31 Oct 2005

S'pore firms Should be Wary of PM's urge to invest in China

Singapore's PM visit to China recently focused on urging Singapore firms to invest in the country. Read the Epoch Times article. China may not be a wise overseas investment decision that has been hyped up to be.


Published in Channel News Asia:
S'pore firms urged to focus on next wave of growth in north-eastern China

CHINA : Singapore's Prime Minister Lee Hsien Loong has described his first official visit to China as a success.

The week-long visit is Mr Lee's first since becoming prime minister last year.

Mr Lee said bilateral cooperation was progressing well.

On the economic front, he said Singapore companies should take advantage of the next wave of growth in north-eastern China.

An impressed Mr Lee agrees with Singapore businessmen he has met on this trip that the next wave of development in China will come from the north-east.

Its most developed province Liaoning has set it sights on becoming the IT centre of north-east Asia.

And this offers tremendous opportunities to Singapore companies like business space provider Ascendas.

Ascendas has struck up a partnership with the software park in Dalian - a key city in Liaoning.

The first phase of the IT Park will be ready by the end of next year.

There are also other opportunities in Liaoning in areas such as services, manufacturing and port facilities.

And Singapore port operator PSA has already staked its claim.

There are also plans by the provincial government to convert the coastline into industrial land.

Mr Lee said: "As they develop, we will go with the flow and ride the tide."

The Chinese government is revitalising the north-east and the centre of gravity is no longer as concentrated in the southern Pearl River delta and Yangtze delta.

As Mr Lee points out, the north-eastern region will be able to learn from the south in their development, thus ensuring quicker progress.

As for the growing bilateral cooperation between Singapore and China, Mr Lee announced that Singapore's Lee Kuan Yew School of Public Policy has just signed MOUs with top Chinese universities - Peking, Tsinghua and Fudan - to offer joint degree programmes.

These programmes will allow students to study in both countries.

And it is in areas such as this that Mr Lee says Singapore has a role to play in the growth of China.

Mr Lee said: "We provide the meeting place, we provide the opportunities. We have an environment where the Chinese people, the businessmen, the academics, the students are comfortable. Others are comfortable and we can make a contribution."

Education Minister and chairman of the Singapore-Liaoning Economic Trade Council Tharman Shanmugaratnam said Singapore schools must deepen their engagement with their Chinese counterparts.

"We have to get our kids to know a range of Chinese cities. Again not just the first-tier cities, not just Beijing, Shanghai. You've got to get to the second-tier cities where you can feel the hunger, aspirations and dreams," he said.

Mr Tharman said in the past year, more than 90 Singapore schools have established links with Chinese institutions.

"For a broad-ranging economic relationship in the long-term, people- to-people relationship will have to be developed as a foundation," he added. - CNA/de


China’s Economic Oligopoly And Political Monopoly
By He Qinglian
Special to The Epoch Times
Oct 30, 2005

Recently China’s investors have been skeptical, wondering if “China’s enterprises could still make a profit.” China has used the mouths of “foreign investment experts” to say, “Though the relevant benefits of such heavy industries as car manufacturing and chemical industry are shrinking, the relevant benefits of light industries show no tendency of dropping down.” The statement was clearly intended to pacify worried investors who doubted if their investment in China could be beneficial.

In spite of the pacifying statement, the news from the U.S. stock market was negative. More than 90 percent of more than 70 Chinese enterprises on the U.S. OTC Bulletin Board (OTCBB) [1] turned their stocks into “junk stocks.”

No trading in the stock of Chinese companies on the U.S. stock exchange for a few days in a row has frequently been noticed. This gloomy phenomenon has been occurring since the second quarter of this year. Only seven of the Chinese companies hold stocks priced over US$3 per share, while the stocks of the other 50 Chinese companies are priced below US$1. In the U.S., stocks priced below US$3 are regarded as “junk stocks”. To put it in another way, over 90 percent of China’s concept stocks on the U.S. stock exchange have degenerated into “junk stocks”.

A state’s economic competitiveness is closely related to its enterprises. Why did these favorites in the Chinese business community degenerate into “deserted orphans” on the U.S. stock exchange? An analysis of the situations of these enterprises provides a window on China’s economy.

State-Run Enterprises Gain Dominance By Means Of Monopolization

In recent years the number of China’s enterprises who have entered into the top 500 of global enterprises is gradually increasing, which has been used by China as concrete evidence to prove the competence of Chinese enterprises.

Let’s start by taking a look at the Chinese enterprises that made it into the top 500. This July, U.S. Fortune Magazine released the latest annual rankings of the top 500 global enterprises. Totally, 15 of China’s businesses were chosen. The three Chinese enterprises that have a ranking higher than 50 on this list are China Petroleum and Chemical Corporation (Sinopec), State Grid Corporation of China (State Grid), and China National Petroleum Corporation (PetroChina). A closer observation of the chosen candidates reveals that almost all of them are state-run monopolies in the petroleum, chemical, banking and energy industries, and they are directly owned by the central government.

