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

DE RUEHCN #0281/01 3350920
P R 010920Z DEC 09




E.O. 12958: N/A


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

"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

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

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.

© Scoop Media

World Headlines


UN: Bachelet Alarmed By Number Of Palestinian Children Killed In Latest Escalation

UN Human Rights Chief Michelle Bachelet today expressed alarm at the high number of Palestinians, including children, killed and injured in the occupied Palestinian territory this year, including in intense hostilities between Israel and Palestinian armed groups in Gaza last weekend... More>>

Save The Children: One Year Under Taliban Rule, Girls Are More Isolated, Hungry, Sad: New Report
One year since the Taliban took control of Afghanistan, an economic crisis, crippling drought and new restrictions have shattered girls’ lives, excluding them from society and leaving them hungry...

Palestinian Ministry of Health: Developments In The Health Situation During The Israeli Aggression On The Cities & Governorates Of The Gaza Strip
For the second day in a row, the Israeli aggression against the Gaza Strip continues by targeting overcrowded residential areas and neighborhoods, as the death toll rose to 13 citizens, including a 5-year-old girl and a 23-year-old woman... More>>

Somalia: ‘We Cannot Wait For Famine To Be Declared; We Must Act Now’
Rising acute food insecurity in Somalia has caused more than 900,000 people to flee their homes in search of humanitarian assistance since January last year, the Food and Agriculture Organization (FAO) has warned... More>>

UN: American West Faces Water And Power Shortages Due To Climate Crisis
Two of the largest reservoirs in the United States are at dangerously low levels due to the climate crisis and overconsumption of water, which could affect water and electricity supply for millions in six western states and Mexico, the UN Environment Programme (UNEP) warned on Tuesday... More>>

Singapore: UN Experts Call For Immediate Moratorium On Executions For Drug Offences

UN experts* today condemned the execution of Nazeri Bin Lajim, a 64-year-old Malay Singaporean national convicted of drug offenses and urged the Government of Singapore to halt plans to execute individuals on death row for drug related charges... More>>