Wednesday, February 25, 2009
Until now, central SOE results have been reported in aggregate, but the only enterprise level numbers we could see were those we could glean from the annual reports of the listed entities owned by SOEs. Now we will apparently be able to see the annual reports of all 141 group companies owned by central SASAC.
One unanswered question: who will audit these rat's nests of confusing cross-shareholdings, and how reliable will the numbers be?
In short, it appears that, among the top 14, four large firms will be encouraged to expand nationally, and four smaller firms will be encouraged to expand regionally.
The "Big 4" firms are: Shanghai (SAIC), First Auto Works (FAW) of Changchun, Dongfeng of Wuhan and Changan of Chongqing.
The "small" firms are: Beijing Auto, Guangzhou Auto, Chery Auto of Anhui Wuhu, and Sinotruk (China National HDT).
Once again, here is yesterday's list of the top 15 (as of year-end 2007):
Notice that the "Big 4" also correspond with the top four on this list. The next three on the list, Beijing, Guangzhou and Chery are among the small four, as is China HDT, a truck company bringing up the rear. (The other seven are producers of sedans.)
This suddenly brings some clarity to the situation. The remaining SOEs on the list, Brilliance, Hafei, Anhui Jianghuai (a good target for Chery?) and Changhe -- if the recent revelation is to be believed -- can all look forward to becoming part of larger enterprises in the future. Some CEO egos are about to get bruised.
What remains to be clarified is what will be done with the private firms on this list: Geely, Great Wall and BYD. It can be assumed that each of these firms is also considering how to grow through acquisitions in order to survive and compete with the SOE giants. It is also not out of the question that one of the big SOEs could make a tender offer for shares in these private firms.
As for the firms not on this list, they may very well travel the same roads as did the likes of Packard, Nash and Studebaker in the United States. Never heard of them? That's the point.
On an historical note, these plans sound very familiar. Back in 1988, the Central Government implemented a plan called "Big 3, Small 3" (三大，三小). The Big 3 of 1988 are part of today's Big 4: FAW, Dongfeng (known as SAW at the time) and SAIC. The Small 3 of 1988 were Beijing Jeep (now part of Beijing Auto), the defunct Guangzhou-Peugeot and Tianjin Daihatsu (which, if I'm not mistaken, is now part of FAW).
Tuesday, February 24, 2009
细则明确支持大型汽车企业集团进行兼并重组，产销规模占市场份额90%以上的汽车企业集团数量由目前的14家减少到10家以内"The rules clearly support mergers and reorganization among the large-scale auto groups. The 14 groups that currently comprise 90 percent of market share will be reduced to fewer than 10."
These are the most specific numbers we have seen to date in terms of what the central government is expecting -- if indeed the "authoritative person" who provided this information to the Securities Journal is truly an authority.
So who are those top 14? I cannot find a complete list of 2008 market shares, but here is a list of 2005-2007 sales of the top 15 manufacturers. These are listed by group (e.g. Shanghai GM and Shanghai VW are combined). Note that the list contains three private automakers, BYD, Great Wall and Geely.
So if at least four or five of the above listed groups are expected to be absorbed into the others, does this mean that companies not on this list may rest easy? Oddly enough, that may be the case, at least during the short term.
However, even though the Central Government appears ready to focus solely on the top 14, the smaller players may want to start making themselves look attractive to potential acquirers.
This industry will look drastically different in a few years.
Monday, February 23, 2009
The new S18 has a top speed of 120 km/hr (~75mph) and can travel up to 150 km (~93 miles) on a single charge. It uses a lithium iron phosphate battery (磷酸铁锂电池), the same technology being used by BYD. It can receive a full charge in four to six hours, or can be charged to 80 percent in half an hour.
Chery's General Manager wasn't very forthcoming with information on price, however, saying that the price is "suitable for families". As with most alternative energy autos being produced today, I suspect the price is significantly more than one would pay for a comparably sized gasoline powered car.
Another issue that would probably make this a less-than-attractive prospect for a Chinese family is the lack of places to plug the thing in. I can imagine families on lower floors of apartment blocks running long extension cords down from their balconies at night.
(On a related note, NPR did an interesting story this morning on the difficulty of getting electric vehicles to market in the US. A link to the podcast is here.)
So why are Chinese car companies all scrambling to get "new energy" (新能源) vehicles to market? I can think of a few possible reasons, the strongest of which relates to corporate survival. Despite the fact that these vehicles are currently money-losers, the central government has made it very clear that production of "new energy" vehicles is a priority, and it is pouring cash into state-owned automakers to fund their development.
This, combined with the fact that the central government has been calling for a consolidation in this industry for a long time, pushes every auto company to develop new energy vehicles so as not to be viewed as expendable in the inevitable wave of consolidation. My assumption is that every auto company would prefer to be an acquirer rather than an acquiree. Those with the strongest brands and best technologies are more likely to come out on top in a merger.
Within ten years, China's 130 auto assemblers will be whittled down to fewer than ten. The market will have only a minor part in the decision as to which survive.
Sunday, February 22, 2009
Meanwhile, a paragraph toward the end of this article caught my eye. It lists the industries that have benefited from specific stimulus plans since the beginning of the calendar year, and it mentions that some industries -- especially the auto and steel industries -- are already seeing the benefits of the plans.
