(FORTUNE Magazine) – GO JUST about anywhere in China and you're likely to run into a traffic jam. Swarms of bicycles, cars, trucks, and pedestrians joust their way around one construction project after another. Skylines bristle with cranes -- so many that you wonder whether the spindly gantries shouldn't be designated the new national bird. China has become the world's largest construction site as crews in nearly every corner of the country rush to reroute roads, bridge unspanned rivers, stack up office towers, and carve factories out of rice paddies in the name of economic reform. All this frenetic building is the most palpable sign of the scope, ambition, and attendant chaos of China's renewed rush to become a market-driven 20th- century economy by the turn of the 21st. And it's not restricted to suburban Hong Kong and the ballyhooed coastal regions of South China (see following story). From sleepy tea- and rice-growing towns in the countryside to the teeming streets of Shanghai, Wuhan, Tianjin, and Beijing, China is booming. The only exceptions are China's remote and backward western provinces, which cover vast areas of desert and mountainous terrain. If you've been doing most of your worrying about Japan as a tough competitor, you can start thinking about adding China. Apparently lost in the dust kicked up by all this activity are the political misgivings and fears of many ordinary Chinese following the 1989 pro-democracy clashes that left student protesters' blood smeared on Tiananmen Square. While the West can't shake those violent images, in China what sets people's tongues wagging these days are the doings at the new stock markets in Shanghai and Shenzhen, the price of lucky phone numbers auctioned off in Beijing, the ''high'' salaries offered by new foreign joint ventures and small independent businesses (about $100 a month, or triple the average worker's ! wage), and other trappings of what many would call capitalism. Says Bank of Tokyo China expert Isao Ohkuba: ''China has already passed the point of no return. The Chinese now have a taste of how people live in the outside world and no longer will they tolerate a lower standard of living. China has to keep reforming.'' The head cheerleader for redoubled economic reform is none other than senior leader Deng Xiaoping, 88 years old and counting. Since early this year, Deng has made a spectacle of visiting factories and special economic zones that are the best examples of the new, improved China, and declaring that ''to be rich is glorious.'' He has relentlessly prodded both the ruling Communist Party and bureaucrats to accelerate reform of state-run industries and the process of opening to the outside world. The numbers are hard even for diehard socialists to argue against. The growth of China's gross domestic product, which has averaged 8.6% annually since reforms began in 1979, should hit double digits this year. Unemployment is down to 2.5%, and exports grew 16% last year to $72 billion. Average salaries rose more than 10% in 1991 while inflation held at 4.2%. Government price controls now affect less than a third of available goods, and more products and materials are being decontrolled every month. Meanwhile, foreign investment, which slumped after 1989's political turmoil, last year climbed to $5 billion. Nevertheless, China is an economy under construction, and communist foremen are still on the building site, so hard hats are recommended. Says a Western diplomat: ''China has made all the easy, win/win reforms of freeing up agriculture and small-scale enterprise, setting up stock market experiments, and encouraging overseas trade and foreign investment. But now they face the meat of the matter: They must revitalize the state-run industrial dinosaurs, they must rationalize the byzantine banking, tax, and currency exchange systems, and they must reduce both the role and the size of government. Each of these reforms faces entrenched opposition either in the Communist Party or in particular ministries and provinces. I'm not sure there's enough political will to do it all.'' China's to-do list is as daunting as it is long. As always, politics complicate every line item. After 42 years of communist rule, there is still no orderly method of political succession for key leaders in either the party or the government. Some practical matters are even more pressing. The & government has had budget deficits in 11 of the 12 years since reform began. Last year the deficit equaled 3.4% of gross national product, and this year it could exceed 4%. The deficit, coupled with double-digit growth rates, could trigger another round of inflation and wipe out much of the improvement in the standard of living in a matter of months. Meanwhile, economic reform -- along with more cost-conscious managers -- is finally beginning to crack China's vaunted ''Iron Rice Bowl'' policy of providing cradle-to-grave job security. So far the expanding economy has created new jobs for those who have been fired, but if it stops doing so, social unrest is almost sure to follow. Reform is also widening the differences in living standards across the country. Such disparities also could lead to social discord. Finally, China must tackle the stodgy, oversubsidized, state-run enterprises that dominate heavy industry -- steel mills, mining concerns, makers of vehicles and machinery. These behemoths account for about half the country's industrial output, but one-third of them are bleeding buckets of red ink, and another third are struggling, even with huge cash infusions and price protection from Beijing. All these are structural problems that require stern, painful change from the top down. But China's answer to many of the problems seems to be, ''Let's build another special economic zone.'' Case in point: the government's ambitious plan to revitalize Shanghai, which is China's largest city, with 12 million people, and home