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SOEs and state coexistence in China

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Core information:

– History (pre 2008)
– Recent information from the government (2007-2011)
– Current situation: mostly related to the China Mobile

Major update‘Princelings’ take up key posts in China’s telcos [Feb 24, 2012]

Sons of PM Wen and party propaganda chief promoted to senior positions

By FREDERICK YEUNG

(HONG KONG) China’s ‘princelings’, the offspring of top Communist Party leaders, are taking up important positions at the nation’s state-owned telecommunications firms, reflecting their growing political clout as the party prepares for key leadership changes later this year.

Li Huidi, the son of Li Changchun – who is the propaganda chief of the Communist Party and the fifth ranked member of the Politburo Standing Committee – and Winston Wen Yunsong, the son of Premier Wen Jiabao, are among those that have taken up senior positions in telecoms companies recently.

The State-owned Assets Supervision and Administration Commission, which oversees all state-owned enterprises, announced on Tuesday the appointment of Li Huidi as a deputy general manager of China Mobile Communications Corp. Prior to the latest appointment, Mr Li was serving as the company’s vice-president overseeing its TD-SCDMA business.

Mr Li, 44, joined China Mobile in July 2008 as general manager’s assistant to help the company develop the homegrown TD-SCDMA 3G network business, as well as handset sales.

Before joining China Mobile, Mr Li worked at Lenovo Group Ltd and UTStarcom Inc.

Mr Li’s promotion has been much faster compared to other senior officials at China Mobile, an industry veteran told EJ Insight on Wednesday.

He noted that normally a deputy general manager needs to have management experience at both the company’s headquarters and at its regional subsidiaries to secure a chance for promotion.

‘Li’s quick promotion for sure is due to the influence of his father,’ the source said. ‘He did not have any actual experience in telecom operators prior to joining China Mobile.’

Following Mr Li’s latest promotion, there is speculation that he could be a candidate to assume the chairmanship of the world’s largest mobile operator in about three years from now.

China Mobile’s current chairman Wang Jianzhou, 62, is expected to retire shortly due to his age.

Xi Gouhua, 59, currently the vice-chairman, is expected to take the chairman’s post for three years. When he retires, Mr Li could get the opportunity to run for the top post.

However, he would need to compete with other senior China Mobile managers, such as general manager Li Yue, who is 52.

Meanwhile, Premier Wen’s son Winston Wen has been appointed as the chairman of China Satellite Communications Corp on Feb 17. Mr Wen replaced Lei Fanpei, an aeronautical engineer, following a company board meeting.

China Satellite Communications Corp is one of the six state-owned telecommunications infrastructure operators in China, focusing on satellite communications and satellite manufacturing. China Satellite Communications is the parent of Hong Kong-listed APT Satellite Holdings Ltd.

Mr Wen is well known in the market as he was founder of Unihub Global Network, a systems-integration company that served large corporations in China before being merged with PCCW Ltd. He later became a partner at private equity firm New Horizon Capital\. \– EJ Insight

Update: Top China Technology Picks By The World’s Largest Fund Managers [Seeking Alpha, Jan 31, 2012]

Major update: China’s ‘black collar class’ unmasked: The ten most powerful business chiefs who are poised to take over the world [Daily Mail, Jan 29, 2012]

They’re known as the ‘black collar class’.

They dress in dark suits, drive black limousines and have rumoured links to ‘black societies’ from the underworld.

Until now these shadowy mandarins leading the charge of China’s thundering economy have remained hidden.

But after a groundbreaking report, the ten most powerful bosses behind China’s terrifying brand of state capitalism have been unmasked.

A Chinese soldier stands guard outside Tiananmen Gate in Beijing as the red flag flies
cars head into the heaving city that his led the transformation of the country's economy
 A country of two sides: A Chinese soldier stands guard outside Tiananmen Gate in Beijing as the red flag flies. Right, cars head into the heaving city that his led the transformation of the country’s economy

They include business dynasties that have ruled firms for decades, according to reports from the Brookings Institution, specialist Chinese publications and the Sunday Times.

These ‘red dragons’ are now set to become as powerful as the Chinese military, provincial leaders and government ministers.

Between them they control the majority of the Chinese economy, where corruption and vested interests are hidden behind a cloak of secrecy.