今年1月4日至2月19日，国务院已经密集出台了汽车、钢铁、纺织、装备制造、船舶、电子信息、石化和轻工业八项产业振兴规划。这些振兴规划出台后已见初步成效，汽车销量开始回升，钢铁价格出现回升，扩大内需的效果已经初步显现。For the record (and so that I can refer back to this post later for the list), the eight industries for which the State Council has released stimulus plans since the first of the year are:
Should Uncle Sam provide billions in loans and grants to a promising but unproven business? Or should the government wait for the market to sort things out before it backs a U.S. company? The risk is that by then another major industry could go the way of memory chips, digital displays, the first solar panels, and the original lithium-ion batteries used in notebook PCs and cell phones.As the article points out, "the Asians" (I think they mean "East Asians") already have a couple of advantages in auto batteries: 1) a jump on lithium-ion technology on which the new generation of auto batteries are being built and 2) deep pockets from which to finance its further development.
American scientists, funded by federal dollars, were at the forefront of each of those. Yet the industries—and the high-paying manufacturing jobs that go with them—quickly ended up in Asia. U.S. labor costs and taxes drove many operations abroad, but often industries fled simply because Asian governments, banks, and companies were more willing than Americans to risk big capital investments.
What I find most interesting about this situation is that U.S. automakers are now struggling with some of the same questions that China's state-owned automakers struggled with 20 years ago as they developed their auto industry.
General Motors and Ford both assert that a domestic lithium-ion industry is vital if the U.S. is to be a major player in green cars. Otherwise, Detroit's fate would be in the hands of suppliers half a world away.According to Eric Thun's Changing Lanes in China, back in the 1980s and early '90s, as the Chinese attempted to develop an auto industry, several development models surfaced:
- A local developmental state in which Shanghai's government coordinated the development of a local ("local" meaning Shanghai, not China) network of supply firms.
- A local laissez-faire state as typified by Beijing and Guangzhou's hands-off approaches that allowed assembly firms to take advantage of competition among supply firms.
- A centrally-controlled SOE model in which the Central Government and local municipalities did not coordinate development efforts.
Beijing and Guangzhou's willingness to allow supply firms to duke it out when assembly plants did not yet have adequate scale to support a supply network resulted in their assembly firms buying parts from wherever they could get them, and that included both Shanghai's parts suppliers as well as foreign JV partners. This defeated the whole purpose of trying to develop a "local" auto industry.
The centrally-owned SOE firms located in Changchun (FAW) and Wuhan (Dongfeng) had similar difficulties in that their local governments, who were motivated to spur their development, were unable to coordinate with the Central Government. The Central Government was far more concerned about development of their firms than of the local regions in which the assembly plants were located.
Without delving too much further into Thun's findings (hang on, I do have a point!) it is important to point out that these models were not selected by city officials from a menu of options. To a large degree, they were path dependent; each model could have been predicted based on local bureaucratic traditions.
My point here (whew!) is that, when a brand new industry was under development, and when it was taking place in a world in which other countries had already begun to blaze a path for that industry, Shanghai's coordinated model seemed to work best. It provided Shanghai with an auto industry that was increasingly self-reliant, and that produced the highest-quality cars in China (at the time).
Given China's experience with development of a new industry, do current conditions call for some sort of state-coordinated development in order for the U.S. electric auto industry not to be prematurely lost to those of other countries?
Does the fact that German, Japanese, Korean and Chinese firms have what seems to be a head-start in development of battery technology justify the intervention of the U.S. government?
Well, looking only at the example of China, we see that China's government is currently pouring a tremendous amount of funds into development of "new energy" autos. However, the only Chinese company currently marketing a plug-in hybrid is a private company, BYD, whose most prominent investor is none other than Warren Buffet.
What do you think? If Shanghai's coordinated model was most successful in giving its local auto industry an advantage, why wouldn't a similar model apply to the development of electric auto technology?
Friday, February 20, 2009
This has led to fears in Australia that the ultimate aim of "China, Inc." is to basically guarantee itself access to cheap sources of iron-ore for its steel industry -- essentially to force Rio to sell it iron-ore at rock-bottom prices. The problem with this logic, of course, is that there are numerous market and regulatory mechanisms that can prevent that from happening, a few of which I noted here.
In an interesting development, Bloomberg revealed today that Baosteel has plans to take over two of its domestic competitors in order to speed along consolidation of the steel industry.
The basic raw material for steel is iron-ore, and there is currently what amounts to a "triopoly" in this industry among CVRD of Brazil, BHP Billiton of Australia and Rio Tinto of Australia -- whose largest shareholder is none other than Chinalco.
China, which produces one-third of the world’s steel, is pushing for consolidation in the industry to boost its competitiveness and raw material purchasing power. ...
“The global recession will help speed up industry consolidations,” said Luo Wei, a Shanghai-based analyst with China International Capital Corp. “Boosting the concentration will increase steelmakers’ profit and their pricing power.” ...
The government will also push Anben Steel Group, China’s fourth-biggest, to merge with Panzhihua Iron & Steel Group, while Taiyuan Iron & Steel Group, the biggest stainless steelmaker, will combine with rivals in Shanxi...
While Chinalco, even as Rio's largest shareholder, would not be in much of a position to expropriate iron-ore supplies from Australia at cut prices, Baosteel, along with the increasingly large and powerful steel groups in China may very well be in such a position -- much to the chagrin of Chinalco's shareholders.
