BEING chief economist of the ministry of railways seems to be a livelier job in China than elsewhere. Instead of sitting behind a desk writing dry reports, you meet foreign bankers and investors and try to lure them into investing billions of dollars in your national rail network.
Huang Min is the lucky man. Sitting in the ministry in Beijing late last month, listening to him explain its plan to open up its railways to investors, I experienced the usual feeling of awe at China’s economic development. Seven new passenger lines, 25,000km of new track, $250bn of investment over 15 years. A railway here, a railway there and pretty soon you are talking real money.
Mr Huang is not the only Chinese bureaucrat to be offering assets for sale. Having encouraged industrial joint ventures for more than a decade, China wants foreigners to scale its commanding heights. Oil companies including China National Offshore Oil Corporation have listed in Hong Kong and New York and banks are following: China Construction Bank floated recently and Bank of China will do so next year.
China needs the cash. The railways are in urgent need of investment: they meet only 35 per cent of the demand for commodities such as coal and industrial goods to be transported around the country. But it has other calls on tax revenues. Lack of public provision for health and education is one reason why the Chinese save so much: even farmers must save to pay for their children’s schooling.
China also needs its state-owned enterprises to become more efficient. The state banks are a prime example of the squandering of capital and resources. They have acted more like government departments than banks, allocating loans to state-owned enterprises with little regard to risk and reward. Having been bailed out by the government, they are now trying to mend their ways.
So Bank of China wants Royal Bank of Scotland and Temasek of Singapore to become investors and to join the board. Li Lihui, BoUs president, talks approvingly of Temasek’s record in “reforming and renewing banks that tend to be slightly problem-ridden”. That is a nice way of saying that BoC needs foreign help to become a bank rather than a social institution.
Yet this is a communist country that has no intention of giving up state control. Mr Huang says foreign investors will be allowed to take a stake in rail projects such as a new Beijing-Shanghai line but the state will steer them to ensure “universal service for society as a whole”. The pitch is: you help us to manage our assets in return for equity but we command the economy.
That is probably good enough to raise funds. Many investors have lost money in China but it is still alluring. Growth has not been squashed by the economic controls the government imposed to avoid inflation and may hit 10 per cent next year. If investors are allowed to exert a management grip on state-owned enterprises, there is clearly plenty of upside.
It is a contradiction, all the same. Are China’s commanding heights to be run for the benefit of all investors? Or are they policy instruments that exist to serve the government’s aims? They can be both, as long as all goes well, but tensions are bound to emerge as soon as there is a setback.
It has already happened at CNOOC, which was outsmarted by Chevron in its effort to acquire Unocal of the US. In Beijing recently, Fu Chengyu, CNOOC chief executive, had a tone of rueful admiration as he recalled how his company was portrayed as an arm of the Chinese government. His argument that CNOOC is “state-owned but not state-run” got him nowhere and it was forced to retreat.
Now Mr Fu says he would like the government to reduce its stake to make it easier for CNOOC to acquire foreign assets, perhaps reducing it to a golden share. You could see this as evidence of communist cunning. Here is a chief executive who answers to Beijing trying to make us think that he is on the investors’ side. Who does Mr Fu think he is fooling?
I take the more optimistic view that allowing foreign investors to influence management works only too well. In a conflict, the directors are who want freedom for the enterprise than with politicians, who prefer subservience. In other words, communists have a bigger agency problem — the divide between the interests of investors and managers — than capitalists.
The force exerted by private capital is easy to underestimate in the early days of the bargain. Mr Li of BoC says that, having cut 23,800 jobs, his bank is at its fighting weight with 212,000 employees. Well, China is a big country, but forgive my scepticism. The government wants its banks to keep employing people, but will Fred “the Shred” Goodwin, chief executive of RBS, be so charitable?
Once the bank’s managers come within the purview of investors with an entirely different view on how to run a business, it will be difficult for them to stick to the old, lumbering ways. Given the choice, would you prefer to run a dynamic enterprise or to carry on behaving as a bureaucrat whose job is simply to hand out state capital to state enterprises?
In the end, capitalism wins because it is not only more efficient than the alternative but more enticing. The ministry of railways no doubt hopes that it can acquire both cash and expertise from abroad without having to sacrifice its traditional approach to running things. But be warned, Mr Huang. You are boarding the train there’s no getting off.
By John Gapper –
Source: Financial Express
Photo credit: lyng883 via VisualHunt / CC BY
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