YUANJIANG, China -- A small, nameless island sits near where the Yuan and the Yangtze rivers meet in central China, and this dusty town is perched on its northern end. Not many visitors come here, other than hard-luck cases bound for the Hunan Special Electrical Machinery Factory, also known as the Hunan Province No. 1 Prison.

Hou Xuezhu has taken the rickety ferry to Yuanjiang dozens of times in the years since her husband was imprisoned here for starting a labor union during the 1989 Tiananmen Square protests. But she was more anxious than usual on the last trip, for her husband has declared war against his jailers.

"Though I am weak and ill, they are trying to force me to work. I refuse," Zhang Shanguang wrote in a letter smuggled out of the prison in April. "I don't know what they'll do next."

For much of the past decade, prison officials have subjected Zhang to what the Chinese call laogai, or "reform through labor." But in recent years, the capitalist-style economic policies that have lifted millions of Chinese out of poverty also have made it more difficult for inefficient prison factories to sell their shabby products. Rather than improve conditions for inmates in Hunan No. 1, this has plunged them into greater misery.

The prison depends on its factory for funding -- a factory struggling to stay in business by squeezing more from its inmate workers. In other words, both Zhang and the prison are fighting to survive.

According to a petition from Zhang, a copy of which was smuggled out of China, and interviews with several former inmates, meals at the Hunan No. 1 Prison are meager and getting smaller. Guards, who sometimes go months without pay, hang prisoners by their hands from basketball hoops and confine them in cells infested with mosquitoes. Disease is widespread. Medical care is limited. Prisoners collapse from exhaustion after working 16-hour shifts.

"I'm afraid of what I'll find out," Hou said softly, sitting in an empty cafe as she began a bumpy, two-day journey to visit her husband in his island prison 600 miles west of Shanghai. "He's complained about the prison before, but it's never been this bad."

"On November 8," Zhang wrote in the smuggled letter, "they began taking me to the workshop and hanging me from a pillar with my hands cuffed above my head and my feet barely touching the floor, every day for more than 10 hours. . . . On March 12, they caught me writing a petition [about prison conditions]. They started beating and kicking me again, and hitting my head with an electric baton."

Sentencing criminals to labor is not considered a human rights abuse in itself. Many countries, including the United States, run prison work programs. But China's forced labor system involves inmates who have never been convicted of crimes, as well as political and religious dissidents. In addition, critics say, conditions in the laogai system are often inhumane.

Even before taking power in 1949, the Communist Party built prison camps on the principle that inmates could be transformed into productive citizens through forced labor. But because China was struggling to rebuild its war-torn economy, another principle was also established: Prisons were supposed to be financially self-sufficient, relying on income from their factories and farms to fund operations.

For decades, these prison enterprises were an integral part of China's planned economy, with sales of their products all but guaranteed by the state. But after market reforms were introduced in the 1980s, prison businesses were expected to compete for customers and resources -- and they began losing large sums of money, according to academic journals published by Chinese researchers with ties to the Justice Ministry.

Prison enterprises were as inefficient as other state factories, plagued by corruption, weak management, outdated equipment and low-quality products. But they faced additional problems, including an indifferent workforce with low skills and high turnover. Many prisons were located far from transportation hubs, raw materials and potential customers.

As sales of prison-made goods dropped, so did prison budgets. Some facilities responded by cutting costs and forcing inmates to work longer hours. Others sought markets overseas, in Southeast Asia, Europe and the United States. A few maintained profitability by abandoning prison labor and hiring better-trained, better-motivated civilian workers.

"Simply not having to pay the inmate workers has not meant that prison enterprises automatically make a profit," said James D. Seymour, a Columbia University researcher and co-author of a book on China's labor reform system. "It's cheaper to pay civilians the low salaries that prevail in China than to maintain a secure prison and provide sustenance for prisoners."

Seymour said China's prisons claimed profits of $44 million in 1984, but were reporting annual losses of more than $18 million by 1994. That year, the government acknowledged its prisons could no longer support themselves and passed a law formally recognizing its responsibility to fund them. But the central government cannot afford to shoulder the entire cost of the sprawling laogai system -- a network of 1,250 to 5,000 facilities housing 2 million to 6 million inmates nationwide, according to various estimates.

A majority of Chinese prisons receive some state funds, but they continue to suffer "severe economic difficulties," according to a book published last year by Justice Ministry researchers. Many prisons are mired in debt, others are hobbled by corruption, and the government has yet to establish a system for funding them, the book says.

