When Premier Zhu Rongji took the reins of this country's lumbering economy in 1998, he promised he would turn around China's moribund state sector in three years. Now, right on schedule, Mr Zhu and his government are claiming a dramatic turnaround in profits for state-owned firms, a stance backed by a host of rosy new government statistics.

New figures being touted by China's economic planners, for example, show that more than 4,000 of the country's biggest state-owned enterprises have reversed losses and are now making money. And with more of China's biggest state firms planning to sell stock this year, the remaining unprofitable companies - state media number them at about 2,500 - also could see their prospects improve in 2001 (More complete figures and reform plans for this year were released on Jan. 9 at a news conference in Beijing).

Yet beyond the official numbers China's state enterprises face a far less certain future today than ever before. One reason is that when China joins the World Trade Organisation later this year, decades-old barriers used to protect these firms will start to fall, meaning the companies will have to rely on themselves, not on Beijing's largess, for survival, as they start competing with better-managed foreign companies.

"China is heading into huge new competition and potentially there could be disaster if they don't manage to improve the competitiveness of the state sector," says Dong Tao, regional economist with Credit Suisse First Boston in Hong Kong.

Another reason for caution is that the improvement is partly because of outside help. To be sure, real reforms have taken place: Dozens of hopeless state enterprises have been closed or merged into stronger rivals, while millions of state enterprise workers have been pushed into early retirement. But higher oil prices, for example, helped give the state's large oil companies hefty profits - and they account for more than 30% of profits of the country's 500 biggest state companies. Especially helpful has been a one-off government debt-relief programme that has wiped nearly $170 billion in bad debt off the books of state enterprises, significantly easing their financial burdens.

Yet even so, across China many state firms continue to struggle, using outdated technology to produce substandard products for which a market dried up long ago. Government bureaucrats, many unfamiliar with market economics, continue to lead these companies, which remain vastly overstaffed. And many of the state companies showing new profits are surviving on record levels of government investment, which even Beijing says can't last forever. Some of them may even be reporting false numbers, long a problem for China's data collectors.

To understand the remaining problems in China's state sector, consider the state of SAIC Multiple Trading Co., a diversified government enterprise listed on the Shanghai exchange. After a 1994 initial public offering, SAIC Multiple went on a spending spree, putting money in a range of speculative property and investment deals. And by 1997, it began recording losses.

Early last year, nearly $31 million in bad debt was removed from SAIC Multiple's books, part of a debt-for-equity swap arranged by Beijing. Two years before that, SAIC Multiple's parent handed the firm more than $10 million in new assets. The efforts were supposed to reverse losses and lead to new profits, but they didn't work. SAIC Multiple made a loss of $36.5 million in the first half of last year, and a company spokesman says the firm will remain in the red this year. Full-year figures for last year weren't available.

SAIC Multiple's woes underscore the core problem facing China's state sector: a lack of incentive for state enterprise managers, a problem tied directly to these firms' status as government entities. Indeed, while China lists dozens of its biggest government companies on the stock markets, they remain owned and managed by the government and its officials. A handful of these firms are starting to link salaries and profits, but even at some of these favoured firms, the quality of management remains sketchy, analysts say, raising the possibility that at least part of the new capital they are receiving could be wasted.

Mr Dong, the Hong Kong economist, says, "China has made more progress on restructuring than any other part of Asia, but continued improvement in efficiency at state enterprises remains critical for it to sustain economic development. It's a simple necessity."