Journal
10/22/03
Michael Steely
Report on article "China's SOE trap" by Li Yongyan, appearing at www.atimes.com on 10/22/03
This is an interesting and short article on the situation currently facing the Beijing government and its handling of SOEs, and I suggest all classmates have a look. Li Yongyan, an analyst of Chinese business, provides a sharp look at the nature of the SOE dilemma, and concludes the article with a short primer on the "Tao" of business for the future FDI (Foreign Direct Investment).
Li's six-point scenario describes a typical SOE in big trouble, a sort of Lillipution giant on the death bed. It is the classic nightmare on Wall Street, and a problem that George Soros would find challenging, let alone a regime sorely lacking in modern capitalist expertise in Beijing.
China is faced with 300,000 dying SOEs, some with workforces of one million workers or more, and it can't shut these companies down since, as Li says, they provide goods and services critical to the economy. Li adds, by example, of the situation in Heilongjiang province, where the government has pumped in 85 billion yuan, which has resulted in 40 billion in debt.
With losses so great, and with so many government chains to bind them, what is the manager of an SOE to do? Such is the dilemma these managers of SOEs find themselves in. Li provides an interesting joke, a common saying going around China today: " The Communists used their bodies when running businesses: They tapped their foreheads when making multimillion-dollar investment decisions, pounded their chests when extolling the bright prospects of the project and wiped their behinds as they rose to leave for another fat cat assignment after the millions of dollars flushed down the toilet."
Li's conclusion is that SOEs are not worth saving, even though the government continues to keep rescucitating a dead vegetable. In another example of a Shanghai-based SOE cement factory, Li shows that even privatization may not be the answer because of government control, even at the local level. Thus, Li says that "they (the Beijing government) have learned the hard way that privatization is the last remedy for the dying patients that are SOEs." So, the question goes back to this: "Will capitalism succeed where socialism failed? Or will commercialism work in a Communism-ravaged country?" Li suggests that it is extremely difficult, to say the least, for overseas investors to play the investment-hungry China monopoly game. Since China depends so much on FDI, it seems the government should not be playing the chooser in the begging game. Li gives his own rules, his five "survival tips" that all investors should heed before expecting any business success in China. The onus is now on the FDI to call the shots and play by their own rules.