This September, China released its own list of top 500 enterprises. This “top 500” has the following features:

First, most of the “top 500” companies are still state-run monopolies. Of all, 83 enterprises make a pure profit of over one billion yuan (approximately US$0.12 billion), with combined revenues totaling 427.1 billion yuan ($52.85 billion), occupying 81 percent of the total revenue of the “top 500”. This points out that the major revenue of Chinese enterprises comes from a very small number of monopolies, most of which are state-run. Though the percentage of the private enterprises picked for the “top 500” has risen to 15.8 percent, the percentage of their revenue is merely 6.7 percent. Based on this, we can conclude competitively, China’s private businesses are far inferior to the large-scale state-run monopolies.

Second, there is the quite remarkable disparity of competitive strength among the chosen candidates. Sinopec, listed as number one, owns assets totaling 620.3 billion yuan ($76.77 billion), and has an annual revenue totaling 634.3 billion yuan ($78.5 billion). On the other end of the list, the assets and revenues of the Zongshen Industrial Group, listed as number 500, are 3.51 billion yuan ($0.43 billion) and 4.56 billion yuan respectively ($0.56 billion), which is only 0.57 percent and 0.77 percent of Sinopec’s assets and revenues.

Third, regarding per capita earnings, of China’s 2005 top 500 enterprises, the cigarette manufacturing industry has the highest per capita earnings, 244,500 yuan ($30,260), while life and health insurance industry has the lowest per capita earnings. Only five of the “top 500” reach a per capita profit over 100,000 yuan ($12,376).

How Are the Chinese Top 500 Enterprises Different From the Global Top 500?

Among the scholars in mainland China, many disagree with the Chinese media’s high praise that Chinese enterprises have entered the upper tier of global top of corporations with their competitive power. Professor Liu Jisheng of Qinghua University’s School of Business pointed out that there are three differences between the Chinese top 500 and the global top 500 corporations.

Firstly, most of the global top 500 are private corporations or family businesses, yet most of the big enterprises in China are state-owned, and some are solely state-funded corporations.

Secondly, most of the global top 500 are in competitive industries such as the automobile industry, but most of the Chinese corporations are in monopolized industries such as oil, electricity and steel.

Thirdly, in terms of economy of scale, operating income, total assets and profit made by the top 500 Chinese corporations constitute respectively 5.3 percent, 5.61 percent and 5.22 percent of those made by the global top 500.

In fact, big Chinese enterprises have two distinctive characteristics. Firstly, they do not rely on market competition to gain size and strength; rather they rely on administrative orders to have forced reorganization. Their survival and development often rely on having the strong state machinery as their backing.

Secondly, these corporations do not rely on unique technical advantages, superiority in service, property rights, price advantage or brand superiority to win in market competition; instead they rely on the monopolization advantage granted by the government to gain a high monopoly return.

Only by understanding these two characteristics of Chinese state-owned corporations can one understand why the stocks of Chinese corporations that were listed in the U.S., after some “initial hype,” have degenerated into “junk stocks” that nobody is interested in.

A General Misconception: The Downfall Of The State-Owned Economy And The Flourishing Of The Private Sector

The deepest impression that 27 years of economic reform in China has left is that China has undergone a large-scale and profound privatization movement, and that China has already become a market economy country.

However people have neglected one point: in the late 1990’s, when Zhu Rongji was the Prime Minister, his strategy for state-owned corporations to follow the policy of “seizing the big and freeing the small” and to withdraw from competitive industries, has formed the base that led to economic oligopoly in China in the end.

In short, “seizing the big” is to rapidly concentrate resources in a very few state-owned monopolizing corporations. Starting from the late 1990’s, relying on government support and profit gained from their monopoly, certain industries in China have already formed the economic pattern of being monopolized by a few state-owned corporations. The private sector can only flourish in the highly competitive industries that the state-owned corporations have withdrawn from.

The Chinese government has political needs for “seizing the big” (i.e., fostering large state-owned corporations). Since the 1990’s, the Chinese Communist Party (CCP)’s one-party despotism has continuously faced with a crisis of legitimization. Many governmental think-tankers already suggested to the government to transform large-size state-owned corporations into “Party assets,” hence accumulating an enormous amount of assets that in name belong only to the CCP.

With this enormous Party asset base, even if faced with political changes in the future, the CCP, with its abundant economic strength, would still win in an election. Stemming from this kind of precautious concern, the CCP’s decision makers have always concentrated on seizing the few state-owned corporations that are most closely connected with the vitals of the national economy and that occupy the leading monopolizing positions, so that it can retain economic control when future political changes occur.

Central Government Enterprises Monopolize Chinese Economy

In recent years, the number of state-owned enterprises and enterprises with the state as the key shareholder has dropped by 4,000 to 5,000 each year. The number of central enterprises that are directly supervised by the State-owned Assets Supervision and Administration Commission of the State Council have decreased from 196 two years ago to the current 169. However assets of these enterprises are continuously growing and their profits are also constantly rising.

