Chinese factory workers making dolls

Even bold decisions taken to transform decrepit state enterprises into modern, competitive corporations have foundered.

The government announced last fall, for example, that it would allow the bankruptcy and sale of smaller state-owned firms, and that it intended to permit the sale of stock in larger companies. But not one of the 56 companies offered at auction has been sold. An official at the Beijing Property Rights Exchange Center said prospective buyers were scared off by poor profit outlooks, exorbitant asset valuations and poor locations.

Nor has there been a rush to invest in the state-owned enterprises. Consultants say the problem is that balance sheets for such companies are often hard to find, and when they are available, they are often inaccurate and incomplete.

Even larger Chinese firms balk at the government's insistence that they buy and revitalize chronically unprofitable state-owned firms burdened with huge debts, bloated payrolls and heavy pension obligations. "As Chinese investors, we're not sure how to evaluate these companies," said Zhang Jian, president of Broad Air Conditioning, at an economic conference in Switzerland earlier this year. "So we haven't participated."

Meanwhile, many smaller state-owned firms that are unable to repay their debts or are unable to compete on the market may be forced to close while the government struggles to save larger ones through mergers and acquisitions.

On the positive side, Central bank governor Dai Xianglong said in March that the country may spend as much as $1 trillion over the next three years on infrastructure and housing, a move that would create new jobs and pump money into the economy.

The government is also loosening restrictions on credit while productivity improves and China's export sector remains relatively strong.

But the key is whether China can reorganize the state sector quickly enough to prevent a precipitous decline in growth. That the primary architect of the economic program, Zhu Rongji, was recently named premier indicates how seriously the government takes the situation.

"The technocrats running this country are the best of China's 20th century," David Hale, chief economist for the Zurich Insurance Group, said recently. "But the challenges are quite awesome, and it remains to be seen if the hurdles can be overcome."

The Associated Press contributed to this report.