Die Meinung

China’s Myth of Private Ownership

We need to understand that large Chinese conglomerates like Huawei, Alibaba, or China National Petroleum are commercially driven organizations that will be tolerated as independent entities only so long as they serve the needs of the Chinese state.

Anne Stevenson-Yang
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The idea that China would evolve to look more like the West relied heavily on the eventual privatization of its economy. Yet Americans are starting to suspect that there might be less to this inevitability than they were led to believe.

Anne Stevenson-Yang

Anne Stevenson-Yang is a co-founder of J Capital Research and is J Capital's Research Director. The esteemed firm publishes highly diligenced research reports on publicly traded companies, relying on deep, on-the-ground primary research. Founded late 2010 in China, the company has particular expertise in the Chinese market but looks at overvalued companies throughout the world. Anne was formerly co-founder of a group of online media businesses in China and also founded and operated a CRM software company and a publishing company. Over 25 years in China, Anne has also worked as an industry analyst and trade advocate. She authored the 2013 published Book «China Alone: China's Emergence and Potential Return to Isolation», arguing that China historically repeats a cycle of expansion and retreat.
Anne Stevenson-Yang is a co-founder of J Capital Research and is J Capital's Research Director. The esteemed firm publishes highly diligenced research reports on publicly traded companies, relying on deep, on-the-ground primary research. Founded late 2010 in China, the company has particular expertise in the Chinese market but looks at overvalued companies throughout the world. Anne was formerly co-founder of a group of online media businesses in China and also founded and operated a CRM software company and a publishing company. Over 25 years in China, Anne has also worked as an industry analyst and trade advocate. She authored the 2013 published Book «China Alone: China's Emergence and Potential Return to Isolation», arguing that China historically repeats a cycle of expansion and retreat.

After years of trying to figure out which businesses are controlled by the state, the U.S. government may be coming to the conclusion that the entire concept is irrelevant. The focus now is on degrees of control.

Over the past several months, this debate has been swirling around Huawei Technologies Co., China’s biggest telecom equipment and smartphone maker. A recent article in the Wall Street Journal estimated that the company received up to $75 billion in state support.

While Huawei has been trying to sell its 5G wares to network operators around the world – and even had ambitions to develop a foothold in the U.S. – China hawks and security experts from Washington to Silicon Valley have flagged concerns that the company’s infrastructure could pose a security threat. The company has denied these claims.

It would be naïve to overlook the role that such mammoth subsidies can play in Huawei's ability to offer astonishingly low prices to its global customers. Such advantages help explain why the company has become a target of President Donald Trump’s trade war, as he seeks to level the playing field for American firms.

Few truly believe Huawei’s official origin story: that the company is «wholly owned by its employees,» according to its website, and «founded with $5,000 in capital». The suspicion that this isn’t the full story means questions about Huawei’s ultimate ownership never quite die.

The difference between use rights and ownership

In China, what we’d tend to think of as equity ownership is really just a means of conveying use rights. The state historically has owned all land, resources and productive assets, and Beijing metes out the right to exploit those riches for a certain period of time to trustees. In dynasties past, that may have been aristocratic families; now it’s red elites.

The key difference between ownership and use rights is that use rights are revocable – and without clear process, as we have witnessed in the swift and opaque dismantling of some of China's largest private overseas investment companies.

In ancient Rome, syndicates would raise money to prepay taxes from a colony, then set out to collect two or three times what was owed. Much in the same way, Chinese elites backed by state banks have raised money to buy limited rights to operate franchises in sectors such as telecommunications, banking, and logistics, only to operate those franchises to the limits of exploitative potential.

But the threat of state expropriation has always loomed, should the franchises begin to look too lucrative – or their private operators take political liberties or even gain exceptional global recognition.

Examples abound: Mid-tier banks such as China Minsheng Banking Corp. and Shanghai Pudong Development Bank Co.; private airlines like Hainan Airlines Holding Co. and Spring Airlines Co.; payments companies like Ant Financial’s Alipay and Tencent Holdings Ltd.’s WeChat Pay; retail conglomerates like Beijing Jingkelong Co., and logistics companies like SF Holding Co. all operate under highly restricted licenses that are in essence government franchises provisionally handed to private operators.

Meanwhile, companies regarded as completely private have been regularly eviscerated by government authorities with no legal process. Anbang Life Insurance Co., the Hainan conglomerate HNA Group Co., the developer Dalian Wanda Group Co. have all been stripped of assets, which authorities handed out to other companies without benefit of public auction.

Wanda, for example, sold the majority of its assets to Sunac Holdings, a highly indebted firm with murky origins whose founder spent five years in jail for embezzlement (a court later overturned the verdict). The government claimed legal malfeasance without any public clarification.

Even if the government doesn’t actually expropriate assets of private companies, there are many other ways it can exert control. When it became clear that Alipay and WeChat Pay were siphoning off customers from state-run banks, regulators began throwing up hurdles to their businesses and otherwise narrowed their access to key profit pools, for example, returns from investing customer capital or fees on payments.

Before listing Alibaba in the U.S., for example, Jack Ma split off its online payments arm, saying that the government wouldn’t permit a foreign company to own a payments tool. Even without an explicit change in regulation, «guidance» can change a private company’s operating behavior in the blink of a Party eye.

There will be no default crisis

What all of this means, among other things, is that the anxious weekly reports about local government debt, bank failures and takeovers, bond defaults, and the like may miss the point. There will be no internal or external crisis, because no debts of any company of scale can really be distinguished from the national balance sheet. China's unique interbank market is where stressed private companies dip into the endless resources of the state.

The companies and governments won’t go bankrupt, because China’s central bank would have to go bankrupt first, and that doesn’t happen when a bank can print money. What will happen is that the currency will devalue as the amount of money in circulation grows, and China will increasingly retract «private» assets into the state.

The Communist Party’s extensive involvement in all aspects of industry and commerce sets the stage for years of continued friction with trading and investment partners. That’s one reason why bilateral trade pacts, which often devolve into bickering over compliance, are a bad idea.

We need to understand that the likes of Huawei, Alibaba, or China National Petroleum Corp. are all commercially driven organizations that will be tolerated as independent entities only so long as they serve the needs of the Chinese state – needs that are increasingly global and political in scope.

In trying to contain this reality, U.S. trade negotiators are completely outclassed: They don’t understand what they are dealing with.