(FORTUNE Magazine) – TALK ABOUT lousy timing. The day after Chinese soldiers turned their guns on unarmed students near Tiananmen Square last June, an ad appeared in Time magazine for a new American-backed hotel, office, and apartment complex being built in Shanghai. The contrast between the chirpy ad and the bloody photos a few pages away was bad enough. What caught the eye -- and resonated with unintended irony -- was the new venture's slogan: ''Now, everything is possible.'' That still sums up how foreign investors feel about China. For better or for worse, nothing can be ruled out. China's Communist leaders insist that their door will remain open to foreign capital and technology. It probably will -- over the long run. But until the split between what one Western consultant characterizes as ''hard-liners and less-hard-liners'' is resolved, both foreign and local business folk must operate under a cloud of uncertainty. Nor does this cloud carry a silver lining. After the massacre some foreigners figured that they might hold an unaccustomed negotiating edge over Chinese counterparts desperate to prove that business was going on as usual. Says an American businessman: ''It was like how you'd feel in the locker room before a big game. Boy, did we think we'd be able to score points by reopening our contracts and using our new leverage to cut favorable deals. But when we got out on the field, we realized that we weren't going anywhere.'' Bureaucrats and factory managers now worry that any concessions they make might later be criticized by party leaders. Similar fears may make it more difficult for foreign joint ventures to identify and promote promising employees. No longer does the official Chinese press declare, as it did last year, ''To get rich is glorious.'' Entrepreneurs have been castigated and, according to some reports, may even be barred from joining the Communist Party. The general manager of a foreign joint venture in northern China tells of trying to talk a talented young worker into pursuing an obvious bent toward management. The worker refused, worried that other Chinese would accuse him of following the dictates of Western bourgeois bosses. The current period of stagnant uncertainty will begin to end only as a number of key economic and political questions get answered. Among them: When will the government lift martial law in Beijing? How harshly will paramount leader Deng Xiaoping and his new right-hand man, party boss Jiang Zemin, punish Zhao Ziyang, the deposed party general secretary who campaigned for many of the past decade's most important economic reforms? When will Japan and the World Bank, China's key suppliers of credit, restart their money-lending machines -- and on what terms? While they await those answers, most Western companies already in China are simply staying put. Within the crucial Overseas Chinese community, rattled Hong Kong businessmen are looking a little harder for other sites in Southeast Asia to hedge their bets. But, paradoxically, investors from Taiwan may actually be adding to their China stakes. That's a gutsy move, since China's economy, in bad shape even before the June debacle, may be plunging toward recession. Growth in industrial output is slowing sharply from last year's 21% rate. In September production in several provinces actually declined. Battered by a dearth of tourists and a rising trade deficit, China's reserves of foreign exchange have shriveled to just $14 billion, barely enough to cover three months of imports. The inflation rate, though it has recently shown signs of slowing somewhat, hangs stubbornly above 20% in most cities. The problems in the countryside, where 870 million of China's 1.1 billion citizens live, are potentially more serious. Because state purchasers continue to pay less than the world market price for grain, farmers keep shifting to higher-yielding crops or converting fields into sites for hotels and small factories. This loss of grain-growing acreage, which could eventually lead to serious food shortages, is already forcing China to spend increasing amounts of precious hard currency reserves on imported grain. Rural unemployment is also rising, thanks to Beijing's new policy of channeling credit and raw materials to large state enterprises at the expense of small, rural factories and other businesses that operate outside the central plan. Over time, unrest in the countryside could become the present leadership's most explosive problem. A year ago there were violent clashes between peasants and local officials in some areas when the government paid for the autumn harvest with promissory notes. To avoid a repeat this year, Beijing committed more than $5 billion of emergency cash to crop purchases. FEW of the difficulties foreign managers face today are new. Money, raw materials, and electric power are in short supply, as they have been since the central government began trying to rein in the economy more than a year ago. Many factories have enough energy and raw materials to operate only a couple of days a week. Shortages are worsening. Renminbi, China's domestic currency, is now so scarce that many companies are living with unusually high receivables, since buyers are unable to pay bills on time. One exporter in Guangzhou, who says he is flush with foreign currency, now perpetually lacks renminbi to buy materials and pay workers. In the past he could purchase it from importers, who needed the foreign currency he had to buy foreign goods. But tough import restrictions mean importers now need far less foreign exchange. Nor can the exporter borrow local currency: Banks have clamped down on new loans. The cycle is potentially perilous. If he were unable to pay his workers, the exporter would soon have to shut down -- even though overseas demand for his product remained strong. The new controls on imports and credit are part of a broad effort by the central government to reclaim much of the decision-making authority it relinquished in recent years. How far this retreat from earlier, market- oriented reforms will go depends not just on the policies that central planners adopt but also on how vigorously provinces and cities, which have ignored similar edicts in the past, enforce them. One foreign company that sells equipment to the domestic transportation industry had been able to overcome the usual foreign exchange shortage by sending salesmen to scour the country for buyers with money. But after the troubles at Tiananmen, the company was informed that henceforth it could sell only to a single state purchasing agent. FOR THE NEXT few years, foreign newcomers mainly interested in tapping the domestic market will find it more difficult to get approval. Says a Western diplomat: ''The government is saying, 'Yes, our door is open, but not for everyone.' '' Even if you are allowed in, you'll find that Chinese consumers have much less money to spend. Janet Shanberge of Kamsky Associates, a consulting firm that works with