to much of the country's heavy industry and its biggest port. While Shanghai's stylish Western architecture has survived and its economy has thrived in recent years, the old city, once known as the Paris of the East, is simply too crowded and its city services too decrepit to absorb much new growth. So, rather than bulldoze the Bund, the famous phalanx of art-deco office buildings put up along the Huangpu riverfront by foreigners earlier this century, authorities chose to redevelop Pudong, a 135-square-mile area of light industry and rice fields directly across the river. The government plans to spend $3.7 billion there by 1995, putting up bridges, new thoroughfares, deepwater port facilities, industrial parks, and China's first free-trade zone, where goods could be imported and exported without duties. Japanese department store operators have signed on to build shopping malls, and Hong Kong real estate developers will put up thousands of apartments for sale to hordes of new residents. ''Let's build Shanghai into a foreign-oriented, multifunctional, and modern cosmopolis,'' crows one of the many temporary billboards at building sites. Central to the strategy to revive state-run industry and to counterbalance Hong Kong's influence after it becomes part of China in 1997 is the Shanghai Securities Exchange. A more staid institution than the wild and woolly bourse in Shenzhen, where shareholders rioted this summer, the Shanghai exchange wants to be the home of big domestic industrial companies seeking to tap into China's vast private savings, now that the mounting deficit is forcing the government to curtail subsidies. So far, 29 stocks are listed on the exchange; nine are special issues called B shares that can be bought by foreign investors. Exchange President Wei Wen Yuan, who had never seen a stock certificate much less set foot in an exchange before the Shanghai bourse opened in late 1990, designed the trading floor to fit into an ornate old theater. Representatives of 136 member brokers squeeze around 200 personal-computer trading terminals, eyes glued to a big electronic screen where the stage used to be. A new trading room will open later this year with 400 more terminals. While trading is less frantic than on the Shenzhen exchange, the SSE index started at 100 in December 1990 and is now above 800. Shanghai Special Shaped Steel Tube Co. is a good example of a relatively small state-run industrial enterprise that has used the Shanghai exchange to leap toward independence. The maker of nearly 6,000 types of pipes, which expects revenues of about $15 million this year, first decided to start issuing shares in 1988. Last March bureaucrats finally gave the company permission to sell 30% of its shares to the public. (It could offer only A shares, limited to Chinese investors.) But before managers could get approval to sell its shares, they had to prepare a business strategy that would hold up to shareholder scrutiny. That meant trimming the work force by 200, to 1,100, and setting productivity quotas and profit targets. Says Chairman Wan Meng Lan: ''It's not so easy to be a manager anymore, even though I have more authority now. It became clear at the first shareholders' meeting that I have to worry about how we do in the market as much as how we do in the factory.'' So far, Wan's shareholders have nothing to complain about. The company's shares, which opened at $5.19, were selling for $26.11 in early September. Every employee is a shareholder now. Wan, 50, owns 125 shares. Sadly, it won't be easy for most of China's heavily subsidized state enterprises to work that kind of stock market magic. Says a Western diplomat: ''The problem is, the state enterprises are more like enormous feudal villages than modern corporations. They have to provide housing, recreation, hospitals, parks, and all manner of services, sometimes for hundreds of thousands of employees and their families. Consequently, it's not a simple matter of privatizing them, because who would want to buy a dinosaur company with dated technology and all that overhead?'' Managers of these enterprises are inclined to turn them into even bigger conglomerates that sometimes turn out like caricatures of Japan's famed keiretsu. A prime example is Shougang Corp., the government's showcase steel company in Beijing. Since economic reforms started in 1979, the company has branched into hotels, banking, machinery making, mining, shipbuilding, shipping, electronics, and even fashion design. To its credit, Shougang's steel, made with Belgian equipment, is high quality. The company's 206,000 employees earn salaries 80% higher than the national average and have better housing, health care, and education than most Chinese. In 1991, the company exported $210 million of steel and earned $287 million on $1.69 billion in sales. But Shougang is an exceptional case and owes much of its success to tax breaks and exemptions from government price controls. The government, nevertheless, holds Shougang up as an example of what state businesses ought to be, much to the chagrin of managers of other state enterprises. A top executive at a competitor calls Shougang ''an exercise in political egotism'' and contends that ''much of Shougang's success comes at the expense of other state-run enterprises that supply it or compete with it.'' Thankfully for China there's much more to the economy than giant, state enterprises. The biggest success stories in China are its small businesses, which rely on hard-headed entrepreneurship, rather than stock markets, subsidies, and special economic zones, to get ahead. Most are what the Chinese call contract enterprises. They are the industrial offspring of the earliest experiments with free enterprise, under which individual farmers could contract with a township or village to cultivate plots of land. They paid a specified sum, usually around 10% of profits, and pocketed the rest.