Now Saturn's approximately 200 dealers are desperately seeking a way to keep their network alive, even if that means selling themselves to a foreign manufacturer. While it is not unusual for a car company to sell its vehicle brand and technology to another company, I have never heard of a dealer network trying to sell itself to a manufacturer, but that's exactly what Saturn is trying to do.
In this story on NPR, an owner of two Saturn dealerships in Connecticut says:
"You've got a collective group of retailers in strategic points throughout the country that represent most major metro areas. You have a brand that over the last 20 years has built a phenomenal relationship both in its community and with its current customer base and we don't think that this is the end of Saturn".Some Saturn dealers are hoping that a foreign firm looking for a way to distribute cars in the U.S. will step forward and keep the Saturn network alive, and Chinese and Indian manufacturers are thought to be possible rescuers.
Though times are tough all over, companies with deep pockets are finding the landscape littered with rich acquisition targets. For example, Oracle has completed 10 acquisitions in the past year. Could this be a good time for a car company -- or group of companies -- to pick up instant U.S. distribution at a fair price in anticipation of the eventual recovery?
The most likely Chinese acquirers would be manufacturers of independent Chinese brands, and the largest of these would be Chery, which has also been mentioned as a possible acquirer of Volvo. In December of 2008, Chery was also granted $1.5 billion in funding by China's Export-Import Bank to be used specifically for overseas expansion. To my knowledge, Chery has yet to tap this source of funding.
The largest state-owned auto firms in China (First Auto Works, Shanghai Auto, Dongfeng, Changan, Beijing Auto, Guangzhou Auto) also presumably have access to funding, but most of their production of passenger vehicles consists of assembly of foreign brands. While they are all working on their own independent brands, these are still a rather small part of their product portfolios.
The private auto firms (e.g. BYD, Geely, Great Wall), while all producing their own independent brands don't have access to the government's deep pockets. While they may be very interested in acquiring Saturn's network, they would have difficulty pulling it off.
Another possibility that occurs to me is that one or more of the major SOEs could buy the Saturn network and use it as a distribution channel for ALL Chinese independent brands. This would relieve the Chinese automakers of the headaches of assembling a distribution network from scratch, and give them instant access to what was once (and presumably will become again) the most vibrant auto market in the world.
Naturally, the Chinese companies would have to overcome quality and safety issues for this to ever work, and that would take some time. I guess the question is whether the Chinese companies could get past that hurdle before individual Saturn dealers simply give up and close their stores.
So what do you think? Would such a proposition be of interest to Chinese auto firms? And if so, could they pull it off?
Wednesday, February 18, 2009
BAIC was China's fifth largest seller of passenger vehicles last year. Their largest selling brand is Beijing Hyundai, and they are also the partner of Daimler-Benz, manufacturing C and E class Mercedes sedans for the China market.
BAIC's targets are Fujian Auto and Changfeng Auto, and all three have had some common partners, so they are not unfamiliar to each other.
Fujian, which has apparently been struggling as of late, has a partnership with Daimler. One of Fujian's subsidiaries, Dongnan Motors, is a partnership between Taiwan's Yulong Motors and Mitsubishi of Japan. Mitsubishi also has a partnership with Changfeng, BAIC's other merger partner.
According to unnamed sources, these mergers, which have yet to be formally announced, are currently being considered by the Beijing government.
While the Central Government has been pushing consolidation in the auto sector for years, until now, such mergers among the major players have been rare. The most recent was between Shanghai Auto and Nanjing Auto at the end of 2007. Also, First Auto Works bought Tianjin Auto in 2002.
Auto factories (at least those that achieve scale) are not only major providers of employment and taxes for local governments, but they are considered to be prestige projects. Every locality wants an auto company, but like the US auto sector in the early- to mid-20th century, China's auto sector is due for consolidation.
There are approximately 130 auto companies in China, the top ten of which account for 83 percent of total sales. And according to Gasgoo.com, there were ten auto companies that made no cars at all in 2008.
The heavy involvement of the state (particularly the local state) in this sector has allowed many of the smaller players to live longer than they should have. If the structure of China's auto sector were completely determined by the market, consolidation would probably have progressed much further.
However, despite the reluctance of local governments to allow their small car companies to be swallowed by bigger fish, I think consolidation is inevitable. China's wish to develop "national champions" with enough scale to reach global markets will eventually overcome local reluctance.
Perhaps the Central Government is temporarily allowing a hundred flowers to bloom in order to judge which enterprises are most capable of learning from foreign partners and developing independent brands.
An interesting question that this raises is: If it is local reluctance that prevents more mergers, to what factors can we attribute the few mergers that do occur?
Tuesday, February 17, 2009
Tian Guoli, CEO of the Cinda AMC, "urged western governments to act quickly to avoid slipping into a protracted, Japan-style recession and stagnation." By all appearances, "China's financial system has been left relatively unscathed by the global crisis." So the AMCs must have worked, right?
Not so fast.
In another article also posted to FT's website today, Anderlini analyzes the effect the AMCs have had thus far and concludes that things probably don't look as good as the AMCs advertise. While indeed relieving the Banks of their NPLs and shoring up their balance sheets, the AMCs are still sitting on most of the NPLs without much hope of recovery. In short, far from solving the problem with NPLs, the AMCs have simply swept them under the carpet.
