The scare stories—and the chaotic reality
AS HU JINTAO, China’s president, flies to America this month, commercial ties between the two countries are at a new low. Alongside tensions about China’s currency, its growing trade surplus with America and intellectual-property theft, is a new concern: the aggressive international expansion of China’s corporations.
In Washington, the $18.5 billion bid by CNOOC, a mainland oil producer, for Unocal, a Californian rival, was portrayed not as a commercial deal, but as a state-funded grab for strategic American assets. It triggered such political opposition that CNOOC abandoned its bid. The FBI has just launched an initiative to expose economic espionage by visiting Chinese students and businessmen. And in Congress, Richard D’Amato, a Democrat and the chairman of the US-China Economic and Security Review Commission, worries aloud that Chinese firms listing shares in America are siphoning American money into a “China bubble”. Nor is concern confined to the United States. India’s security bureau is reportedly considering restricting the expansion in India of Huawei, a Chinese telecoms-equipment maker, over its suspected military ties.
The real scaremongers assert that the Chinese state is a single—and single-minded—entity with a master plan to reclaim China’s rightful place at the centre of the world. China’s companies are thus mere tools of an expansionist policy propagated by Beijing’s leadership. More subtle are the fears that, because it is impossible to untangle the ownership of most Chinese companies, foreigners cannot be sure to whom they are selling. When the ultimate authority could be the Communist state, that is a worry.
The Chinese government certainly wants to create globally competitive firms and it is pushing some to secure strategic resources, like oil and metals, overseas. The Chinese state also still has a broad influence over business. But the chaotic way this power is exercised contributes to the weakness, not the strength, of Chinese firms. “It is not a plausible argument that China Inc can take a co-ordinated Long March overseas,” argues George Gilboy, a professor at the Massachusetts Institute of Technology and, until recently, head of strategy for Shell in China. “It can’t even manage that domestically.”
After two decades of reform and privatisation, only about a third of China’s economy is still directly controlled by the government through state-owned enterprises (SOEs). But these are concentrated in key sectors like defence and utilities. While many of the biggest state firms have publicly quoted subsidiaries on international stock markets, the government retains ultimate ownership—one of the objections raised against CNOOC. The top 190 or so SOEs are directly controlled by the State Assets Supervision and Administration Commission (SASAC)—set up in 2003 to restructure these often moribund firms.
And yet even this group of elite companies is not guided by a single, controlling hand. Take telecoms: China’s early decision to deregulate the sector and break up the state monopoly into four competing firms—two fixed-line (China Telecom and China Netcom) and two mobile (China Mobile and China Unicom)—was widely admired. It made China the world’s largest telecoms market and created fat profits for operators. Yet Beijing’s bureaucrats now threaten to undo this good work. Frightened by the growth of new services and a price war, they recently forced the bosses of the four firms to take each other’s jobs to discourage competition, to the amazement of some independent directors.
Infighting among bureaucracies with competing agendas crops up again and again across China’s industrial landscape. It made life so difficult in the power industry, that some foreign investors quit in disgust, causing power shortages. Overseas investors have been equally befuddled in the media sector, where joint-ventures promised over the past two years are suddenly off the agenda. The media regulator, SARFT, which also oversees cable television operators, is battling MII, the telecoms regulator, to prevent the big telecoms operators from launching competing internet TV services. That SARFT happens to be the last of four stamps of approval needed to obtain a licence could cripple the industry before it is born.
Battles between competing branches of central government are overlaid by struggles between central government and local officials, who want to protect jobs in their own backyard. In a country with a saying “the hills are high and the emperor is far away”, edicts from Beijing are routinely ignored.
The contrast with Japan is stark. The Japanese government had less direct control over its corporations, but its officials co-ordinated their domestic development before earmarking sectors for overseas expansion. The Chinese bureaucracy, while in direct charge of more of the national economy, is riven by factional infighting.
Unhappily, the resulting chaos is also hurting the most promising two-thirds of the economy that is in private hands. Private companies are often beholden to state banks for capital and to local officials for favours and contracts. Since private enterprise was not even acknowledged until 1988, entrepreneurs had to bring state investors aboard as political protection, becoming so-called “red-hat” companies. Yasheng Huang, a professor at MIT, says that the results can be disastrous: “Government shareholders may be passive at first, but once a company succeeds, they interfere. Countless Chinese firms have been driven to bankruptcy or failed to grow big because local governments decided to exercise their legal claims on ownership.”
Take Kelon, a refrigerator maker. Currently on the brink of collapse after an embezzlement scandal, it once was China’s best firm. With the help of its tiny township government in Shunde county, its founders, Pan Ning and Wang Guoduan, turned it from the 42nd-largest fridge maker in 1984 into China’s biggest in six years. Focused management and marketing flair (Chinese people put fridges in the living room to impress visitors, so Kelon made the smartest models) led to a Hong Kong listing and global awards. However, in the late 1990s, Guangdong’s provincial government forced Kelon to take over a loss-making SOE air-conditioner maker at an exorbitant price. Because Mr Pan and Mr Wang had not shifted ownership to Hong Kong, Guangdong officials could force the Shunde shareholders to fire them and appoint a bureaucrat to replace them. He then rapidly ruined the company.
Now, worryingly, something similar may threaten Haier, China’s leading white-goods maker, which recently failed with a bid for Maytag, an American rival. Admired globally for its efficiency and innovation, Qingdao-based Haier is the creation of Zhang Ruimin, China’s most famous entrepreneur, who transformed a company so demotivated that its workers used to urinate on the factory floor. Yet Mr Zhang has just lost a long fight to reward his managers with shares via a Hong Kong listing. Late last year SASAC ruled that Haier was owned by the Qingdao government and that management buy-outs at big SOEs were forbidden. Compare that with Legend (now Lenovo), which bought IBM’s computer business—it escaped state influence and has flourished. A “red-hat” company, it was originally banned from selling personal computers in China, so went to Hong Kong to export, set up a joint venture and obtained a Hong Kong listing. Although it returned to China to manufacture, its production and research facilities are registered as Hong Kong affiliates, not with Legend China, and it is reducing the share owned by its state sponsor. Mr Huang of MIT argues, “there is nothing domestic about Legend except the nationality of its managers. It is as foreign in China as GE.”
Reasons to be fearful
Foreign fears about the expansion of Chinese firms are often compounded by the murkiness of their ownership. Take Huawei, a telecoms firm that is the most global of any Chinese company, and also among the least transparent. Although technically private, its shares are probably owned by local state telecoms customers. It also has a $10 billion credit line from China Development Bank, famed for its loans to support state policy. Its founder, Ren Zhengfei, was a former People’s Liberation Army officer. But the fact that no one knows who runs Huawei could weaken it. It has grown fast in a booming market, but its unclear ownership means it cannot easily get a stockmarket listing, nor reward staff with stock options. It may also hinder plans for overseas expansion—like a rumoured bid for Britain’s Marconi—since potential foreign partners will be wary of a firm with such an opaque ownership structure.
Fears that Chinese firms are acting as the commercial arm of an expansionist state are thus belied by a more complicated and disorderly reality. The real reason to fear China’s overseas expansion is quite different. Because Chinese firms have grown up in an irrational and chaotic business environment, they may export some very bad habits. As Mr Gilboy puts it: “when Japanese companies took over American ones, they mostly made them better. If the Chinese run foreign firms like they operate at home, driving prices down, misallocating capital and over-diversifying, that is genuinely something to fear.”
Copyright The Economist
The scare stories—and the chaotic reality