With industrial contract enterprises, it's only a bit more complicated. First you need a bright idea for a business, say, making wedding gowns or photo enlargers or factory assembly equipment or personal computers. It is important to avoid products that fall under government price controls or are made of materials that are rationed. Then you get a loan commitment from the township or village bank, usually on the order of $1,800 to $2,000. Next you go to your township governor or village mayor to present your business plan and work out a contract for the amount of money you will ''contribute.'' Smart entrepreneurs low-ball their projections, because future payments increase incrementally from the original sum. After that it's up to you. So how do they work in real life? Like gangbusters. Just ask Wang Jia Ying, 34, a former waitress from Shanghai who turned her passion for fashion into ZhiMeiNai, a producer of Western-style wedding gowns and formal wear for Chinese movie studios. ZhiMeiNai operates out of a country courtyard villa outside Hiqui, a farming community of 13,000 people, 100 miles west of Shanghai. Posters of Fred Astaire and Ginger Rogers decorate the walls. Wang started the company in 1988, at first employing only herself, her husband, and two retired tailors. Says she: ''We are completely self-made people. We had nothing at first and knew nothing about business except what we had read. All I knew was that designing clothes is fun.'' Now ZhiMeiNai employs 50, mostly young women. Their average salary -- $1,100 to $1,555 a year, plus free housing and health care -- is triple the national average. ZhiMeiNai's 1991 revenues were about $150,000 and profits $37,000, before paying the $5,000 promised to the township. Contract enterprises needn't be small or low tech. Stone Office Technology and Equipment Co. of Beijing, a producer of personal computers and word processors, is neither. It has 3,100 employees and sales in 1991 of more than $425 million. Stone even has a subsidiary in Australia. The big sellers are machines that can manipulate Chinese ideograms as well as Roman letters and conventional numbers.

