxi to investigate.Though the inspectors found that Li’s activities were entirely above board, Li felt the incident had left a residue of suspicion with the government.

But trust between government and business is exactly what is needed to lift state firms like CNNC Huayuan out of their morass, according Zhou.

“It’s the front line government employees, such as officials from industrial and commercial bureaus, food safety bureaus and quarantine authorities, who determine the fate of entrepreneurs. But the morality and expertise of those grass-roots government staff are worrying,” he said.

It’s knowledge Zhou has gained not only from the 280 hours of interviews he and this team compiled for the 90-minute documentary but also from his career as a civil servant. Before retiring in 2009, Zhou was a deputy chief of the State-owned Assets Supervision and Administration Commission’s enterprise reform bureau.

“I worked in state firms for two decades before taking a government position for state-enterprise reform policies for another 20 years. I witnessed the SOE reforms over the years. It was bitter, miserable and complicated, full of ups and downs,” he said.

“The history is worthy of being recorded. What I experienced gave me leverage to choose the filming angle and targets, and also enabled me to avoid sensitive topics.”

I witnessed the SOE reforms over the years. It was bitter, miserable and complicated, full of ups and downs
Zhou Fangsheng

The idea for the film came when Zhou, who is vice-chairman of the China Enterprise Reform and Development Society, was asked by state broadcaster CCTV to advise on a series tracking the 30 years of state firms in economic transition. The series was released in 2012 and he then decided to go one step further to record the experience of ailing individual enterprises.

Zhou says part of the problem is that bankruptcy is taboo for local governments and the bankruptcy law introduced in 2007 has gone largely ignored. Only 5 per cent of problematic enterprises have applied for bankruptcy protection in China, staying alive on financial infusions from authorities fearful that failures could endanger official careers.

“If they can get money from somewhere, enterprises will not apply for bankruptcy protection; banks do not favour restructuring as it raises the risks of bad loans; and local governments are reluctant to encourage firms to do it because they feel they would ‘lose face’ and are under great pressure to maintain social stability and prevent mass protest,” he said.

READ MORE: China’s reform of SOEs ‘should not be seen as chance to profit from sale of state assets’

But the reluctance only makes the situation much harder to salvage in the future. Zhou said government finances were much better than during the last round of state-owned enterprise reform in the late 1990s. But now the impetus for reform was woefully inadequate. Beijing has made repeated calls for zombie SOEs to be overhauled or shut down but there has been little progress.

Zhou hopes the film can open up debate on the stalled reform process. “More and more enterprises are encountering difficulties in the economic slowdown. The best way out is to go for bankruptcy protection or restructuring – restructure valuable enterprises and encourage liquidation of less-valuable ones,” Zhou said.

He is filming a second and third instalment with his team this year. His bigger plan is to encompass changes at private companies and foreign-funded firms.

“I have a 10-year plan to film two to three documentaries each year, and it will be enough to present a complete micro-level history of enterprise reform when I am 75 years old.”

Browse photography at Denver.Gallery.