Lay-offs reached such a scale that they triggered serious unrest. Meanwhile, restructuring, mergers and closures reduced the number of SOEs from 262,000 in 1997 to 174,000 in 2001. Eventually the government had to call a halt. Urged on by the centre, local officials organised auctions of state assets, most of which were sold at rock-bottom prices to managers and party bosses. The following five years saw a wave of incorporations and stockmarket listings of SOEs, big and small, as the central government and the provinces sold minority stakes. It means that the government wants to keep control of the biggest and most important companies, but will let the smaller ones fend for themselves. He enunciated the doctrine of zhuada fangxiao (вЂњgrasp the big, let go the smallвЂќ), which remains the guiding principle of SOE restructuring. It was only in March 1998, when Zhu Rongji became prime minister, that reform of the sick state sector moved to the top of the political agenda. That they made huge losses did not matter.

Factories were, in effect, вЂњlittle societiesвЂќ, responsible for everything from education and medical care to housing and recreation. When state corporations were set up in the 1960s, they were simply arms of government bureaucracies, which told them what to make, took all their revenues and covered all their costs. This is not to deny that progress has been made. This crowds out the private sector, China's growth engine, and threatens the entire financial system, because most of those loans will never be repaid. Virtually all of China's heavy industry and much of its technology is in state hands. In 2002, the state controlled half of industrial output, and SOEs still account for 35% of urban employment, despite having halved their workforce in the past 12 years. It is no exaggeration to say that China's economic future depends on such reform. But it exists throughout the country, and shows how much further SOE reform has to go. The contrast between old and new in the state sector is at its starkest in China's north-eastern вЂњrustbeltвЂќ, where state-owned enterprises ( SOEs) generate 70% of GDP. He survived the feat, but his famous slogan, вЂњI will get the oil, even if it takes 20 years off my lifeвЂќ, proved prophetic: he died in 1970, aged only 47. To divert attention from Daqing's troubles, local officials drag visitors to a museum commemorating вЂњIron ManвЂќ Wang, an oil worker who in the 1960s helped to cap a blazing wellhead by jumping into a vat of badly mixed concrete. Yet through its ties to CNPC, PetroChina in effect still pays for the main hotel and some restaurants in Daqing, as well as for the housing, heating and even wages of thousands of laid-off workers. Warren Buffett, America's smartest investor, owns a stake. The production facilities are owned by PetroChina, an arm of China National Petroleum Corporation so thoroughly restructured that it is listed on the New York Stock Exchange. More than 50,000 вЂњnodding donkeysвЂќ dot the city centre and the surrounding desolate plain.

Daqing, in Heilongjiang province, is at the centre of China's largest oil field. Several hundred miles further north, the contradictions are even sharper. Along with routine overmanning, it helps to explain why productivity at Dalian New Shipbuilding, despite cheap labour, the latest equipment and subsidised loans, is just one-seventh to one-tenth that of its Japanese and South Korean rivals. вЂњIn reality, it is not that easy.вЂќ Yet the school is only one of the group's non-shipbuilding activities. вЂњTheoretically, it would be better to get rid of the school,вЂќ says Sun Zhenlie, the company's vice-president.

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