While Tian is absolutely correct in urging the US to do something to fix its banks, his model will only work well in a government not bound by standards of openness and transparency. (And maybe someday not even the lack of transparency will prevent things from boiling over.)
“These AMCs must by now be massively insolvent because all the better assets have been sold and they have used the proceeds to pay the interest on the bonds they issued,” says Mr Lardy. (Nicolas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington, D.C. speaking of bonds the AMCs issued to the banks in exchange for their NPLs at face value.)
Many of those bonds are due to mature in the coming months, however in dozens of interviews Chinese officials have proved unwilling to answer any questions on how the principal of bonds totalling at least Rmb1,000bn – the minimum face value of bonds thought to be still on their collective books – will be repaid to the banks.
In a report last year, China’s own state auditor said it was concerned that the AMCs were no longer able to pay the interest, let alone the principal, on the bonds they had issued to the banks.
The US acted fairly quickly to solve the huge S&L crisis in the late 1980s by establishing the Resolution Trust Corp, which did its job and then closed its doors by the mid-'90s. Ten years later, China's AMCs are still going strong with no signs of winding up business.
Another possible example is Sweden's rescue of its banks in 1992. In the latter case, the government took on bad assets in exchange for equity stakes in the banks. After a few years of working out the bad assets, the banks had returned to good health and the state sold its shares in the banks netting a profit for taxpayers.
Monday, February 16, 2009
According to this article in the Economic Observer, for the past four years, SASAC has been conducting a "trial" of sorts with boards of directors -- which seems surprising since China's Company Law (公司法) already prescribes the purpose and functions of the Board of Directors, Supervisory Board and the Shareholders Meeting.
Perhaps the need for the "trial" has been that things weren't working out as planned. According to an anonymous outside board member interviewed for the article, "the gap between the trial board of directors and a 'real board of directors' is huge." Boards simply do not have the authority to "hire and fire, conduct performance evaluations, and set compensation" as is prescribed under the company law.
However, according to a document released late last year, 《关于董事会试点中央企业董事会选聘高级管理人员工作的指导意见》, the power to appoint each firm's general manager, deputy general manager, chief accountant and board secretary will now fall to the board of directors.
Until now, this duty was handled in combination by SASAC and the Party's Organization Department (i.e. Personnel Department). From this point, the only apparent involvement of the Party will be when the Board of Directors "reports" such appointments to the Party Committee of SASAC.
The document does acknowledge that, while the company law has required that these powers be vested with the Board of Directors in the past, this has not been the case, and it will change. In other words, "we've been breaking the law, but we're gonna stop now".
For those not put off by the unpronounceable names, there is an interesting nugget on Chinese business-government relations in this story. There is also an important commentary on Western protectionism.
I'll address the BizGov point first.
Xiao's firm, Chinalco is China's largest state-owned aluminum company, and through its proposed purchase of part of Rio Tinto, an Australian miner, it is also seeking to become a mining giant. (For a little backstory on the Chinalco-Rio Tinto deal, please see this previous post.)
It is an interesting phenomenon in China that the CEOs of SOEs are rewarded with political positions. As Garnaut writes:
As a reward for his success in enlarging an already massive SOE, Xiao will be moving up to the State Council, and while Xu of Baosteel will not necessarily be punished, Garnaut hints that his future will not be as bright as Xiao's. If the past is any indication, Xu may be more likely to move down a provincial Governor or Vice-Governor position rather than up to a State Council position.
The likely promotion of Chinalco's Xiao Yaqing to the position of deputy secretary-general of the State Council illustrates how Communist Party politics is enmeshed with China's state-owned enterprises. ...Chinalco and Baosteel are institutional rivals that compete for influence and favour within the system. Executives at Chinalco, the aluminium industry leader, enjoy nothing more than ridiculing the steel industry leader, Baosteel. ...
Chinese state-owned enterprises are evolving away from their command economy roots and opening to the market. Paradoxically, the best way for a state-owned company to outperform its rivals is by pursuing profit even if it means circumventing political wishes.
Baosteel made the mistake of satisfying government ambitions for making high-technology steel for cars, ships and planes — the very industries that suffered most when the steel sector tanked last year. Now the private steel makers, which followed the market, are making money from construction steel and Baosteel's Xu has nowhere to go.
Here is the most important point: Xiao is being rewarded, not for profit (Chinalco's 2008 profit was down 50 percent), and not for increased market value (Chalco's market value is about where it was when Xiao took over in 2004), but for SIZE (Chalco's assets grew by 46 percent in 2008).
Despite the tremendous amount of marketization that has taken place over the past three decades, there still lingers a lot of the old command economy mentality of "bigger is better" in Beijing.
And now for the second (and completely unrelated point)...
Garnaut's editorial message is that Australia would be making a huge mistake by erecting political barriers to Chinalco's increased ownership percentage in Rio Tinto. There are, of course, a lot of populist reasons for doing exactly that, but Garnaut gets at why Australia need not be worried.
The important issue revolves around one of the most boring problems I ever encountered during my finance career: transfer pricing. In short, the idea is that affiliated companies cannot artificially cause losses and/or gains by charging each other non-market prices for goods and services. When this happens, all sorts of interested parties will come out of the walls threatening lawsuits. (At least that's how it works in free market economies with mature legal systems.)
