China’s Great Missed Opportunity
While a U.S. Representative to the Asian Development Bank Executive Board of Directors during the first Bush Administration, I consistently called for China to “bite the bullet” and privatize its state-owned companies as soon as possible. Representatives from European and other Asian countries would just shake their heads and mutter about impatient Americans while counseling that China adopt a slow, incremental approach to privatization.
(PRWEB) August 4, 2005 -- While a U.S. Representative to the Asian
Development Bank Executive Board of Directors during the first Bush
Administration, I consistently called for China to “bite the bullet” and
privatize its state-owned companies as soon as possible. Representatives from
European and other Asian countries would just shake their heads and mutter about
impatient Americans while counseling that China adopt a slow, incremental
approach to privatization.
Here we are more than twelve years later and
this bullet has turned into a time bomb that could derail China’s impressive
economic growth and a better life for its people. The fact that a majority of
China’s large companies are still owned and controlled by the Chinese government
has three negative economic consequences.
First, it has stunted the
growth of China’s financial markets and prevented many companies from tapping
equity capital markets. Almost 70% of the shares of China’s 1,377 listed
companies are substantially owned by the state and cannot be traded. This is the
dreaded “overhang” which bedevils the Communist Party leadership and bureaucrats
anxious for private Chinese shareholders to have share prices mirror economic
growth.
The Shanghai Composite Index recently dipped below 1,000 for the
first time since 1997. The problem is that when the government sells these
shares, private shareholders are diluted and share prices decline. The use of
public funds to compensate private shareholders for this dilution has been
considered and rejected as too expensive.
The Chinese government announced a
$15 billion buyout fund to invest in state-owned companies but markets are
deeply skeptical. My view is that only solution is auction off equity to private
investors and de-list poor performers and let them struggle for
survival.
Meanwhile private firms hungry for capital are denied a chance
to list on these exchanges. The result is that private Chinese companies rely on
banks for 99% of their financing! This lopsided dependence on bank financing is
unhealthy and furthermore many Chinese banks are bogged down by mismanagement,
bloated bureaucracies, corruption and saddled with politically motivated
non-performing loans
In addition, China’s stock market slump is putting
its brokerage firms in intensive care. China’s 114 brokerage firms that depend
largely on stock trading commissions suffered a 45% decline in revenue in the
first half of this year. Trading in the China A shares (for Chinese citizens
only) market has virtually disappeared. The Shanghai Composite Index is down 15%
this year. The Chinese government also has an unofficial moratorium on new
listings.
Second, maintaining state ownership and control of so many Chinese
companies leads to a lack of transparency and openness that is necessary for
China to fully participate as a member of the global investment community.
Foreign institutional investors tend to favor investing indirectly in
China through the Hong Kong Stock Exchange to gain better disclosure and listing
requirements. As an investment advisor, I recommend clients participate in
Chinese growth primarily through investing in Hong Kong (EWH) Malaysia (EWM),
Canada, (EWC) Australia (EWA), and other Asian countries. The issue of
dysfunctional Chinese financial markets has also led to our recommendation to
clients that India, not China, may be the best performing Asian stock market in
the next ten or twenty years.
Look at what Indonesia is doing to open
its financial sector to international investment. International investors are
now allowed majority and management control and just last week a large Singapore
and Malaysian bank announced plans to make sizable investments in Indonesian
banks. The Indonesia government is also drawing up a list of which of its 145
state-owned enterprises will be sold to investors. International investors have
taken notice - the Indonesian stock market is doing well and our recommended
Indonesia Fund (IF) is up 29% this year.
Third, as the recent high
profile cases of Lenovo, Haier and CNOOC demonstrate, as state-owned Chinese
companies seek to acquire or invest in foreign companies, the reaction is
wariness, skepticism and outright political hostility. The Chinese leadership is
trying to groom about 100 of its largest companies to go global in a big way and
“brand hunting” of leading multinationals firms with its surplus cash ($700
billion in foreign exchange reserves) is the fastest way to achieve this
objective. If you thought the Japanese spending spree during the 1980s was
controversial in America – fasten your seat belt.
The U.S. Congress and
other foreign governments will resist these bids since they have little interest
in having a foreign government, especially an economic rival enjoying a $200
billion bi-lateral trade surplus, purchase its most prized companies. The issue
of Chinese bidders using government financing is also a red flag. Then there is
the issue of reciprocity – foreign companies can only obtain minority interests
in Chinese state-owned companies and approval for even these minority stakes is
not transparent and highly political.
Finally, there is the broad policy
question as to the intent of the Chinese Communist leadership. The slow and
grudging pace of privatization
could reasonably be read as an indication that
the Chinese government has no intention of relinquishing control of state-owned
companies. This, in turn, has serious consequences as countries evaluate how to
treat a rapidly growing authoritarian country that seeks to participate and
benefit in the global economy by using state-owned and state-sponsored
companies.
The Chinese adage of “crossing the river by feeling the
stones” may be a wise policy at times but in this case a plunge into the river
ten years ago would have been much better for the Chinese economy and people. It
is by no means too late to take the plunge and the US should be ready to help in
any way it can.
Carl Delfeld is head of the global advisory firm
Chartwell Partners and is editor of the “Chartwell Advisor” and the “Asia
Investor Intelligence” newsletters. He served on the Executive Board of
Directors of the Asian Development Bank in Manila and is the author of The New
Global Investor (iUniverse: 2005). For more information go to www.chartwelladvisor.com or call 877-221-1496.
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Source : http://www.prweb.com/releases/2005/8/prweb268593.htm