By Eva Cheng
Early this year, Beijing's international investment arm — China International Trust and Investment Corporation (CITIC) — sold 15.5% of its Hong Kong-listed Citic Pacific to the latter's chairman, Larry Yung Chi-kin, and senior managers for HK$10.9 billion (US$1.4 billion). The sale was a 24% discount from the last market share price, giving Yung and friends a handout of HK$3.5 billion. CITIC was 42% owned by the State Council before the sale, so the deal amounts to the people of China being ripped off by more than HK$3 each to fatten the pocket of these "red" capitalists.
In November, the government of Shanghai tested the water for what could be more sales of its key assets, by issuing shares for its Hong Kong-listed Shanghai Industrial Holdings. Items sold included a toll road connecting Shanghai to the airport, two car-parts makers, a dairy and a shopping centre, for HK$3 billion.
In May, Beijing's municipal government raised HK$1.56 billion by selling shares of Beijing Enterprises Holdings, its Hong Kong-listed arm. As operator of the Chinese capital, it owns exclusive rights to sell tickets to the Great Wall and half of McDonald's lucrative franchise in Beijing, among other privileges.
The government of Guangdong province is a veteran at cashing out state assets through the Hong Kong stock market, through its Gitic Enterprises. So are top state enterprises, which hold exclusive rights to key areas of China's economy, such as China Resources (trade) and China Merchants (transport). More state entities and cities are contemplating this path.
It is far from clear how the proceeds will be used. But given the highly developed ways through which Communist Party officials and state enterprises have siphoned state assets into their own pockets, there is little guarantee that the funds raised — in Hong Kong, New York, London and other stock markets — will stay in China's public coffers or be put to productive use.
The sales amount to denationalising the Chinese economy in bits, often at bargain prices. Undervaluing assets is one of many ways to drain the public coffers for personal gain, because shares for public subscription can be restricted to only a fraction of the total, with the rest allocated to "special" accounts.
In fact, the expectation that more Chinese assets will be sold cheaply has led to a demand for Beijing Enterprises' shares 1276 times the amount available. Many "red chips" — stocks issued by China's state entities — were also heavily oversubscribed. The money deposited by would-be purchasers of the Beijing Enterprises subscription was three times Hong Kong's cash supply.
Activity in the stock market and stock prices are at best a pale reflection of the real economy. This rising dominance of red chips is only a belated and partial reflection of the fundamental trend: the Hong Kong economy has fundamentally transformed itself to take advantage of China's new economic course. On this path, which started in the late '70s, economic decisions are increasingly geared to meet private profits rather than social needs.
Beginning in the mid-'80s, for the first time since the 1949 revolution, foreign capital was allowed back into China; at the same time Beijing partially denationalised industry. (The dismantling of the nationalised system of agricultural production started earlier and was more pronounced.)
A mainland partner is required in many cases in China, but in other situations foreign capital can own the entire business. Cheap land, tax holidays, lax labour rules and other attractions are offered, primarily in four special economic zones in the south and 14 coastal cities.
Today, only about half of China's industrial firms or assets are state owned. But their actual economic strength is much weaker, because many do not produce goods in demand and/or are crippled by debt they owe each other and to state banks, which can be used as a way to milk state resources.
Hong Kong has been playing a key role in China's path back to capitalism. Smaller business concentrated in the south, shifting production lines there to exploit the abundant cheap labour, where profits are greatly enhanced by Dickensian labour rules.
Bigger business goes further: to Wuhan, for a major container terminal and rail overhaul of this central hub; to Shanghai, for half of the ownership of the port authority; to Beijing, to rebuild its busiest downtown shopping district. Power, road and hotel projects, which are foreign owned or funded, are scattered all over China.
Two-thirds of the foreign investment in China came from Hong Kong, which is employing an estimated 5 million workers in southern China. Forty per cent of China's exports pass through Hong Kong, relying on its ports, air links, communications and financial infrastructure, which are far more efficient than in any other Chinese city.
China also generates about 30% of its foreign exchange earnings from Hong Kong, its single biggest source. It has raised most of its loans there. Hong Kong has long been Beijing's window and conduit for contacts with the world capitalist system.
Meanwhile, Hong Kong was also fundamentally transformed. Its manufacturing employment was halved from 900,000 over the '80s (because such jobs shifted across the border), while the share of services in the economy rose to over 80%. About 24% of Hong Kong's exports in 1978 were re-exports; they are more than 80% today, mainly from China.
In serving the Chinese economy, tiny Hong Kong became the world's eighth largest trading territory in 1993 and, in the last few years, has operated the busiest port in the world.
Capital from Taiwan and south-east Asia, primarily from ethnic Chinese, also used Hong Kong as a base to trade with and invest in China. Some do so under the disguise of a Hong Kong company, partly to minimise retaliation from their home governments. Taiwanese capital's significant trade and investment with China relies on Hong Kong's mediation because of Taipei's ban on direct deals.
The main imperialist countries still find Hong Kong useful as a springboard to the China market, with the US and Japan accounting for about 30% each of Hong Kong's total foreign investments. China is a prime market for US capital goods.
July 1 brings the political unification of two economies already significantly integrated. A shadow cabinet has been in operation across the border since last year, and the core laws to bring Hong Kong into line with the repressive framework in China are ready to be rubber-stamped at a 2.45am meeting on July 1, in the same building where the midnight handover is to take place.