For example, Australia's tax authorities would take action if they were convinced that Chinalco were forcing Rio to sell its iron-ore to China at a loss. This would mean a loss of tax revenue for Australia.
Furthermore, Rio's individual shareholders would also take action if they believed market value was being expropriated by Chinalco.
The point here is that, in an open economy, there are plenty of market/regulatory mechanisms to prevent dominant shareholders from taking advantage of minority shareholders. Australia should be happy to take China's money for an increased share in Rio and allow its market and legal infrastructure to serve its intended purpose.
The same would have been true in the case of the CNOOC-Unocal deal back in 2005. Unfortunately many US Congress members either couldn't, or wouldn't, allow their better judgment to guide their actions, thereby damaging the free trade credentials of the US.
To those who would argue that China deserved a stiff-arm due to its "currency manipulation", I would argue that the US cannot talk out of both sides of its mouth. Either the US supports free trade, or it does not. Do extenuating circumstances require the US to abandon its commitment to free trade? (In an analogous argument: Do extenuating circumstances require the US to abandon its commitment not to torture?)
China got burned by the US in 2005. Will it happen again at the hands of Australia in 2009? And if so, what lesson should the Chinese take from their experiences abroad?
Saturday, February 14, 2009
Though small and medium enterprises (SMEs) form the backbone of China's private sector, they have had a notoriously difficult time obtaining bank loans. Entrepreneurs have had to resort to loans from family members or underground banks that charge exorbitant levels of interest.
China's state-owned banks have typically shied away from lending to these smaller firms because it is simply much easier to lend to other big SOEs. Everyone knows that the state will eventually come to the rescue of SOEs; not so with private firms.
Why is this happening in Guangdong and not elsewhere? I will venture a few guesses. First of all, the central government and Shanghai have traditionally focused their energies on big firms that have the potential to become "national champions". The smaller firms, while certainly providing an important boost to the economy, simply aren't as interesting to politicians trying to move up the ladder. (In all fairness, the State Council has recently spoken in support of SMEs, so maybe this will also result in concrete action at some point.)
Second, Guangdong has for years been a preferred location for small factories, both Chinese and foreign-owned, turning out everything from iPods to shoes to lawn furniture. Perhaps it is Guangdong's proximity to Hong Kong that has made it an ideal location for exporters. Perhaps it is a local government that values SMEs' contribution to the economy.
Whatever it is, these nameless, faceless firms have become an important part of the Guangdong economy over the years, but they have recently fallen on hard times. Official statistics indicate that 2,452 manufacturing companies closed in Guangdong in 2008. I've seen even bigger numbers than this, but they do not come from official sources.
Guangdong Province also intends to support any cities in the province that implement programs to support their local SMEs. Another 1 billion RMB will be made available for this purpose.
Guangdong clearly understands how to leverage local funds to stimulate the economy. The 2 billion RMB that will be used to fund the company that will guarantee SME loans can be used to support many times that amount in loans (because not all SMEs supported can be expected to default on their loans).
Small business loan guarantees provide a great way to get more bang for the buck, or the yuan. Perhaps other governments (not just in China) could take a lesson from Guangdong.
Friday, February 13, 2009
The most interesting detail I can see is that three of the top six market share gainers are the only three private firms on the list: BYD, Great Wall and Geely. The remaining firms are SOE-foreign JVs and a handful of SOE Chinese brands (Chery, Brilliance, Hafei, Tianjin and Changan).
Given Beijing's support for its state-owned automakers, and its determination to see consolidation in this industry, the continued success of the private firms is fascinating. One of the objectives of my research is to understand the story behind why these guys continue to slug it out with the SOEs, and why they think they can succeed.
Although there's no way for me to know this for certain, it is possible that BYD's bump is related to Shenzhen's announcement of a fleet purchase of BYD's new plug-in hybrid.
Also, keeping in mind that these are full-year 2008 numbers compared to January of 2009, Hyundai's increase is a little surprising given that 2008's numbers likely contain huge fleet purchases of Hyundais for taxis in Beijing.
As for Toyota's drop, that's surprising given the popularity of Toyota in China. While there's no love lost between China and Japan, Chinese consumers tend to place Toyota at the top in terms of quality.
Any other ideas on what may have driven these one-month changes in market share?
UPDATE: Despite its having lost a sliver of market share during January, Chery announced that it had the biggest January in its 12-year history, working its people overtime during the Spring Festival and moving over 35,000 vehicles. They attribute the big increase to the tax breaks given to purchasers of small cars from January 20.
Wednesday, February 11, 2009
Among the provisions are "encouragement" for financial institutions to provide credit to buyers; extension of existing financial support policy for purchasers of ocean-going ships to 2012; encourage efforts to scrap and replace old technology single-hull tankers; extension of a moratorium on new ship construction facilities (to keep production capacity stable); and various measures to support innovation, etc. As is typical, publicly released documents lack specific details on how such provisions will be implemented.
It is interesting to watch the unfolding of the differing stimulus approaches being undertaken by the United States and China. While China and the US have both approved plans specifically aimed at the auto industry, their approaches to other industries have differed. Whereas the U.S. seems to have put most of its eggs in a single, monstrous stimulus basket, China's leaders, with cooperation from industry leaders, are crafting separate plans for individual industries. (Though China has also announced some overall stimulus spending as well.)
