September 05, 2005
China, Inc.
Posted by Gordon Smith

My colleague John Ohnesorge pointed me to a recent article in September 1 issue of The Economist entitled "The Myth of China, Inc." (not available online) The article observes that the fear of China is based on the notion that "China's companies are ... mere tools of an expansionist policy propagated by Beijing's leadership," or more subtly, that "because it is impossible to untangle the ownership of most Chinese companies, foreigners cannot be sure to whom they are selling. When the ultimate authority could be the Communist state, that is a worry."

Notice that this fear presumes a coordinated, centralized power, but according to The Economist, that beast does not exist:

The contrast with Japan is stark. The Japanese government had less direct control over its corporations, but its officials co-ordinated their domestic development before earmarking sectors for overseas expansion. The Chinese bureaucracy, while in direct charge of more of the national economy, is riven by factional infighting.

The most interesting part of the article, from my standpoint, was the discussion of corporate ownership. Far from being a coordinating force, state ownership, control, or influence may destabilize otherwise promising ventures:

Private companies are often beholden to state banks for capital and to local officials for favours and contracts. Since private enterprise was not even acknowledged until 1988, entrepreneurs had to bring state investors aboard as political protection, becoming so-called "red-hat" companies. Yasheng Huang, a professor at MIT, says that the results can be disastrous: "Government shareholders may be passive at first, but once a company succeeds, they interfere. Countless Chinese firms have been driven to bankruptcy or failed to grow big because local governments decided to exercise their legal claims on ownership."

In this light, perhaps what we should fear from the acquisition of U.S. companies by Chinese firms, The Economist concludes, is that the Chinese firms will export their pathological governance practices: "Because Chinese firms have grown up in an irrational and chaotic business environment, they may export some very bad habits."

Does this seem plausible? Or likely? My experience with China is fairly superficial, but I wonder whether Chinese managers might be interested in using acquisitions to free themselves from local politicians. By owning non-Chinese assets and attracting investments from non-Chinese sources, perhaps those managers could begin to extricate themselves from government control.

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