A pattern is emerging in China - using the stock markets, both domestic and international, to suck up the cash to pay for modernization. We have seen it in the oil and telecom industries and we are just about to see in the power industry.
What sticks out with all these moves is that they reveal a conflict between what is good for shareholders and what is good for the structural improvements of China's economy and its consumers.
China's focus on 'business' is not the same as a focusing on improving the economy. An efficient, well functioning market is good for everybody, including consumers. But business people, especially share investors are not always interested in well functioning, efficient markets for the simple reason that it is very hard to make money in such markets. The US is not perfect, but you only have to look at the lower prices across a whole range of consumer goods, compared to Europe, to reach the conclusion that companies in those markets have to have extremely efficient supply chain mechanisms, smart management, quality goods and massive economies of scale to make a buck.
But China's reliance on money from other people, in the form of foreign direct investment and foreign listings, not to mention the cash sucked out of the pockets of its own population through the squandering of bank deposits, means that a US-style economy is still light years away.
The 'reforms' in the sectors mentioned above bears this out.
The so-called reforms are structured with one end in mind - to make the shares of the companies on the verge of listing as attractive as possible to foreign shareholders. The foreign shareholders are, of course, the ones with the cash.
According to the Wall Street Journal, (May 17) for example, "the $10 billion network purchase by China Mobile (of eight cellular phone networks from its parents) is the latest step by China to improve the competitiveness of its state owned phone operators by making them accountable to its overseas shareholders."
Sad to see a market friendly paper the WSJ falling for this fairy tale. The best way of making these companies attractive to foreign shareholders is by keeping the genuine reforms and competition down to an absolute minimum, because shareholders (and it's their duty to do so) are most attracted to monopolistic practices, where the fattest profits are made. The restructuring the investment banks help the Chinese companies with is to make them into acceptable to investors, but the government is merely facilitiating this process rather than setting up an open, competitive environment.
The break up of the State Power Corporation has already been frequently written about, but it is still rarely pointed out that the SPC will continue to be the majority owners of the power generators, which will simply become de facto regional monopolies. This is despite the widely publicised aim of the reforms being to force the SPC out of the power generating game and to make it focus on transmission and distribution. And while Huaneng Power International and Beijing Datang are looking to be listed overseas, price and other forms of competition are being pushed back to some undetermined date.
The same story is apparent with the imminent listing of the China's fixed line operator China Telecom, which is also being split up into what are, again, essentially regional monopolies and listed separately. The first listing, of China Telecom, which will control the southern market, wants to raise in excess of $5 billion in an international listing slated for October. The players might be permitted to compete in their own backyards, but they will have such an overwhelming dominance that it will be difficult for new entrants. Anyway, the largest shareholder in each of the entities will still be the government, making competition a bit of a farce.
As in the power sector, tariff reform and deregulation, I guarantee, will not be spelled out in the run up to this listing. While paying lip service to the desirability of such reforms, the last thing the government in China wants to do is see $5 billion from profit-seeking foreign investors slide away from it.
Who knows what the Chinese government is up to? No doubt there are some reformers who aware of genuinely modernizing the country, rather than hovering up funds from other people. But raising funds in the international capital markets should come a poor second to generating healthy domestic market structures. So far, the listing process is creating huge amounts of cash for certain people, but it is not clear if the best interests of the country are being served.