The reasons for the differences are obvious. In cases where the U.S. government has lent significant funds to, or bought equity interests in, specific firms, we see industry-specific plans (primarily autos and banks). Since China has already staked out the industries in which the state intends to maintain substantial ownership, it is already easy to predict where the State Council's energies will be directed.
It will be interesting to see which model will be more effective at stemming the crisis.
Monday, February 9, 2009
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.
"We hope companies will offer promotions at healthy and limited levels, and we know how much discounts companies can afford," Mr Chen said. "We support promotion levels based on demand and supply. However, if they are overdone, there will be an adverse impact."
Some economists, who described the minister's comment on commercial behaviour as rare, said Mr Chen's warning underlined his fears about worsening deflation and unemployment as well as concerns that a punishing price war could squeeze smaller domestic players out of business.
Of particular interest is the above phrase by Chen: "we know how much discounts companies can afford". This is fascinating! Apparently some companies are in danger of pricing themselves right out of business without even knowing it. It's a great thing the government is knowledgeable enough to prevent that from happening.
I'm sure consumers are also relieved to know those annoying discounts won't last much longer.
Saturday, February 7, 2009
Over the years, we have certainly seen evidence of 国退民进 at work, but occasionally we see quite the opposite.
A securities brokerage located in Shanghai's Pudong District, Aijian Securities, was originally majority controlled by Huiyin Investment, itself a privately-held firm. Aijian had been planning to undertake an equity restructuring and an injection of additional capital that would have left Huiyin as the controlling shareholder, or so they thought.
Once all was said and done, Aijian Securities found that its controlling shareholder was no longer Huiyin. Its new ultimate controlling shareholder was none other than the Pudong District SASAC -- in other words, the State.
How could this have happened?
Apparently the Shanghai City Government had this intention in mind all along.
One of Aijian Securities' original shareholders was Shanghai Aijian Corporation (hereafter, Shanghai AJ), a listed firm (SH600643) whose ultimate controlling shareholder is the City of Shanghai. While Shanghai AJ originally either directly or indirectly controlled 20.4% of Aijian Securities, it was not the controlling shareholder. As mentioned above, Huiyin Investment, a private firm, originally controlled 54% of Aijian Securities.
According to the Economic Observer, the Party Secretary of one of Shanghai's districts, Chen Zhenhong, was transferred to the post of Vice-Chairman of Shanghai AJ in 2006. While there, Chen organized and arranged the restructuring of Aijian Securities both to draw in private capital and to land himself in the position of Chairman of the Board of Aijian Securities.
Also around 2006, Aijian Securities' controlling shareholder, Huiyin began to experience financial difficulties, and as a result Aijian's balance sheet became increasingly more leveraged with debt that was convertible into equity. While it is not known for certain who the holder of such convertible debt was, we can surmise that it was Shanghai AJ since Shanghai AJ (which, don't forget, is controlled by the City of Shanghai) became the majority owner of Aijian Securities after the restructuring.
In a clear case of 国进民退 (the government enters, the people withdraw) Aijian Securities is now a part of the Pudong District Government's plan to ensure that Shanghai (not Tianjin, not Beijing, not Hong Kong) becomes the Financial Capital of Greater China. This plan also includes increased stakes in insurance companies, banks and fund management firms.
When I consulted a reference guide* to determine the origin of 国退民进, I discovered that its very invention was surrounded with weasel words that resulted in a concept so broad one could drive a maglev train through it. Like the phrase "with Chinese characteristics" it was intended to mean whatever the leaders want it to mean.
No one is suggesting that there was any kind of conspiracy or underhanded dealing that resulted in the nationalization of Aijian Securities, merely that, when governments in China set their minds to a task, there is little that stands in their way, least of all meaningless catchphrases.
* 章迪诚，著，中国国有企业改革编年史，（北京：中国工人出版社，2006） pp.556-7.
Friday, February 6, 2009
Today's SCMP offers anecdotal evidence that some farmers are having difficulty getting rebates on appliances they bought months earlier.
Under the programme, suppliers offered tenders for the right to participate in the scheme, and farmers had to buy their appliances from designated retail outlets to qualify for the rebate. But policy loopholes, bureaucratic inertia and lax oversight are making it very hard for the scheme's intended recipients to reap the benefits and farmers, retailers and officials are blaming one another for the programme's failings.This highlights a common problem in which the Central Government promulgates a policy and then leaves implementation details to lower levels of government. While the costs of rebates are intended to be split 80/20 between Central and Local Governments, apparently no one in Beijing thought to ask whether the cities and provinces could afford to cough up their shares of the cash. Obviously some local governments are more willing than others.
One of the farmers' complaints is that lower-level governments have little interest in implementing the scheme.
Some fingers have also been pointed at participating retailers:
Higher-than-expected numbers of subsidy applications drained the fund in November and December, according to one Chongzhou (Sichuan) commerce official, as well as deception by some retailers. The Chongzhou government felt forced to pay the subsidies out of its own budget.I suppose in this regard, China really is no different from any other country. Government programs, regardless of how well-intentioned, open windows of opportunity for corruption.
"The retailers collected many farmers' identification cards and used them to apply for the subsidies, but they did not sell as many electronic products as they claimed," the official said.
