The empire strikes back

Why China’s private sector businesspeople are becoming worried

The empire strikes back

Centuries before the city of Wenzhou became famous for its commercial prowess, there was another city in China associated with business success. During the 15th century, Jingdezhen became the centre of the country’s porcelain industry.

Located in Jiangxi province, Jingdezhen’s experience differed from Wenzhou in a key respect. While Wenzhou was a product

of private sector enterprise, Jingdezhen was founded by the state, and run as a going-concern by the country’s emperors. The porcelain-hungry court constituted the city’s main customer base too.

The distinction between the two cities is becoming important.

Articles about China’s dynamism over the past 30 years have focused on the ‘Wenzhou model’ and how it has spurred economic growth. But there is a growing consensus that a new era is upon us, in which the ‘Jingdezhen model’ may be a better signpost to the country’s economic future. State-run capitalism is once more in the ascendant.

As reported in WiC29, the private sector seems to be the main loser. A good example: earlier this week, state-owned Shandong Steel succeeded in gaining control of Rizhao Steel, previously owned by China’s second richest man, Du Shuanghua. During the hostile takeover it soon became apparent that Du didn’t have much choice but to sell; and at a price estimated at close to a third of Rizhao’s market value.

This is not an isolated example – in fact, the Southern Weekly reports on other examples, including that of Zhao Youshan, an entrepreneur who ran petrol stations and oil depots. As the founder of Longqing Petrochemicals, Zhao spent years competing with state-owned oil giant CNPC. But he recently sold his business to CNPC, and comments: “Most of Heilongjiang’s private enterprises have been acquired by CNPC and now in the northern market you can barely see any privately-owned petrol stations.”

On the same theme, the Financial Times reports that Mengniu Dairy – the nation’s biggest milk producer – is also experiencing increasing state encroachment. Although established as a private company by entrepreneur Niu Gensheng, a state-owned enterprise bought 20% of the firm in July. Last week Yu Xubo, the CEO of COFCO (China National Oils Foodstuffs and Cereals Corp) replaced Niu as Mengniu’s chairman, firming up perceptions of a state takeover.

Southern Weekly reckons the same trend can be found in many sectors of the economy. It recalled that the presidents of private property firms at this year’s Boao Forum had expressed frustration that state-owned companies were winning most of the bids for prime pieces of land. So it analysed who had bought the 10 most sought-after parcels of land in China’s major cities and discovered that – in the first six months of this year – 60% were firms with government backgrounds. “China’s state firms are experiencing their largest ever expansion,” it concluded.

A major reason is the government’s Rmb4 trillion ($584 billion) economic stimulus package; and the attendant Rmb7.3 trillion of new bank loans doled out in the first half of the year.

About 90% of these funds went to state-linked firms. Given the emphasis on massive infrastructure projects, that should come as no great surprise – for example, China Railway Construction won contracts for the bulk of the Rmb600 billion devoted to building new track, while China CNR and China South Locomotive are the main beneficiaries of the Rmb300 billion to be spent on new trains.

Similarly, the Beijing News points out that Shandong Steel would not have been able to finance its M&A plans for Rizhao Steel if it weren’t for the Rmb240 billion of loans it received from state banks. “Without its government ownership, which bank would lend so much money to an enterprise making such heavy losses?” the newspaper queried.

The People’s Daily reports that small and medium-sized businesses have been less lucky. It found that while 130,000 (private sector) SMEs generated 47% of the city of Wuhan’s GDP, they got only about 10% of the bank loans on offer.

This worries many, especially as private sector firms – and SMEs in particular – have long been the engines of job creation.

Southern Weekly also sees a decisive shift away from the thinking of the post-1978 reform era. Then the private sector was encouraged – while the state sector was widely seen as not only inefficient but in its death throes. As recently as 1998, there were 58,000 state-owned firms making a combined loss of Rmb100 billion a year.

Now, says the newspaper, the logic has reversed. The national champions are state firms, and they are, by and large, doing well.

Indeed, in April it was announced that the country’s top 140 state firms overseen by Sasac (the State-owned Assets Supervision and Administrative Commission) made a combined profit of Rmb665.3 billion in 2008.

A term has even been coined to describe the current trend: guojinmintui (the state advances, as the private sector recedes). And as an (anonymous) Chinese banker told the Financial Times: “Since the current administration took over seven years ago, there has been a real backlash against the development of the private sector and that is now accelerating.”

President Hu Jintao often speaks of his goal of a ‘harmonious society’. Entrepreneurs must now wonder if the ‘harmonious’ economy is one dominated by state firms.

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