"The economic situation of some prisons is nearly at the verge of collapse," wrote Shi Dianguo, a professor at the Central Justice Officer Academy, noting that more than 70 percent of prison expenses are covered by the prisons themselves. "This makes it difficult to guarantee that prison operations don't suffer from the drive for economic results."

The Justice Ministry declined requests for interviews about the Chinese prison system or the Hunan No. 1 Prison. The prison also declined. But one official who answered the phone there denied that conditions were deteriorating and said government funds cover most prison expenses. He said the factory remains profitable, and inmates never work more than eight hours a day.

The inmates tell a different story. The prison has all but stopped production of the industrial generators and construction equipment that it made for decades, they said. "The guards say nobody wants to buy them now," said one inmate who was released last year. "It's junk. The quality is too low."

Instead, the former inmates said, prison authorities have signed contracts with private companies to manufacture an assortment of such labor-intensive products as wigs, medicine boxes, gloves and Christmas lights. And they are pressing prisoners to work longer hours.

In the early 1990s, prisoners were required to work eight hours a day. Now prison officials force inmates to work 12 to 16 hours a day, six or seven days a week, the former prisoners said. When production deadlines approach, inmates sometimes have to work even longer hours.

"On occasion, inmates work throughout the night without sleep. It's very common to see inmates spitting blood and fainting from exhaustion in the workshops," wrote Zhang in his petition, a copy of which was obtained by the New York-based group Human Rights in China. "After laboring for long hours under bright lights, some inmates sustained serious retinal injuries that have affected their vision. But the guards accuse them of faking it and force them to work until they go completely blind."

One inmate who was released recently said prison guards have a personal interest in pushing inmates to work harder because budget shortfalls mean they do not get paid, sometimes for months at a time.

"They set a quota for you, but if you meet the quota, then they raise it. You work harder to meet it, and then they raise it again," the former inmate said. "It's torture to meet these quotas, but it's torture if you don't meet them, too."

Several former inmates said prisoners who fail to meet quotas or otherwise upset the authorities are handcuffed to basketball hoops in the prison yards, or to high railings in the workshops, their feet barely touching the ground.

"We'd be working, and these people would be just hanging there next to us," said one inmate. "It was like a warning."

Another inmate said guards force prisoners to prop up heavy doors for days at a time, or torture them by binding their hands tightly with ropes. Guards also put troublesome inmates in six-foot-square solitary confinement cells infested with mosquitoes in the summer. But inmates can bribe guards for easier work assignments or for help obtaining reductions in sentences.

Of the 2,000 to 3,000 inmates in the Hunan No. 1 Prison, most were convicted of regular crimes. But former inmates said more than 100 political prisoners were held here in the early 1990s, many arrested after the Tiananmen Square crackdown. Less than half that number of dissidents are in the prison now, the inmates said.

Prisoners sleep 12 to 16 to a room, and guards depend on inmates to help run the prison. Meals are getting smaller. Many consist of dirty vegetables and seaweed soup. Meat used to be served twice a week, but now it appears only occasionally on prisoners' plates. Rice is stale and full of pebbles. The water is not boiled.

Tuberculosis and hepatitis are widespread, but medical care is limited and inmates often die from their illnesses. "Unless someone is clearly dying, inmates hardly ever get proper medical attention," Zhang wrote.

Last year, one of Zhang's friends, a political prisoner named Li Wangyang, was released early on medical grounds. Arrested in 1989 in good health, Li could not walk without help when he left the prison and he suffered from heart, thyroid, eye, hearing and lung ailments.

In February, he went on a hunger strike to demand the government pay for his medical care. But on May 6, police removed him from a hospital bed and arrested him again. His sister was arrested, too.

It is unclear how many inmates signed Zhang's petition before the guards discovered it. But Liu Qing, president of Human Rights in China, said a group of inmates, both regular criminals and political prisoners, spent months passing it around before they were caught.

Zhang, 46, was at the center of the clandestine petition campaign. The former teacher, who organized a labor union in Hunan in 1989, was released from prison in 1996 but arrested again two years later for starting a group to help laid-off workers. His wife had urged him not to do it, telling him to think of their children. But police showed up one morning and took him away before the children woke up.

"I was angry at him at first. But there's no point now," Hou said. "I'm just sad -- and worried."