China Stakes on SOE Corporate Governance

ChinaStakes, a fantastic Shanghai-based political economy site that I follow daily, has posted a commentary on a recent People's Daily article that asserts the importance of Communist Party leadership in state-owned enterprises.

I somehow managed to miss this People's Daily commentary, so I am happy that ChinaStakes has highlighted it for us. If there has been any doubt as to the role of the Party in China's SOE, People's Daily makes it crystal clear: SOEs exist to serve the political aims of the party. Any economic goals are only secondary.

You can read the entire ChinaStakes post here.

China Gives the US a Way to Save Face

We often hear scholars and policy wonks ask the question of what kind of power China will be in terms of international relations. We attempt to put them into our Western-derived boxes such as realist, liberal, status quo, etc.

I think China is increasingly showing us that it will not fit into our traditional boxes. While it may at times exhibit realist or liberal behaviors, at its roots, China is what it has always been: a Chinese power.

Such Chineseness was on display today as China's Ministry of Defense summed up two days of maritime safety meetings with the US military:

The way to resolve China-US maritime incidents is for the US to change its surveillance and survey operations policies against China, decrease and eventually stop such operations. (See Financial Times story here.)

Notice what they did not say. They did not make demands for what we can be certain they really want, which is an immediate end to US surveillance. Rather, China is offering the US a face-saving way out of this. As China suggests, the US can begin to decrease such operations, then eventually end them.

This assumes, of course, that, at some point in the future, China will be in a position to force the US to stop such surveillance in its own backyard. China itself seems quite certain that, at some point, the US won't be there anymore. The only question, from their point of view, is whether the US gradually and voluntarily ends such surveillance in the near future, or China ends it in the longer term.

Public vs Private: Does this distinction "defy logic"?

I was honored to have one of my recent posts, "How do Australia's Foreign Investment Rules Apply to China?", cross-posted by the East Asia Forum where it received the following question/observation from Lincoln Fung:

What does the ownership in terms of public versus private make to owning some shares of a firm in an another country? All firms in a country are subject to the regulations of that country, whether they are owned domestically or by foreign investors. A country can always regulate the behaviour of the firms operate in its land. So what are the concerns or fears of a firm is owned by a public firm of another country? It defies logic to understand the reasons behind.

Mr. Fung's questions are very important. Indeed, this distinguishing between "public" and "private" drives much of my own research. And, in fact, I used Mr. Fung's very line of reasoning in an interview about the Rio Tinto case with a journalist from the Sydney Morning Herald earlier this year. As for defying logic, I understand that such a distinction may defy some people's logic; however, from other people's perspectives, such a distinction may seem perfectly logical.

For example, there is the populist logic that a "communist", authoritarian state lacking in transparency and rule of law is not to be trusted. While one may disagree with that premise, it is not difficult to understand why someone holding that premise would logically be wary of China's intentions.

There is also the logic of neoclassical economic theory which tells us that a government, conflicted as it is with various political objectives, cannot run a business as efficiently or effectively as the private sector. Again, someone from China who is accustomed to the government having a major role in just about everything may not understand this "logic".

Many people in the West have been influenced by the two "logics" I have mentioned above. These have become so ingrained in Western culture that few people even bother to question them. However, the recent economic upheavals have led many in the West outside of academia (economists and political scientists have been pondering such questions for quite awhile) to ask whether government can indeed have a positive role.

This is not to say that governments will most certainly have an increased economic role going forward. They may, but then again, there are plenty of reasons to question the sustainability of China's state-centric economy.

Increased Worker Activism: Symptom of a Central-Local Issue?

For the second time in a month, local Chinese officials have been forced by workers to call off privatization of steel mills.

The first incident occurred in Jilin Province on July 27 during which thousands of workers protested the proposed privatization of Tonghua Iron and Steel. The manager of the mill was beaten to death by disgruntled workers who felt their needs were being ignored.

The latest incident occurred on Sunday as Henan Provincial officials, again, pushed by protesting workers, called off the proposed privatization of Linzhou Iron and Steel.

In both cases, the SOEs being privatized are owned by local governments, not the central government. The workers, on the other hand, are officially represented by the All China Federation of Trade Unions (ACFTU), which is a centrally-managed organization affiliated with the Communist Party.

While no evidence suggesting any corruption has been presented as of yet, local government officials have profited quite handsomely in the past from privatizations of local SOEs.

The focus of the Hu-Wen government -- in stark contrast with that of the Jiang-Zhu government which pushed for increased privatization -- has ostensibly been less on privatization, less on growth at any cost, and more on ensuring that China's common people get a chance to benefit from economic reforms.

There are a couple of apparent conflicts between central and local governments that we may see playing out in the steel industry (among others) right now. First, the ACFTU, according to the Wall Street Journal, "has been taking a more active role in trying to represent workers' rights", and as a result, their organization may have taken a role in encouraging workers, if not to protest, at least to demand their voices be heard. This is in direct opposition to the incentives to local officials who are highly motivated to privatize locally-owned assets.

