Chinese Character

China’s newly Noble official

Senior government official joins foreign commodity trading firm

China’s newly Noble official

Pleased to be on board: Li Rongrong joins Noble

When Li Rongrong retired as head of Sasac last year, it looked as though we might have seen the last of one of China’s most powerful state-capitalists. But the erstwhile ‘boss of bosses’ seems reluctant to depart the scene altogether. This week, Li became the most senior retired government official to join the board of a listed foreign company – commodity trading firm Noble.

Just what role Li will play at Noble isn’t yet clear. But securing access to a range of commodities is a Chinese strategic imperative. CIC, a Chinese sovereign wealth fund, purchased a 14.9% stake in the Hong Kong-based firm in 2009 as part of that goal.

Li’s supporters have credited him with turning around many of China’s moribund state-owned companies. His critics complain he has created powerfully entrenched monopolies. But both agree that he’s an influential architect of what has come to be known as the ‘China model’ of state-directed economic development.

That sort of high politics is a far cry from where Li started out. Born in 1944 in Suzhou, Li appears to have been blessed with impeccable timing. He managed to graduate from Tianjin University with a degree in electrochemical engineering in 1968 – just before students started to get sent out to work in the countryside. That meant that during the Cultural Revolution he was able to find work in a factory in Jiangsu, his home province.

He may have started out on the factory floor at the unglamorously -named Wuxi Fuel Injection Equipment Plant but Li soon began to rise through the ranks. His career really started to take off after Deng Xiaoping and other reformers took power in 1978. Li became the plant’s deputy director in early 1983, and after joining the Communist Party he was promoted to the top job the next year, establishing himself as a reform-minded and reliable manager.

That led to political promotion. Before long Li had left the factory and taken up a series of increasingly senior roles in local government, culminating with his appointment as head of the Wuxi City Planning Commission in 1991.

During his time as a Wuxi government apparatchik, one story in particular is credited with bringing him to the national stage. A local home appliances-maker, Little Swan, had been losing money and 17 successive managers weren’t able to turn things around at the state-owned firm. The tale is that, instead of passing the buck, Li controversially went back to the firm’s original boss, reasoning that he knew its operations better than anyone. The gamble worked and reached the ear of a rising star on the State Council in Beijing: Zhu Rongji.

So in 1991, Zhu made a trip to Wuxi to hear the city’s new head of planning deliver his ideas for reinvigorating Wuxi’s state-owned companies.

Liking what he heard, Zhu took him under his wing and soon made Li a vice-minister at the State Economic and Trade Commission (one of the bodies that would go on to become the NDRC).

From that point on, Li’s career closely followed his mentor’s – and Zhu went far, becoming China’s prime minister in 1998. That gave Li the opportunity to take on more senior planning posts, and eventually got him a seat on the Communist Party Central Committee in 2002 (a position he still holds).

In 2003, the year Zhu retired, Li was then made the first boss of the newly-formed State-Owned Assets Supervision and Administration Commission (Sasac) – tasked with overseeing China’s most important state-owned firms.

At the time, the bulk of China’s state-owned firms were notorious for being poorly-managed loss-makers. “When Sasac was first established, there was a debate of what its role should be: whether to manage or sell the state-owned firms,” explained Century Weekly magazine. “Li Rongrong never wavered – he is a firm believer that state-owned companies can be managed well.”

A key goal was to avoid the wholesale theft of public assets that occurred in Russia in the early nineties. But as a former state firm manager himself, Li knew the companies would succeed only if incentives were in place and managers were held accountable. In the years since his appointment, the assets under Sasac’s purview would grow from Rmb7 trillion to more than Rmb21 trillion.

His first innovation was to begin regular performance reviews, with a system of rewards and punishments for senior managers. “If targets weren’t met, managers would be punished by docking their pay… firing, or demotion,” explains China Economic Weekly. The idea was to bring in checks and balances, and to improve standards of professionalism. To that end, Li also supported moves for state-owned companies to list overseas, adopt modern governance standards and employ a board of directors.

That task is still far from complete. “[When Li stepped down] only 30 central enterprises had established a board of directors,” writes Century Weekly, “the rest are still run with the old ‘mouthpiece’ manager system [the CEO alone has absolute authority]… the largest defect [of which] is the shocking loss of state assets, waste and corruption.”

Li also tried to simplify the corporate structure of state-owned firms. “[He said] firm should reduce the number of company layers to three,” wrote Century Weekly, “since subsidiaries out of reach are often the reason for the loss of state assets.”

Another goal: getting the SOEs focused on core business, and out of the fields in which they weren’t competitive. This is another area where the job is half-done. “Most state-owned companies haven’t got out of real estate but are instead getting deeper into it,” explained the magazine. “In this regard, Li Rongrong seemed powerless.”

But Li didn’t just think that state-owned firms should be well managed for their own sake. He believed they should fit into a wider plan to make China more economically competitive – especially in strategically important sectors.

“Anything that involves the national economy and national security should be done by state-owned enterprises,” he explained, according to China Economic Weekly.

That philosophy drove his belief that many of the firms under his charge should be merged into ‘national champions’. It may have meant less competition at home, but the plan was to go for economies of scale that would allow the consolidated entities to compete overseas. Under Li’s remit, the number of firms controlled by Sasac fell from 196 to 123, largely thanks to industrial mergers. The drop was still less than planned. Li had wanted to bring the number of firms down to as low as 80, but ran into criticism for imposing shotgun marriages in order to make that happen. (The painfully drawn out merger between Sinotrans and China National Shipping Group is one example, see WiC87). But he was unrepentant. “In pushing for the reorganisation of state-owned firms, I think I took a very slow pace.”

That policy is still a point of contention, blamed for encouraging firms to be “monopolistic and lacking corporate social responsibility,” according to China Economic Weekly. Li’s successor, Wang Yong, is rumoured to be taking a more cautious approach to the merger trend.

But Li’s new role will require a fresh outlook again, this time as a non-executive director. Of course, Noble – which was founded by British trader Richard Elman – has little in common with most of Li’s former corporate charges. But it too has been doing business in China for more than 30 years. And what China needs, Noble is often able to supply – so both must be anticipating that business will grow substantially in future. Having Li on board will surely benefit all parties concerned…

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.