Official data shows that from 1998 to 2003, the number of state-owned and state-as-key-shareholder enterprises has dropped from 238,000 to 150,000, yet their profit increased from 52.9 billion yuan (approximately $6.54 billion) to 378.4 billion yuan ($46.80 billion). In 2004, the total profit further rose to 531.19 billion yuan (roughly $65.70 billion), an increase of 42.5 percent from 2003.

In 2004, the five industries that made the most profit nationwide were oil exploitation with 177.73 billion yuan ($21.98 billion) of profit, steel with 103.89 billion yuan ($12.85 billion), chemical engineering with 85.63 billion yuan ($10.59 billion), electronic communications with 82.19 billion yuan ($10.17 billion), and transportation with 77.19 billion yuan ($9.55 billion). These industries constitute 46.4 percent of the total profit earned by all industries combined.

An analysis of the profit structure for the state-owned enterprises and enterprises with the state as the key shareholder clearly shows that, in 2004, the profit realized by seven companies—China National Petroleum Corporation, China Petroleum and Chemical Corporation, China National Offshore Oil Corporation, Baosteel Ltd., China Mobile, China Unicom, and China Telecom—constitutes 78 percent of the total profit earned by central enterprises.

It is well known that communication, energy, electric power and transportation etc. are the most monopolized industries among state-owned enterprises. This shows that the high profit increase for state-owned enterprises and enterprises with the state as the key shareholder are likely due to the strong monopolization of these industries.

These facts prove that, judging from an industrial perspective or the entire economic perspective, sales volume and profit for Chinese industry and monopolized service sectors are concentrated in a very few central corporations. In other words, the pattern of its economic oligopoly has basically taken shape. A monopoly formed with this kind of oligopoly-patterned economy has greatly benefited the Chinese government, such that the director of State-owned Assets Supervision and Administration Commission Li Rongrong reiterated that the central government’s goal is to raise 80 to 100 large-size state-owned corporations and make their way into the global market.

The Chinese Government Facilitates the Oligopoly Economy

Many outside observers agree that an intense and cruelly competitive market has been one remarkable characteristic of the Chinese economy from 1992 to the present. In the late 90’s, the Chinese government declared that state-owned enterprises would completely withdraw from competitive business. This move hid from observers the reality behind the intense competition. That is, the high monopoly of key resources is another manifestation of the Chinese economy.

China’s large-scale state-owned enterprises, especially those directly controlled by the central government, have become the largest beneficiaries of China’s capital market with the help of a series of slanted policies and the unique market access regulations of China.

In just 10 short years, China’s capital market developed a clear route—to serve the peripheral enterprises, then the state-owned businesses, and then the businesses owned by the central government, which include other ultra-monopolized companies. This structure is not the outcome of natural evolution out of China’s capital market, but is the direct logical result of a capital market continuously geared towards political needs.

Political Monopoly Needs Oligopoly Economic Support

There is another question that needs answering: Why does the Chinese government so diligently build large-scale monopolized state-owned enterprises?

The answer is that it is completely a political need.

Right now China is transitioning from an old authoritarian regime to a new form of totalitarian regime. Observers have seen increasingly tightened control of the society by the Chinese authorities, in addition to the government’s high suppression of the general public’s political muscle. However, they have yet to see the dangers China currently faces while transforming from the longstanding authoritarian rule to a new totalitarian rule.

Totalitarian rule requires increased control of thought. It also requires a huge system of organizations with which to control the society. Meeting both needs, in turn, requires a solid economic foundation.

Mao Zedong used every means possible to control people. He did not rely just on political violence and ideological cultural violence; more importantly, he relied on economic control.

If the Chinese people at that time had left the Chinese Communist Party’s economic and cultural entities, they would have had no resources for survival. Chinese intellectuals often opined that they wanted to be Tao Yuanming, who abandoned his official positions and lived as a hermit. Yet there is no place to which they can escape, since China, including every rock and tree, all belong to the “Nationalized Properties” owned by the CCP.

The Chinese government under Hu Jintao relies more and more on total control of the society. Strengthening the party organization is just one method. Another important method is to strengthen economic control. It is unrealistic, however, to fully revert back to the complete economic control of the Mao era. Thus, they can only implement control over the industries that are the life-blood of the national economy, such as the petroleum industry, the energy industry, and the telecommunications companies related to information circulation.

China’s petroleum industry is immense with over 60 branches worldwide. This illustrates the Chinese government’s international energy strategy and, more importantly, its economic dominance within China through its control over petroleum—a modern economy’s life-blood.

There are three criteria for analyzing these increasingly growing state-owned businesses that are fed by the government.

The first criterion is to use the U.S stock market, which is purely based on the performance of the enterprises; the second criterion is to believe the CCP’s evaluation made explicitly to further its political and market dominance; and the third criterion, which is also this writer’s opinion, is to use humanitarian standards, such as whether to support or oppose China’s new totalitarian politics when deciding whether or not to invest in China.

Note: [1] The OTC Bulletin Board (OTCBB) is an electronic quotation system that displays real-time quotes, last-sale prices, and volume information for many over-the-counter securities that are not listed on The NASDAQ Stock Market or a national securities exchange.

No comments: