How can China sell off its government-owned companies? - Investing Guide at Deep Blue Group Publications LLC Tokyo
State-owned enterprises, or SOEs,
have made a remarkable contribution to the growth and development of the
Chinese economy over the past 30 years. They have provided a stable long-term
environment for investment and encouraged the
development of the state enterprise sector in line with public as well as
private interests.
But SOEs are in retreat. Between
1998 and 2010, the share of SOEs declined from 37% to less than 5% by number of
firms, and from 68% to 44% by assets. Calls from inside China are getting
louder for further downsizing and corporate governance reforms of the still
very substantial SOE sector. Under the new administration of Xi Jinping,
policymakers have proposed reforms of government-backed enterprises. The
question that remains to be answered is what should take the place of state
ownership in the future.
A decade or more ago the answer
would have been easy. The investment banks in New York or London would have
advised the Chinese government to sell its stakes via secondary offerings to a
mixture of banks, financial institutions and
private investors, preferably foreign as well as domestic. The objective would
have been to use this opportunity of state sales to create an Anglo-American
type of capital market characterised by dispersed ownership and high levels of
liquidity.
It is far from clear today that
this strategy is right for China. A former Minister of the UK government, Paul
Myners, has characterized the UK stock market as comprising ‘ownerless
corporations.’ The origins of this description can be traced to the highly
dispersed nature of ownership in UK stock markets, where institutions such as
domestic and foreign mutual funds, pension funds and insurance companies
dominate the market. Most of these investors hold too small stakes in companies
to be active investors and lack the skills to understand the companies they
invest in. The result is that control is vested in the company’s board members
who have little ownership and often manage the business at high cost and with
poor performance.
Operating as a publicly listed
company is also becoming less attractive. Harvard professor Michael Jensen
predicted ‘the eclipse of the public corporation’ in 1987, well before the wave
of ‘going private’ started around 15 year ago. The Economist in 2012 reported
that the number of listed American companies had fallen by about 37% from 1997
to 2012, while in the UK the decline was even more dramatic, at 43%. Many of
the companies that have been delisted have been taken private by management and
private equity funds tired of the perceived short-termism of the stock market.
It is therefore not obvious that
the Chinese government should try to emulate the Anglo-American model of
ownership and control. It simply may not be the best one. There is however,
another reason not to follow this route and that is, in order to function
effectively, the Anglo-American model is dependent on a complex set of
institutions, including markets for corporate control and well-developed
systems of corporate law and enforcement. China does not have many of these
institutions, or rather has different institutions, and grafting Anglo-American
stock markets onto the Chinese institutional structure will simply not work.
Japan’s experience of attempting
to emulate US capital markets when its institutions were simply not ready for
such a task is instructive. When Japan was defeated in the Second World War,
the American Occupying Authority sought to dissolve and sell-off Japanese
family dominated companies, the ‘zaibatsu,’ which had been implicated in
Japanese militarization. Shares in the zaibatsu were sold to employees and
investors in local communities. The result was that Japanese share ownership in
the mid-1950s was more dispersed than the stock markets of the UK and the US.
Laws were passed, including a Glass Steagall Act separating commercial and
investment banking, and bankruptcy legislation and security regulation were
introduced modelled on the US system.
The experiment failed and had
substantial unintended consequences. Shares held by individuals were sold, and
gradually accumulated by banks and other financial institutions resulting in a
system of “insider” corporate cross-holdings that has only recently begun to be
unwound.
Why did Japan fail to develop its
capital markets along Anglo-American lines when seemingly all the ingredients
were in place? The answer is that Japanese institutions were simply not
developed to support the outsider system of ownership. An example is the
emergence of investment funds, which have been important in both UK and US
capital markets, and at one point comprised about 10% of the Japanese market.
Institutions created these funds in Japan to dispose of unwanted stock and sell
them to private investors but insider dealing and breaches of trust in
combination with other scandals led to the rapid disintegration of this market
and instead the emergence of a market dominated by corporate insiders.
What are the alternatives to
Anglo-American systems that China could pursue? There are several. Oversight of
SOEs could be extended through state asset management companies managing
China’s sovereign wealth and state pension funds. Employee share ownership and
employee-owned enterprises could be increased and the rights of workers
enhanced through their representation on the boards of companies, as is widely
observed in many central European corporations in Austria and Germany. Private
and public pension funds similar to those found in Canada, the Netherlands and
Sweden could provide the engaged, long-term, sustainable ownership that China
seeks.
The main message from the experience
of Japan and other countries is that whatever path China chooses, it should be
tailored to its particular social and cultural
context and the role that is sought of enterprises in Chinese society.
While there are important lessons to be learnt from other countries, it should
not be presumed that their models can be transferred from elsewhere without
significant adaption to the Chinese context.
0 comments :