Monopolist, moi?

Debates rage about domination of state firms

Monopolist, moi?

The Chinese claim to have invented most things and ‘monopoly’ is one of them. Not the board game, which was the brain child of American citizen Elizabeth Magie (she created the game to make the case for a land tax). China’s monopolies date much further back, to the trade in silk, porcelain and tea. Then the emperors tried to monopolise knowledge of how each item was produced (eventually the trade secrets were lost to others).

Still, talk of monopoly power remains on the agenda, with Li Rongrong defending the country’s giant state-owned enterprises stoutly in an interview with 21CN Business Herald. The former head of state asset manager Sasac (see WiC45) said most of these firms operated in situations of “natural monopoly”.

But as the Wall Street Journal noted, Chinese academics were quick to take issue with Li’s characterisation, including Xu Xiaonian, a finance professor at the China Europe International Business School, who said the comments were “illogical and off the mark”.

‘Natural monopoly’ is a very specific economic term, applicable to situations where competition generates few efficiencies – water utilities being an example. But in the interview Li seems to be using the term more widely to justify why big state firms are getting bigger.

Behind this debate is an accompanying one, about guojinmintui. First mentioned by WiC in issue 30 (see article ‘The empire strikes back’) the phrase has a literal meaning of ‘the state advances as the private sector recedes’. And for China’s market-minded reformists guojinmintui is a worrying trend that they’ve seen much more of in the past four years. Large state firms – some under the erstwhile strategic guidance of Li and his team at Sasac – have sought to consolidate, as well as buy up or muscle out private firms in their industries.

Those who support Li’s view, say his tenure helped create national champions capable of competing in the global economy. But his critics believe the trend has corrosive side-effects, especially a slow throttling of entrepreneurial activity in many sectors of the economy.

Li is dismissive in response. As he told 21CN: “Guojinmintui is a pseudo question, and the SOEs are the scapegoats of criticisms against state monopoly. I am now teaching at Tsinghua University. Half of the students are from private enterprises. I can say that I have never heard any private company criticise the SOEs. It’s only a few scholars who are really criticising them.”

Anecdotal evidence suggests the guojinmintui trend is, if anything, gaining momentum. Last month state-owned oil giant Sinopec launched a hostile takeover for China Gas, which sells gas to residents of 140 cities. Sinopec is already a major player in gas production and wants to expand its empire by absorbing downstream assets. If successful, another private sector player will be eliminated (China Gas was founded by entrepreneur Liu Minghui – who is being investigated for alleged embezzlement – with key shareholders including South Korea’s family-controlled SK Group).

Newspaper 21CN says another landmark deal epitomises the trend. Not only does it feature the state’s advance but at the expense of a foreign-owned private firm.

It’s a complicated story, starting out in Shanxi province in the late nineties, when the Daning Coal Mine broke ground. The local government was keen to attract investment and a foreign partner was preferred. A US investor, the CBM Group, injected funds and became the major shareholder with a 56% stake .

Later, the American owners got concerned when a State Council directive indicated that coal mines were “of great value to the national economy” and should be controlled by “state-owned capital”. So in a complex deal CBM transferred its stake to a Hong Kong-based company, eventually selling it to Banpu, a Thai coal miner. Angered, the mine’s other key shareholder (connected to local government), ordered a production halt. The dispute was only solved when China Resources Coal Power bought Banpu’s stake late last year. The upshot: with its acquisition the country’s first and only foreign-controlled coal enterprise became part of a state-owned conglomerate. Daning Coal Mine illustrates not just guojinmintui in action. It is also reveals a broader evolution in local government attitudes to foreign capital: from enthusiasm a decade ago through to greater indifference and, at times, outright hostility today.

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