Monday, February 9, 2009

What Motivates SOE Chief Executives?

We all know the standard neo-classical economic theory of how state-owned businesses cannot outperform privately-owned businesses. (Or if we don't know it explicitly, we in the West have all heard it in some form for most of our lives.)

There are several key reasons for the theoretical lack of competitiveness of state-owned enterprises (SOEs), one of which is that the state's objectives are conflicted between the economic and the political. This makes it difficult for the state to provide the proper incentives to the chief executives of these SOEs.

The recent story on the attempt by Chinalco, a central SOE, to increase its controlling stake in Rio Tinto, a publicly traded Australian iron-ore producer, has received a lot of press as of late. (See stories here, here and here for a little background.)

Of related interest is yesterday's news that Xiao Yaqing, Chairman and CEO of Chinalco (as well as its listed subsidiary Chalco) is resigning right in the middle of negotiations over the Rio Tinto stake. While the timing of this resignation seems a little strange, I think it illustrates very well what drives these guys.

According to this SCMP story, Xiao, who until now has been an alternate member of the Communist Party's Central Committee, will apparently take up an important position in China's cabinet, also known as the State Council. I spoke with someone in Beijing today, and the rumor going around -- and I stress that this is just a rumor -- is that Xiao will become Deputy Secretary General of the State Council under Ma Kai.

While probably not as high profile a position as CEO of Chinalco, this position is considered to be a reward for Xiao's work, and is not surprising. These kinds of political appointments are not at all unusual for those who run SOEs in China.

Another recent example is Li Xiaopeng (son of former Premier, Li Peng, not to be confused with gymnast Li Xiaopeng) who last year vacated the position of Chairman of Huaneng Power to become Vice-Governor of Shanxi Province.

An interesting related question I cannot answer is whether the performance of an SOE under a given Chief Executive affects his chances of political promotion.

And if it does matter, I wonder whether those analyzing performance are able to distinguish between brilliant leadership and a merely coincidental intersection between a CEO's turn at the helm and a bull market.

UPDATE: Confirmation of the rumor. Looks like Xiao Yaqing will take up the post of Deputy Secretary General of the State Council.


  1. While there might be (please note the word "might") some credits in Anderson's sayings, the article and its view points are bascially skewed (or biased) and not representative in the "global context". (Perhaps it is "right" in the "West" or in the US if that is Mr. Anderson's focus.) As a "China Specialist", Mr. Anderson might want to increase his horizon to other parts of Asia (or even the WHOLE world), and he might be interested in looking at the "SOE" in other countries, say in Singapore.

    (To be continued...)

  2. @Anonymous

    Thank you for your comment.

    I am a little confused as to why you think there is bias in what I wrote. As a scholar, I take this charge very seriously.

    Please note that I made no judgment about the way things work in China, and I began the post by admitting that we in the West tend to look at things through a neo-classical lens.

    The whole point of this post was to say that things work differently in China. The questions I ask at the end indicate that I don't fully understand how or why they work the way they do. (If you could shed some light on those, I would be grateful!)

    As for "not representative in the 'global context'," I would say I am guilty as charged. But this blog is not intended to address the global context. It is enough of a challenge for me to understand things in the China context.

    And while I agree that Singapore may provide an interesting comparative case, frankly, its influence in the world is negligible. People in America aren't clamoring to understand Singapore, but they are very concerned about what China does -- and all too often very misinformed. It is my hope that I can help to change that.

    I am happy to note that you ended with "to be continued". I'm the only blogger here (at the moment), so please feel free to address me in second person.


Note: Only a member of this blog may post a comment.