As China develops, the government is facing the increasingly daunting challenge of reviving the state sector. With market forces taking center-stage, state-owned enterprises, or SOEs, have become synonymous with the words cumbersome, inefficient and uncompetitive.

Many are bankrupt and their employees jobless. Others are surviving, but only just held down by leftover obligations from the planned economy era. In this edition of China's Challenges, CCTV reporter Wang Xin tell the story of one of the country's steel giants.

Anshan Iron and Steel Group is China's oldest steel company and one of its largest. The group, based in the city of Anshan in Liaoning Province, has a history of almost nine decades. For most of that time, the whole country relied on it for iron and steel products.

The group's glory faded 10 years ago as market forces began to eat into the planned economy. Anshan Steel was hit hard by something it had never been faced with before: fierce competition from a growing number of rivals.

Anshan Steel faltered under the pressure: its outdated production methods were rejected by old clients. For its employees, it looked like the game was up.

Zhang Xiaogang, vice general manager of Anshan Iron & Steel Group, said, "At the beginning of the 90's, old equipment, terrible production quality, low-level management, social function, population, these were all the terrible problems for us."

The group's fortunes had hit rock bottom. The only way was up. One blackened furnace is still smelting iron. But it's the only antique left. Shiny new facilities have now replaced the rusty dinosaurs of a bygone age.

The management also changed their marketing strategy to focused on high-quality and value-added products, in which the company can still be competitive.

Rong Feng, Sr. Engineer in Anshan Iron & Steel Group, said, "After that, our products were upgraded. That means our company gets more profit and staff members get more salary and have more money in our pocket."

The efforts paid off. Customers began to return. The group is now back in the black and making profits. But only just.

State-owned factories are still obligated to cover the welfare of retirees, a left-over of the planned economy. In the case of Anshan Steel, that's 120,000 people, twice the size of its workforce.

"The terrible thing for us is the social function from the history. The population is the terrible thing. Anshan-Steel's population is the largest in the world," Zhang Xiaogang added.

In fact, the company has downsized its workforce by almost half and is still cutting jobs. But it still has had to pay those it lays off.

Without a sound social safety net in place, the local government has to rely on enterprises to look after laid-off workers. After all, social stability is at stake. But for factories like Anshan Steel, that are only just managing to hold on in the new market economy, this seems too heavy a burden to carry.

(CCTV.com May 10, 2004)