Western companies in China, believes those that do best will be the ones that sell things China can't do without -- such as grain or equipment that earns hard currency. Also favored will be companies that use China as an export base or a source of supplies. Despite the official lip service everyone pays to the new hard line, belief in yesterday's less constrained economic policies and social attitudes has clearly not died. One Westerner who was in southern China during the Cultural Revolution of the 1960s says he is heartened by how unexpectedly open people in Beijing have been about what happened. The events at Tiananmen Square, he says, come up not only in one-on-one conversations but also occasionally in meetings with bureaucrats. This same businessman recalls a Chinese official asking him if he could arrange a business meeting on short notice. Why? The official implied that it would give her an excuse to skip a political training session that she, like many Chinese, has been obliged to attend since June. What probably ought to change is the way many foreigners do business in China. James Stepanek, who spent five years there as the top representative for a large U.S. high-tech company, wrote recently in the Asian Wall Street Journal: ''I still cannot comprehend the ease with which the Chinese side extracted the extra discount, the extra week of negotiations, the extra favor.'' A merchant banker active in arranging financing in China predicts that interest rates charged by foreign lenders will become ''more commensurate with the risk.'' Already, he says, one Chinese company has agreed to a loan priced at 125 basis points over Libor, a key interest rate benchmark. Pre- crackdown, the same company's borrowing spread was just 50 basis points. True, memories can be short. Hong Kong, which shook with convulsions for a couple of months after Tiananmen Square, today seems unchanged. The territory's volatile stock market has recovered half the ground it lost, hotel & occupancy rates have slowly edged up, and real estate speculators have reemerged. Indeed, a group of 146 unfinished luxury houses sold out three weeks after going on the market in September. Their average price: $1 million. In October the government announced a much debated plan to invest $16 billion in a new airport, shipping terminals, roads, tunnels, and other large projects designed to cope with future growth. Across the border in Guangdong province, where Hong Kong manufacturers employ several million workers, business has hummed along with few disturbances. BUT THE TRUE TAB from Tiananmen Square has yet to be tallied. It will be paid in the brains, energy, and capital of those emigrating from Hong Kong who otherwise might have stayed. Last year 45,000 people left, up from 30,000 the year before. Says William Purves, chairman of Hongkong & Shanghai Bank: ''What has happened will lead to a further brain drain in 1990 and 1991.'' Agrees Simon Murray, managing director of Hutchison Whampoa, a conglomerate with interests throughout Hong Kong: ''The confidence built up over years was destroyed in a day. Middle managers, those around 33 with a few children, say, 'Can I risk ((staying)) without a lifeboat?' '' To most, a lifeboat means the right to live in a foreign country. Though no Hong Kong companies have pulled up stakes, many are now looking into establishing at least a portion of their operations abroad. One likely winner: the island republic of Singapore (see box). Optimists argue that no Communist leader would knowingly strangle China's largest investor and trading partner. Gordon Wu, managing director of Hopewell Holdings, a giant Hong Kong company, points out that China has long had the power to wreck the territory but has never chosen to use it. The mainland furnishes more than 65% of Hong Kong's water supply, meat, and vegetables. If China opened its borders, as it did briefly in October, a flood of refugees would soon engulf Hong Kong. A Princeton-educated engineer who ponders the future from a music-filled aerie on the 64th floor of Hopewell Centre, Wu had his confidence sorely tested after June 4. The stock market's collapse killed a Hopewell rights offering, and work stopped on a superhighway the company is building between Hong Kong, Macao, and Guangzhou, the capital of Guangdong province. But in September construction resumed. And while Wu doesn't dismiss the chance of further trouble across the border, he expects the first leg of the highway to | open late next year. Says he: ''What guarantees Hong Kong's existence is our ability to lift up the Chinese economy.'' Even the Chinese in Taiwan are showing surprising faith in the mainland's economic prospects, though that faith is born partly of necessity. Wages in Taiwan are more than eight times what they are across the straits in China's Fujian province. Manufacturers of such labor-intensive products as shoes, garments, and electronic components swarmed across from Taiwan beginning in 1987, when the government in Taipei relaxed travel restrictions. In many cases, whole factories were dismantled and shipped to China through Hong Kong. Since June 4, Taiwan's investment in China has continued to grow, though at a far slower pace, according to knowledgeable business executives in the region. In a politically important move, a large group of Chinese investors from Taiwan is making a publicly announced trip to southern Guangdong province in December to discuss investment possibilities. Previously Taiwanese doing business on the mainland kept a scrupulously low profile. BUSINESSMEN from other countries are also warily raising their heads. Motorola is still considering a $100 million investment in Tianjin. The Wrigley chewing gum company is currently negotiating a $20 million deal in Guangzhou. In separate deals, Chase Manhattan and Bankers Trust recently agreed to syndicate loans to two large Chinese companies. Japanese bankers, sensitive to the charge that they are overeager to resume business as usual, welcome the Americans' return. ''We certainly cannot neglect what happened in June,'' says Hisao Kobayashi, director of Dai-Ichi Kangyo's international planning division. ''But China is forever, and we have to take the long-term view. We should never pull out.'' Though U.S. executives in China are more reluctant to be quoted, they generally feel the same way. Nonetheless, it is sobering that many China watchers these days don't rule out a decade or more of political instability. The furious power struggle among the country's leaders, evident in May and June but overshadowed for a time by the upheaval in the streets, has yet to play itself out. Much depends on the order in which China's ruling octogenarians finally pass from the scene. Ironically, most Western observers are rooting for Deng to outlive the rest of his generation. In the inscrutable world of Chinese politics, the man who ordered the appalling killings in June is still viewed as a moderating, stabilizing force. (