This illustrates the difficulty of implementing policies in China. It is comparatively easy for the State Council to debate and craft a policy, but translating that policy into real action where the Local State touches the people often proves more difficult.
Some scholars claim that the Communist Party's nomenklatura system of Party appointments and promotions helps to keep lower level officials in line: they listen to their superiors because they want to be promoted. But this discipline apparently does not reach into the lower depths of government.
Yesterday I mentioned this to a scholar from Beijing who, without the least hesitation, expressed skepticism about the numbers. "Do the comparisons cover the same types of vehicles?" I was asked.
We can thank the Financial Times for finally getting to the bottom of this issue. One important detail that I had failed to note earlier was that the original source of this story was none other than General Motors.
Just an assumption here, but I'm guessing that GM's analysts have become pretty skilled at comparing their numbers to those of other automakers over the years. The fact that they could make such a mistake is puzzling. Could it have been intentional?
"It's not apples to apples," one industry source said yesterday. GM's estimate for Chinese sales includes all vehicles, including passenger cars, commercial vehicles, trucks and buses. Its US figure excludes everything except passenger cars, pick-up trucks and sport utility vehicles.
Figures from JD Power, the auto consultancy, demonstrate why the comparison is so misleading. JD Power says China produced 9.3m vehicles in 2008 - but 2.8m of those were light commercial vehicles and nearly 900,000 were medium and heavy vehicles, categories not included in GM's US totals.
Wednesday, February 4, 2009
Local protectionism, or policies that encourage purchasing locally-made products (or discourage buying products from elsewhere) used to be a problem in China that received a lot of attention in the 1980s and '90s, but it hasn't received much press over the past decade or so. Perhaps that was because the long bull market brought enough of a rising tide to lift all boats.
To quote Warren Buffet (and mix my metaphor somewhat), now that the tide is receding, we can see who has been swimming naked. A lot of local regions desperate to bolster their economies are enacting policies to keep as much money as possible at home. Unfortunately, even some who had been wearing swimming trunks are also joining in the beggar-thy-neighbor games.
According to the article:
- The City of Hangzhou is adding 5 percent on top of the already announced 13 percent "home appliances to the countryside" rebates -- but only for purchasing local brands.
- The City of Changchun is waiving new car inspection fees, but only for cars made by First Auto Works which just happens to be headquartered in Changchun. They are also requiring that no less than 50 percent of equipment purchases for large projects be of locally-made equipment. And they are adding a further 10 percent subsidy to the Central Government's subsidy for tractors and farm equipment made locally.
- An Anhui Province internal document obtained by a reporter contains the following provisions:
- Infrastructure projects should use equipment made in Anhui Province
- Anhui party and government organizations, as well as city taxi companies, should buy cars made in Anhui. (Cars made by Chery and Jianghuai, two Anhui auto manufacturers, are specifically mentioned.)
- Enterprises in Anhui, especially in the auto and home appliance industries, are instructed to use steel produced in Anhui.
- Anhui government projects are instructed to use Anhui-produced steel, concrete, doors and windows, glass, wiring and electrical equipment.
- Anhui energy producers are to purchase coal from Anhui.
- Promotion of Anhui-produced tobacco and alcohol products.
- Purchases made by all levels of government are to be of Anhui products.
- In implementing the Central Government's "home appliances to the countryside" policy, Anhui-made farm equipment and fertilizer are to be promoted. (Which seems a strange directive given that the policy is intended to promote purchases of "home appliances" -- hence the name -- not farm equipment.)
But all is not lost. Apparently some people have been listening to economists (or at least to their own common sense).
At the beginning of the year, the City of Wuhan's draft government work report contained a provision recommending that plans be drawn up to encourage consumers to buy products made in Wuhan. After discussion, this provision was excised from the final document as some believed the government "should not use the excuse of the financial crisis to violate the market economy by intervening".
Apparently the Central Government is powerful enough to stiff-arm Chongqing's attempt to stimulate its local real estate market. Is it strong enough to stop the self-destructive spiral of local protectionism?
I remember being a little surprised at the time that a local government had the power to change tax rates -- particularly in markets in which the Central Government has frequently attempted to exert macro-control. Chongqing is run by Bo Xilai, a "princeling" son of late Party elder Bo Yibo, so, I reasoned, maybe he is given a little more leeway for creativity than the average provincial governor.
Well, apparently the State Council was also surprised by the tax cut, and today, they basically told Chongqing to knock it off. As it turns out, not even princelings have the power to change tax rates without consulting the Central Government.
We know what the Central Government thinks, but what about the tax rebate itself?
One of the arguments against the tax rebate was that it would have little effect on the lives of the laobaixing (common people) -- only the relatively small sliver of society that can afford to buy a home would be helped. However, I would argue the same probably applies to recent tax breaks on autos approved by the State Council.
Another argument, one that stands on firmer footing, is that the State Council still thinks housing prices are somewhat overvalued, and that such policies serve to place an as yet unwanted floor under current prices. And while this would certainly help the share prices of listed housing developers, again, it would do very little to help the laobaixing.
I see a couple of takeaways here:
- Despite the many arguments about decentralization and loss of influence by the Central Government, they apparently still have the ability to order changes to local policies that run counter to central policy. (Would anyone argue that Chongqing/Bo Xilai has sufficient power to ignore Beijing?)
