State capitalism in China
Of emperors and kings
China’s state-owned enterprises are on the march
Nov 12th 2011 | from the print edition
WHEN China joined the World Trade Organisation (WTO) in December 2001, many people hoped that this would curb the power of its state-owned enterprises. Ten years on, they seem stronger than ever. President Hu Jintao can expect to hear about this at the Asia Pacific Economic Co-operation summit this weekend. Hillary Clinton, America’s secretary of state, has warned stridently of the dangers of state capitalism. A Congressional report released on October 26th railed against the unfair advantages enjoyed by state-owned firms and lamented that China is giving them “a more prominent role”.
Indeed it is. In a new book called “China’s Regulatory State”, Roselyn Hsueh of Temple University documents how, in sectors ranging from telecommunications to textiles, the government has quietly obstructed market forces. It steers cheap credit to local champions. It enforces rules selectively, to keep private-sector rivals in their place. State firms such as China Telecom can dominate local markets without running afoul of antitrust authorities; but when foreigners such as Coca-Cola try to acquire local firms, they can be blocked (though this week China did approve Yum! Brands’ bid to acquire Little Sheep, a Chinese restaurant chain).
In the dozen or so industries it deems most strategic, the government has been forcing consolidation. The resulting behemoths are held by the State-owned Assets Supervision and Administration Commission (SASAC), which is the controlling shareholder of some 120 state-owned firms. In all, SASAC controls $3.7 trillion in assets (see chart). The Boston Consulting Group (BCG) calls it “the most powerful entity you never heard of”; though it does not always get its way. Some state-owned firms have powerful friends and are hard to push around.
In some ways, SASAC aims to modernise its enterprises. Peter Williamson of Cambridge’s Judge Business School points approvingly to the steel industry. China was once littered with small, uneconomic steel firms; SASAC has urged them to merge, creating three “emperors” and five “kings”. That, says Mr Williamson, means there are enough steel firms to foster competition at home; yet they are big enough to venture overseas. What the government’s plan lacks, however, is any idea that private steelmakers might compete, in China, with the emperors and kings.
According to the Congressional report, state-owned firms account for two-fifths of China’s non-agricultural GDP. If firms that benefit from state largesse (eg, subsidised credit) are included, that figure rises to half. Genuinely independent firms are starved of formal credit, so they rely on China’s shadow banking system. Fearing a credit bubble, the government is cracking down on this informal system, leaving China’s “bamboo capitalists” bereft.
Those who argue that state-owned firms are modernising point to rising profits and a push to establish boards of directors with independent advisers. Official figures show that profits at the firms controlled by SASAC have increased, to $129 billion last year. But that does not mean that many of these firms are efficient or well-managed. A handful with privileged market access—in telecoms and natural resources—generate more than half of all profits. A 2009 study by the Hong Kong Institute for Monetary Research found that if state-owned firms were to pay a market interest rate, their profits “would be entirely wiped out”.
One reason is that state firms must pursue the state’s aims, which include many things besides making profits. David Michael of BCG observes that the government forces state firms to shoulder all manner of extra costs. For example, when coal prices shot up recently, the country’s energy giants were not allowed to pass the hikes on to consumers. When the China Europe International Business School asked its senior alumni at state-owned firms about their biggest headaches, many grumbled about official meddling.
Still, Mr Michael, who served as one of the only foreigners on China Mobile’s advisory board, believes SASAC deserves some praise. The group runs management-training courses, benchmarks firms against international standards and establishes codes of conduct. Following recent scandals involving Chinese firms overseas, it issued an edict in July restricting the use of derivatives by the main state-owned firms. And SASAC is now pushing the biggest of its charges to appoint boards of directors.
Yet Curtis Milhaupt of Columbia Law School insists that such reforms are “not where the action is”. In a new paper, he examines how exactly China’s big state firms are controlled, and reaches troubling conclusions. Regardless of whether a state-owned firm is listed in New York, has an “independent” board or boasts a market-minded chairman with a Harvard MBA, he finds that the strings always lead back to a core company that is in the tight clutches of SASAC. He thinks genuine market reform will come only when state firms venture abroad en masse and have to adapt to global norms.
A recent ruling in Europe may prove a straw in the wind. Earlier this year, an attempt by Sinochem, a state-owned chemicals firm, to enter into a joint venture to make antibiotics with DSM, a Dutch firm, attracted the attention of the European Commission’s antitrust authorities. They decided to scrutinise not just Sinochem itself but all of SASAC’s empire. The deal was approved anyway, but this may have set an important precedent.
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