Second, the central government has been adamant that China's steel industry, in its present state, is far too fragmented for any one company to become a major global player, not only as a steel producer, but as a negotiator with iron ore suppliers. While the central government's power to force locally-owned SOEs into mergers is questionable, further privatization of these assets would even further dilute the central government's power over this pillar industry.

As an aside, I also find it interesting that, the richer China's people become, the more rights they seem to demand. This connection between wealth and demands for rights has been pretty much debunked by economists and political scientists over the past decade or so, mostly because no one has been able to identify the causal mechanism connecting wealth and democratization -- this despite abundant empirical evidence pointing to a relationship* -- with (until recently?) one glaring exception: China.

*Robert J. Barro has called this relationship "an empirical regularity".

This is not to say that China's workers suddenly have rights simply because they've demanded it, but, while the ACFTU (with its access to the resources of the central government) is clearly in a position to help stop worker unrest, one wonders whether they may have been encouraging their organization.

At a minimum, we can identify clear conflicts between central and local governments here, and the workers seem to be caught in the middle.

Why is Chery Losing Talent?

A few days ago, the Wall Street Journal's ace auto journalist in China, Nori Shirouzu, reported that Beijing Auto has recruited away Chery's current Chief of R&D.

While this news, in and of itself, is certainly no cause for alarm, it seems to be part of a larger trend that may portend difficulties for Chery. According to several well-placed insiders with whom I have recently spoken in China, Chery may be having a bit of a problem hanging on to its talent.

The R&D Chief who has recently left, Gu Lei, brought with him to Chery 11 years of experience at Ford Motor Co. Mr. Gu's predecessor was also highly sought after to run Chery's R&D, but he departed for academia after only three years -- and several very successful model launches, I might add.

Some of the discontent -- and this is only speculation -- may be arising from Chery's ambitious launch schedule. The company has announced that it would launch an astounding 15 new models this year -- a schedule that, at this point, no longer looks possible, but which nevertheless may work Chery's people to death as they attempt to achieve it.

One Chery insider, who also recently came from a foreign producer, confessed to me that he no longer has weekends off since he joined the company. While he's excited to be working for a domestic automaker, he wasn't certain how long he could keep up the pace.

How do Australia's Foreign Investment Rules Apply to China?

Australia's government announced yesterday an easing of foreign investment rules. The rules have apparently come under criticism recently for causing delays that may be overly burdensome to foreign investors.

One recent deal, the proposed purchase of a controlling interest in Aussie miner Rio Tinto by Chinese metals company Chinalco, was canceled during Australia's review process. According to Reuters, some critics have complained that the delay caused by Australia's review process injected doubt and uncertainty, possibly causing Rio to cancel the deal before a decision was rendered. There is, of course, no evidence to support this speculation.

The Reuters story also points out that the changes to Australia's rules only affect private investment. Sovereign investment, that is, investment by foreign governments, is still subject to the same rigorous review process. So in fact, this change in rules would have had no effect at all on the Rio Tinto purchase. Chinalco is owned by China's central government, and its proposed controlling purchase of Rio was only a small part of the $12 billion in Chinese state investment into Australia proposed during the first five months of 2009.

One question not addressed is how exactly Australia will distinguish between "public" and "private". Among most countries with market economies, the question is not so difficult to answer.

For example, if Ford Motor Co. from the US wanted to buy an Australian parts company, this would be considered "private" investment. But if General Motors wanted to buy the same parts company (and assuming it were able, which I know is a bit of a stretch) this would be considered "public" since GM's majority shareholder is the US government.

But how would these rules apply to Chinese companies?

For example, Lenovo, maker of the Thinkpad on which I write this post, is a publicly traded company. If it wanted to buy an Australian software firm, surely it would be considered private, right? Not exactly. When you follow the trail, you find that Lenovo's controlling (though not majority) shareholder is the Chinese Academy of Sciences, a government-controlled thinktank.

What about Geely Motors? Geely is traded in Hong Kong, and its controlling shareholder is the company's Chairman, Li Shufu, a private Chinese citizen. I think this case would be more clear cut, and indeed, apparently Australia thought so when they allowed Geely to buy DSI, an Australian maker of drivetrains.

However, as I pointed out in a recent post about Geely, the line between "public" and "private" in China can be blurry. Despite the private ownership of Geely, China's State Council apparently maintains the right to sign off on Geely's strategy for expansion.

China's Auto Policy: Under-Promise, Over-Deliver?

People's Daily reports some surprisingly strong numbers in terms of the domestic market share of China-branded passenger cars:

In the first half of 2009, Chinese-brand car sales reached 955,300, an increase of 4.21 percentage points year-on-year and accounting for 45.32 percent of the total passenger vehicle sales and 29.45 percent of the total sedan sales respectively.

Compare these numbers with the three-year goals stated in China's recent "Automobile Industry Adjustment and Stimulus Plan" (which I previously wrote about here). This policy was released only in March of 2009:

自主品牌乘用车国内市场份额超过40%，其中轿车超过30%。

Chinese brands will surpass 40 percent of the passenger car market, among which sedans will surpass 30 percent.

If I read this correctly (and if People's Daily's statistics are to be believed), the State Council's three-year market share goals were achieved about two-and-a-half years ahead of schedule!