- The State Council seems determined that the benefits of economic stimulus not accrue only to the upper class -- or at least that they not appear to do so.
Source: Economic Observer
Tuesday, February 3, 2009
Perhaps this new policy under consideration is aimed at people like them. Apparently there is discussion of cutting in half the value-added tax on a used car transaction to 1 percent.
While one percent seems a small savings, perhaps it will help to spur some sales of used cars, and maybe even help to shore up the value of used cars in China. Of course this would not directly help the auto manufacturers, but it could provide an indirect stimulus to new car sales by convincing current owners of cars to sell and trade up.
Every little bit helps.
Meanwhile, the U.S. Congress talks, and talks, and talks, and talks ... zzzzzzz
The long list of affected industries is expected to include: general machinery, petroleum/petrochemical equipment, electrical appliances, machine tools, agricultural machinery, engineering machinery, heavy equipment, instrumentation, printing machinery, environmental protection machinery, internal combustion engines, hydraulic pneumatic seals, bearings, moldings, etc.
The plan is expected to include six provisions:
- To establish special funds for technological transformation of the equipment manufacturing industry
- To create specialized research projects for major technological equipment
- To strengthen macro control to ensure domestic market demand for equipment and effectively spurring development of the Chinese equipment industry
- To begin construction of projects in transportation, energy and raw materials over the next three years, and give priority to purchase of domestically manufactured equipment (i.e. "buy Chinese")
- To cancel the policy promulgated in 2007 that provided subsidies for imported equipment
- To promote restructuring (联合重组) of enterprises in the equipment industry and increase the degree of financing support
Fair enough. Foreigners benefited from China's import subsidies for awhile. It's certainly their prerogative to cancel them. And given the "buy American" provision in the stimulus bill that was passed by the U.S. House of Representatives, the "buy Chinese" provision is to be expected. However, given the comprehensive nature of these plans, what we may be seeing here is a significant step back toward the days of industrial planning. (Though some may argue that China never really stepped that far away from planning to begin with.)
Seeing these plans to stimulate the domestic equipment industry, and previously mentioned stimulus plans for the steel, auto and appliance industries, it becomes increasingly difficult to argue that China is doing nothing to stimulate its domestic economy.
However, the much bigger question is: How big does a stimulus plan have to become before it starts to be perceived as protectionist?
Sources: 21st Century Business Herald, Economic Observer
Monday, February 2, 2009
Underscoring the potential for instability that could result from unemployment, this article in the Sunday Times lists a number of violent incidents that have thus far managed to go unreported by state-owned media in China. While only anecdotal, the suppression of reporting on these types of incidents leaves one to wonder what else is going unreported.
Government figures show that in recent years 6m to 7m new rural migrant workers a year have poured out of the countryside to fill the factories, construction sites and restaurants of the booming cities, which means the government must actually deal with as many as 27m new jobless in the countryside.
On top of that, a survey by a government think-tank in December estimated 1.5m recent tertiary graduates in China were unable to find work by the end of November and universities and technical colleges are expected to churn out another 6.5m graduates this year.
(Which, incidentally, reminds me that there was a time in which China would release statistics on mass incidents. However, it seems that such statistics stopped being reported several years back. The last figure that sticks in my mind is 87,000 in 2005. Did I miss anything?)
On the other hand (I know, I'm starting to sound like an economist), while the recent statistics sound scary, these 27 million migrants are not all returning to the same village. There are nearly a million villages in China, so the returned migrants are pretty well dispersed. If local authorities were able to effectively handle 87,000 incidents in 2005, there seems little reason to believe they cannot reasonably handle a little more.
The authorities are probably much more concerned about the 1.5 million or so unemployed college graduates who are waiting around for their years of studying to pay off. They tend to be more geographically concentrated than migrant workers, and better at spontaneous organization (though just as prone to factional infighting as the country's leaders, as was demonstrated about 20 years ago).
UPDATE: Victor Shih posted this piece today on RGE Monitor in which he combines unemployment figures of returned migrants, students and urban unemployed. Nationwide, the total is nearly 37 million.
Sunday, February 1, 2009
Rural buyers of certain durable goods will be eligible for a 13 percent subsidy. The list of eligible goods includes refrigerators, TVs, mobile phones, washing machines, motorcycles, personal computers, water heaters and air conditioners. There are of course limitations on the size of individual subsidies so as to prevent the purchase of luxury goods.
The program was piloted in three provinces beginning in December of 2007, then extended to a total of 14 provinces in December of 2008. As of 1 February 2009, the program has now been extended to rural areas throughout all of China.
Apparently preliminary results convinced authorities it was worth extending nationwide. During the first 20 days of January, "Chinese farmers had bought more than 160,000 subsidized goods. This is already 90 percent of the total sold in December 2008." (Chinaview.cn, 30 January 2009)
The cost of the original pilot was shared 80-20 between central and local governments, respectively. There is no indication (yet) as to whether this particular provision will continue with the nationwide program.
It is easy to be critical of Beijing when focusing solely on currency policy, but programs like this are evidence that China's leaders aren't sitting on their hands. These appliance subsidies, along with tax cuts on auto purchases, should help somewhat to ease pressure on China's exporters, and therefore, on China's trade surplus.
Additional sources: Sina.com, People's Daily
UPDATE: Posting a link to the story about Haier mentioned by Duncan in comments to this post.