Stone was one of the earliest contract enterprises to go industrial. Founded in 1984 by three former college roommates, it started out assembling Japanese computer printers but soon began building the printer mechanisms into full- blown computers of its own design. While business has thrived, the founders have not had an easy path. In 1989, then-president Wan Runnan fled after giving computers and moral support to student pro-democracy protesters. Wan, now living in Paris, remains on China's list of most-wanted political fugitives, and officials at Stone don't like to talk much about him.

Since then, another co-founder, Duan Yongji, 46, a dapper engineer who formerly worked in China's aeronautics ministry, has been president. Duan has spent a lot of time since Wang's exile keeping the government's nose out of Stone's business. ''Our ownership is murky now,'' says Duan. ''Even though we borrowed the money and built the company ourselves, the government says Stone belongs to the people -- in other words, the state. But we have always wanted the company to be owned by private shareholders. I say the government is welcome to ownership of Stone only if it is willing to buy our shares.'' So far the government hasn't allowed Stone to sell shares to the public, and as a result, Duan and his partners don't know whether they'll ever profit personally from their entrepreneurship. Even so, Duan lives lavishly, at least by Chinese standards. Though his salary is only about $2,000 a year, the company provides him with a shiny Mercedes-Benz, a cellular phone, a roomy house, and $2,000 a month in travel and entertainment expenses. What's Duan's biggest concern? ''It isn't the government. I worry more that foreign joint ventures moving into China will overwhelm us with their superior technology and higher salaries.'' His fears are not unfounded. Western and Japanese companies have discovered that despite China's backward reputation, among its 1.17 billion people are quite a few computer nerds and technical whizzes. Two years ago Omron Corp., a Japanese maker of medical instruments and computer systems for banks, set up a joint venture software development laboratory in Shanghai to find out if Chinese programmers could turn out worldclass software. Now the venture, called Omron Shanghai Computer Corp., employs 70 people. According to President Bao Shuping, quality and productivity exceed that of Omron's labs back in Japan. Bao brags: ''Everybody here but the driver has a university degree, and 50 of them have graduate degrees. Can you name another company with credentials like that?'' While China's main lure is cheap labor, many like Bao wish they could pay their Chinese employees more than they do. Says he: ''I have a big problem with China's irrational income tax policy, because it doesn't let me reward my people directly for doing good work. Every yuan they make above 800 yuan (about $150 a month) is taxed at 60%. That forces us to provide hidden income in the form of nicer homes, free vacations for families, expense accounts, and occasional trips abroad. It would be so much simpler just to pay them more.'' The average salary, not including hidden income, for Omron's Chinese engineers is 700 yuan a month -- about $130 -- or roughly four times the national average. The Omron venture is small potatoes compared with other foreign high-tech investments. One of the biggest is Motorola's $120 million pager, cellular phone, and semiconductor plant in Tianjin, a coastal city about 100 miles from Beijing. Motorola, which broke ground for the plant this summer, is one of only a handful of Western companies allowed to own its facility outright rather than as a joint venture with a Chinese outfit. Even with full autonomy, getting a high-tech venture going in China is a challenge. Surprisingly, the biggest headaches aren't technical ones. Says Daryl Despain, Motorola's controller in China: ''Our No. 1 problem is the housing issue, and that is really all kinds of problems rolled into one.'' Rather than following the time-honored practice of providing houses for workers, Motorola wants to help them buy their own homes. Says he: ''The temptation for a company is just to build dormitories and apartments, but that is not the right thing to do for our employees. We think home ownership is good for people.'' Despain also can foresee problems meeting China's stringent export quotas for foreign ventures. The pager plant is supposed to export 70% of its production of 3,000 units a week. But with phone service so unreliable in China, domestic demand for pagers is heavy. One distributor has offered to buy all the devices the company can make. As much as Motorola would like to comply, it can't. Also, Despain says China's confusing foreign exchange rules and dual currency system -- one kind for Chinese citizens, one for foreigners -- make it difficult to keep enough of the right kind of cash on hand. Regardless of the problems, there is a bright side. In late August, Motorola opened the temporary pager plant that will make the devices until the new factory is finished next year, and within just three weeks, workers had , matched the quality of a sister plant in Singapore. Says Despain with a shrug: ''I've never done anything so frustrating that I enjoy so much.'' That's the sentiment of just about everybody involved with the lurching economic reform in China. Despite the lousy infrastructure and the bureaucratic impediments, the political uncertainties and the cultural contradictions, China's small successes and big ambitions are ever so slowly beginning to confirm that its fabled economic potential is for real. Now if only they could do something about the traffic . . .

BOX:

VITAL STATISTICS 1992 PROJECTIONS Population: 1.17 billion Population growth: 1.4% Unemployment rate: 2.5% GDP per capita: $302 Foreign Direct Investment: $5.5 billion Government Budget Deficit as % of GDP: 4% ($14.1 billion) Inflation rate: 7% Foreign debt: $65 billion Exports: $83 billion Imports: $71 billion

Source: U.S. Embassy, Beijing

CHART: NOT AVAILABLE CREDIT: SOURCE: U.S. EMBASSY, BEIJING CAPTION: CHINA'S GNP