Eva Cheng
China's brewing debate over its rulers' aggressive denationalisation program has recently been bubbling with new heat after a Chinese private firm threatened to launch a hostile takeover in an attempt to stop the US Carlyle Group investment firm from taking over the state-owned Xugong Construction Machinery company.
In October, Carlyle publicly agreed to pay US$375 million for 85% of Xugong, which has annual sales of $2 billion, including being a major supplier of construction machinery to Iran.
Carlyle, formed in 1987, has operated no production facilities directly anywhere in the world but has $42 billion of funds under its management. It is backed by or employs many high profile former Western government leaders, such as former US president George Bush senior, former US secretary of state James Baker and former British PM John Major.
In June, Xiang Wenbo, the chief executive of Sany Corporation, a rival of Xugong, denounced the proposed takeover on nationalist grounds and said his company would make a higher bid for Xugong. He claimed that Xugong had seriously undervalued its share price for Carlyle.
Xiang's allegation hit a raw nerve in China, where sweeping privatisations of state-owned firms in recent years have occurred amid widespread allegations that corrupt officials and their hangers-on have shortchanged the public coffers by deflating the sale prices.
Another contention in the current debate is that China doesn't need any more foreign investment because its domestic savings have exceeded borrowing demand for several years, and that its foreign exchange reserves have doubled in the past two years to nearly $1000 billion, seriously impairing its central bank's ability to curb excesses in China's economy by regulating credit supply.
Another worry is that the Carlyle bid for Xugong represents the first attempt by foreign capitalists to gain a controlling stake in a Chinese state firm — moreover, one that is central to setting the pace of technological development in a strategic industry.
Reflecting the sensitivity of the deal, last month the Chinese commerce ministry unprecedented three-day consultation with at least five other government departments or regulatory agencies and various industries affected by Xugong to review the Carlyle offer.
In the June 14 Shanghai Securities News, Xiang pointed out that Carlyle's real purchase price for Xugong is not the widely reported headline figure of $375 million, but only $250 million, because the inflated figure includes a promised capital injection of $120 million into Xugong afer its takeover by Carlyle.
In an August 6 critique of the deal, Zuo Dapei, a well-known anti-neoliberal economist at the Chinese Academy of Social Sciences (CASS), argued that Chinese state control over the manufacture of construction machinery will be crucial to qualitatively elevating China's entire industrial structure and its technological level, a process that Xugong is well positioned to lead.
Zuo warned that foreign control of Xugong could endanger the entire construction machine-making industry and put China's economic development at risk.
"In the present context of China's currency and monetary conditions", Zuo wrote, "what we need is a major overhaul of state firms to rid their management of corrupt elements and replenish them with fresh funds on that basis, rather than to sell them off, least of all to foreign capital. Speaking in terms of the interest of China as a whole, Carlyle's takeover of Xugong will bring it no benefits at all, offering for sure, serious drawbacks instead."
Yu Yongding, head of the CASS Institute of World Economics and Politics and an adviser to China's central bank, told the July 25 Shanghai Dongfangzaobao daily that the sale of Xugong to foreign investors was "irrational", highlighting in particular that it would worsen the country's already skyrocketing foreign exchange reserves.
Yu explained that an important reason why the reserves have risen to such a high level is that the foreign capital that entered China hadn't been invested to procure production and other facilities from overseas, but simply to acquire shares in Chinese privatised state firms so as to derive a slice of their profit dividends from these firms' export earnings. As a result, China wasn't benefiting from the real productive resources that the foreign investments are supposed to bring.
Most of the foreign investments have therefore flowed into the central bank's foreign exchange reserves, which have been used to purchase $327 billion in US treasury bonds to help cover the $17 billion-a-month trade deficit the US has with China, resulting from US firms importing of China's cheap manufactures.
Speaking at a July 22-23 forum in Qingdao city in eastern China's Shandong province, Yu said China's trade and foreign exchange reserve "are causing a huge welfare loss to China". He was quoted by the US Forbes magazine as saying: "In fact, China ... is providing tens of billions dollars of subsidies to the United States every year."
Yu told the July 31 China Enterprise News business daily that he's yet to see a compelling reason why Xugong should be privatised, warning: "The sale of Xugong is not an isolated problem, but one on which the future direction of China's enterprise reform is hinged."