Re-monopolizing China’s Industry

Gordon G. Chang

The recent completion of two government-directed mergers in China’s energy and manufacturing sectors and other mergers now in the making suggest Beijing is reversing two decades of reform intended to make Chinese industry more efficient and competitive in local and global markets. The ongoing effort is certain to fail in the long term.

As reported [1] by the Wall Street Journal last week, Beijing is contemplating two mergers of state oil giants: the China National Petroleum Corporation with China Petrochemical Corporation, better known as Sinopec,and China National Offshore Oil Corporation with Sinochem Group. The apparent goal is to increase China’s leverage in the global energy market. “We want to create a big Chinese brand to better compete overseas,”an informed official told the paper. He added, “We want our own ExxonMobil,” failing to note that these Chinese giants are already larger than ExxonMobil by various measures, including, most importantly, the size of balance sheet.

One or both combinations, if consummated, will come on the heels of other government-compelled mergers. One, announced last December, resulted in the consolidation of CSR Corporation and China CNR, the world’s biggest makers of trains. Ironically, these two companies were spin-offs from the same parent, the China National Railway Locomotive and Rolling Stock Industry Corporation. Xie Jilong, CNR’s board secretary, at the time stated [2] the combination was initiated by Beijing, not the two firms.

Why the merger? The State Council, the cabinet of China’s central government, was upset that the two Chinese manufacturers competed against each other for the right to build 284 subway cars for the Massachusetts Bay Transportation Authority, in Boston. CNR won the competition last October with a bid that was about half of the highest bid and a quarter lower than the second-lowest bid, according to Lawrence Li of the banking firm UOB Kay Hian, speaking to [2] the South China Morning Post.

Soon after the CSR-CNR merger, the China Power Investment Corporation was similarly forced [3] to merge with the State Nuclear Power Technology Corporation. Additional deals in the state nuclear sector are expected, especially an amalgamation of China National Nuclear Corporation and China General Nuclear.

In the near term, Beijing may be able to prevent state companies from bidding against each other in foreign markets, but in the long term China loses. These mergers will create the very problems that the reforms launched 20 years ago were intended to eliminate when state monopolies were broken up—inefficiency and higher prices brought on by political meddling, central state management, corruption, and patronage. Tellingly, local Chinese officials opposed [4] the December deal between CSR and CNR, fearing that higher prices would result from the elimination of meaningful competition.

Apparently this has not occurred to Xi Jinping, China’s ruler since November 2012, who now holds sway over economic policymaking and almost certainly is behind these corporate consolidations. Referring to state enterprises last August, he reportedly said [1] the government “must ensure they thrive.” 

That’s what the Maoists thought when they created the gargantuan businesses and then protected and nurtured them. Since then, it has been obvious that the pro-monopoly policies of the 1950s crippled China’s economy and industry. That’s why Beijing technocrats spent the last two decades taking apart Mao’s monopolies.

 

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