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Cablegate: World Bank/Ifc On Resurgence of State-Owned Enterprises

VZCZCXRO3776
PP RUEHCN
DE RUEHCN #0281/01 3350920
ZNR UUUUU ZZH
P R 010920Z DEC 09
FM AMCONSUL CHENGDU
TO RUEHC/SECSTATE WASHDC PRIORITY 3585
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHCN/AMCONSUL CHENGDU 4296

UNCLAS SECTION 01 OF 02 CHENGDU 000281

SENSITIVE
SIPDIS

STATE FOR EAP/CM

E.O. 12958: N/A
TAGS: ECON EIND EFIN PGOV CH
SUBJECT: WORLD BANK/IFC ON RESURGENCE OF STATE-OWNED ENTERPRISES

REF: A) CHENGDU 271; B) CHENGDU 263

1. (U) This cable contains sensitive but unclassified
information - not for distribution on the Internet.

2. (SBU) SUMMARY: Chengdu IFC officials recently shared their
assessment that state-owned enterprises (SOEs) have been on the
resurgence since well before the financial crisis. They
particularly emphasized the proliferation of "chengtou gongsi"
or city investment corporations in Chengdu and Chongqing,
contrasting with the almost complete absence of local-government
SOEs in Sichuan as of the early 2000s. A range of factors have
driven this process, they noted, including: cash strapped
municipal governments seeking a platform to implement large
development projects; some officials retaining a philosophical
commitment to a state-supported conglomerate model for economic
development(a la South Korea); corruption and nepotism; and the
immaturity of the private sector. SOEs retain some notable
advantages over private-sector companies, able to quickly deploy
large resources without regard to commercial considerations, but
the overall trend is ultimately "not in the country's interest."
Their greatest concern is that SOE expansion constricts the
space for private-sector development. In their view, the
pendulum will swing back against the SOEs again, although this
could take several years. END SUMMARY.

3. (SBU) During a November meeting with Consul General (ref A),
the head of the Chengdu office of the World Bank's International
Finance Corporation (IFC), Lai Jinchang, and Charlie Cheng,
IFC's Program Manager for Corporate Advice-Sustainability,
discussed the resurgence of SOEs in recent years, both in
Southwest China and nationwide. The SOE comeback predates the
financial crisis and the stimulus package from which they have
further benefited, they observed. Citing the example of
Sichuan, they noted that more than a decade of privatization
trends had left the province with an extremely small SOE
presence by the early 2000s, comprising primarily a few
national-level "key" industries and a handful of provincial
SOEs. (Dongfeng Electric Corporation is an example of the
former; liquor producer Wuliangye and television manufacturer
Changhong (ref B) are examples of the latter.) However, the
last few years has seen this trend reversed, they said, with a
tendency toward the establishment of local (provincial and
municipal) SOEs in a variety of fields, such as energy and
infrastructure, and increasingly expansion into other sectors as
well.

"Chengtou Gongsi":
Platform for Development, or a Vehicle for Corruption?
--------------------------------------------- ---------

4. (SBU) The trend toward SOE resurgence has been particularly
marked at the municipal level, where they observe the increasing
dominance of the "chengtou gongsi" or city investment
corporations. Lai and Cheng cited a range of factors driving
the establishment of these local SOEs, including:

-- Cash strapped municipal governments, under pressure to
accelerate economic growth, have turned to local SOEs as a
platform to raise funds and implement major development
projects. The chengtou gongsi model has given local governments
"greater flexibility" to build infrastructure, and provide a
means for borrowing large sums from banks -- a "very risky
situation" about which the China Banking and Regulatory
Commission (CBRC) has warned.
-- Many officials still believe in a statist conglomerate
approach to economic development. While noting that less
idealistic motives are often at work, some view the promotion of
"national champions" as necessary to increase competitiveness,
with South Korea often held up as a successful model.
-- Various forms of corruption and nepotism remain central. As
a government official, if given the opportunity to set up a
company, and then place yourself in a high-status, high-pay
position within it, "why wouldn't you?" asked Lai.
-- The private sector remains immature. Governance and
sustainability structures within private companies remains
significantly underdeveloped, they noted, with most still
running as "one-man shops," even if they have all the right
structures on paper. They expressed optimism that this is
changing as an increasing number of private-sector managers gain
overseas experience and education. Nonetheless, they said,
there is still a long way to go before private companies will be
able to compete with SOEs on reputation, both for access to
finance, and as an attractive option for the most talented
employees.

"Probably Not a Good Trend": SOEs Encroach on Private Sector
Space
--------------------------------------------- --------------
-------

CHENGDU 00000281 002 OF 002

5. (SBU) SOEs retain some notable advantages over private sector
companies and will continue to have an important role in the
Chinese economy, they said. Citing the example of post-quake
reconstruction in Sichuan, they noted that SOEs were in a better
position to respond than private sector companies, given their
ability to deploy large resources quickly. Unlike private
companies, they noted, SOEs could launch projects with little
concern regarding the impact on their bottom lines. However,
they assessed the overall trend as "not in the country's
interest, but in the interest of many people."

6. (SBU) Of greatest concern to them is the extent to which SOE
expansion constricts the space for private-sector development.
If the new local SOEs "were just doing infrastructure, it might
be ok, but they have now gone way beyond that," said Lai. With
no obligation to return earnings to shareholders, SOEs are often
investing unproductively. He cited the example of a
newly-established insurance company being run by state- and
privately owned Sinopec that recently moved into office space
within the same Chengdu office building as the IFC. "This
should clearly be a (purely) private-sector investment, and it
is a completely non-core business for them, but they have the
political connections," said Lai.

An Anti-SOE Pendulum Swing on the Way?
-------------------------------------

7. (SBU) Given these criticisms, the IFC officials hope to see
the pro-SOE trend reversed. Certainly, their role should not
see further expansion, they said. The SOEs continued expansion
within the domestic sphere, often by leveraging political
connections, they fear, will only crowd out the private sector.
(However, they saw Chinese SOE expansion into overseas markets
as basically a positive long-term development for the national
economy.) Despite their concerns regarding the current
trajectory, the IFC officials nonetheless see the pro-SOE trends
as ultimately a temporary swing of the pendulum. They expect
that over the coming decade many will fail and the model will
face increasing political backlash.
BROWN

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