Eva Cheng
The consolidation of private capital in China at the expense of the state sector has taken another significant leap forward. "Mergers and acquisitions" (M&A) among Chinese companies and the gobbling up of Chinese entities by foreign capital reached a new high of US$41 billion during the six months to June. This represented a 71% jump from the same period in 2005.
The inflow of foreign capital accounted for $12.8 billion, or nearly a third, of the M&A activities during this period. M&A activities in China (including in Hong Kong and Macau and that of Chinese entities' overseas purchases) had already ballooned by 34% from $34.6 billion in 2004 to $46.4 billion in 2005.
"Since 2002, every year has been a record year [in M&A value and activity]", wrote Tyrrell Levine and Kim Woodard, investment consultants specialising in M&A, in the April edition of the Far East Economic Review.
These activities aren't moves to strengthen the state sector. They mainly serve Beijing's goal of further denationalising China's key industries. Levine and Woodard wrote: "one of the government's overarching policy goals is to shunt state-owned enterprises (SOEs) into the private sector, retaining only a tiny core that the state deems crucial for national defense, energy, etc. As a result, an estimated 4000 to 5000 SOEs are privatized each year out of a total remaining stock of roughly 135,000. The government sees M&A activity as a key driver of this restructuring and privatization process."
Quoting a National Bureau of Statistics survey, the official Xinhua News Agency reported on August 20 that only 220 of China's top 500 manufacturing enterprises are directly controlled by the Chinese state.
The Chinese working people, who bear the brunt of this privatisation process, have voiced their concerns — particularly via the internet — about the current wave of M&A deals. Of particular concern is that in one industry after another, foreign capital is seeking to gobble up the pace-setting top enterprises, or at least acquire a strategic stake in them.
Fifty per cent or more of shares are not required to control a company. Around 30% is adequate, as confirmed by the mandatory general offer rules in most stock exchanges around the world, including China's.
One of the earliest shocks was in 2003 when Eastman Kodak bought 20% of Lucky Film, China's biggest film company. The following year, Hong Kong and Shanghai Banking Corporation also succeeded in acquiring 20% of the Bank of Communications for $1.75 billion. Then in 2005, HSBC doubled to 20% its 2002-acquired 10% in Ping An Insurance, China's second-biggest life insurer. HSBC already owns 8% of the Bank of Shanghai.
Last year, among a range of moves by US and European capital to snap up significant shares of Chinese companies, US investment bank Goldman Sachs led a consortium in acquiring 8.45% of the Industrial and Commercial Bank of China, the largest of China's "Big Four" banks, for $3.8 billion.
Purchases by foreign capital in China during the first half of 2006 included: Swiss bank UBS, the Royal Bank of Scotland, the Asia Development Bank and Temasek (a Singapore state agency) jointly acquired nearly 22% of the Bank of China, the most prestigious of the Big Four, for $6.8 billion; and US electronic retailer Best Buy Inc bought 51% of Jiangsu Five Star Appliance, China's fourth-biggest appliance and electronic retailer, for $180 million.
Concern among China's population that more firms in the country's key industries will fall into foreign hands was increased in October 2005 when Carlyle struck a deal to take over 85% of the state-owned Xugong Construction Machinery company, China's biggest construction machinery maker.
Subsequent takeover proposals only magnified those concerns. The Germany-based Schaeffler, the world's second-biggest bearing firm, sought recently to buy entirely Luoyang Bearing, for $138 million. In the sector of railway bearing alone, where Schaeffler already has a 25% market share, a successful purchase of Luoyang Bearing will give Schaeffler more than 50% of market control. Luoyang Bearing supplies bearings to many of China's major infrastructural projects, including the Three Gorges Dam and various Chinese spaceships.
Caterpillar, the world's largest manufacturer of earthmoving and construction equipment, also proposed to buy 100% of Shandong Machinery Ltd.
In August, Glencore International AG, the world's biggest commodity trader, also proposed to take a significant stake in Qingtongxia Aluminium Industry Group, China's second-biggest aluminium maker by output.
Opposition to the recently proposed major deals has been particularly vocal. In June, the Bearing Industry Association of China sent a petition to the Machinery Industry Association of China, its senior counterpart in China's industrial order, voicing its grave concern over the Shaeffler-Luoyang Bearing deal. In early July, the Machinery Industry Association filed an urgent report on those concerns to the ministry of commerce, prompting the ministry to respond on July 12 with the promise of careful vetting of any applications.
The Carlyle-Xugong deal still hasn't been approved, nor have the Schaeffler-Luoyang Bearing and Caterpillar-Shandong Machinery proposals. Instead, reflecting growing public concern, according to Xinhua News Agency on August 22, a special document devoted to the controversy, entitled "Strategic Management Method to Enhance the Restructuring of the Machinery Industry", has been presented to the National Development and Reform Commission for consideration. The State Council, China's cabinet, is expected to have the final say on whether proposals from that document will be accepted.
In an apparent gesture to divert public concern, on August 10 Xinhua unveiled a new set of rules on M&A with the promise of a strong anti-monopoly focus. Set to take effect on September 8, the rules name factors such as the integrity of national economic security and the protection of important domestic brand names as sufficient grounds to invoke anti-monopoly probes in foreign capital's acquisition of major Chinese enterprises.
However, there is little evidence to suggest that these "anti-monopoly" proclamations will have much impact in reversing the escalating privatisation in China, which has strengthened the position of both foreign capital and Chinese private capital at the expense of China's working people.