And with the rest of the world teetering on bankruptcy, these unstoppable bosses are poised to take take over a string of Western companies.

It’s a thundering assault on the rest of the world from a country that controls virtually every aspect of its citizens lives.

These are the ten most powerful members of the ‘black collar’ elite driving China’s alarming expansion.

Zhang Qingwei

Control of the skies: Zhang Qingwei Control of the skies: Zhang Qingwei

Qingwei was the former boss of the Commercial Aircraft Corporation of China (Comac).

Under his leadership the company has fought to wrestle back control of the Chinese skies from Boeing and Airbus.

The communist state has little time for dependance on foreign companies, and has battled to create a fleet of planes that will compete for passengers.

In a sign of his influence and power, Qingwei has been singled out as the state entrepreneur most likely to win political office. He has begun that march up the communist party, with an appointment as a provincial governor.

Wang Jianzhou

Phone boss: Wang Jianzhou Phone boss: Wang Jianzhou

Anybody who has used a mobile phone in China will have used Jianzhou’s company – China Mobile. The mobile phone network is the largest and most powerful in the world, with an estimated 650million subscribers.

In its aggressive spread across the globe, China mobile has even provided reception for one of the hardest places on earth to reach – Mount Everest. The firm has 230,000 employees and is listed on the New York Stock Exchange and Hong Kong Stock Exchange.

Despite the staggering wealth and power of China Mobile, it has received repeated criticism over its charges. Critics have claimed that half of its profits came from cynical fees for services that are free in many countries, where market competition and democratic government would have banned them.

Li Xiaolin

Electric lady: Li Xiaolin Electric lady: Li Xiaolin

With her delicate features, short hair and red lipstick, Li Xiaolin could be any other Chinese housewife.

But Xiaolin is in fact one of the most powerful women in China.

Xiaolin comes from the Li Family, a dynasty that ‘controls all electric power interests’, according to U.S. diplomatic cables.

Her hardline father Li Peng has stepped down as boss of China Power International Development, but the company is run by Xiaolin and her brother Xiaopeng, a vice governor of Shanxi province.

The pair ‘exercise tremendous power and influence in China’s electric power industry’. Both are tipper to rise prominently within the regime.

Zhou Yongkang

Security chief: Zhou Yongkang Security chief: Zhou Yongkang

As security minister for the Politburo, Yongkang is tasked with the protection of the state – a broad job that few westerners actually know what it involves.

Yongkang may be coming to the end of his term in office, but his power and influence still stretches far and wide.

Yongkang was boss of the China National Petroleum Corporation, and is understood to have made 14 visits to Sudan in trips that are likely to have been centred around oil production.

According to a diplomatic cable released by Wikileaks, ‘Yongkang and his associates controlled the oil interests’ of China.

The turbo-charged expansion of China’s economy has rested on a cheap supply of oil, and that’s largely down to Yongkan’s oil deals.

Su Shulin

Chemical: Su Shulin Chemical: Su Shulin

One of China’s youngest mandarins, Shulin began his rise to power as boss of Sinopec (China Petroleum & Chemical Corporation Limited ), the top-ranking company in the Fortune Global 500.

The chemicals firm is a subsidiary of the state-owned Sinopec Group.

Within China its path to power has been smoothed by the communist party.

But in the rest of the world Sinopec has been heavily criticised for an appalling record of environmental damage. Primatology professor Christophe Boesch criticised Sinopec’s use of dynamite in Gabon in 2004, noting that it might drive native Gorillas deeper into the jungle, where they would be outside legal restrictions on hunting.

Shulin has since left Sinopec and is regarded affectionately by state media.

He has recently been given a role as a provincial governor and is thought of as being among the ‘sixth generation’ of national leaders.

Chen Yuan

Son of suppression: Chen Yuan Son of suppression: Chen Yuan

A banker who is still regarded as a young newcomer, largely due to the powerful shadow cast by his father.

Yuan is the son of Chen Yuan, one of the powerful figures who urged the brutal suppression of protests in Tiananmen Square in 1989.

The treatment of students at the protests sparked a global outcry, as still leaves a stain a on China’s appalling human rights record.

Residents were protesting at economic reforms being implemented to transform China into a ‘socialist market economy’, the catalyst for the country’s rise to economic power.

In a sign of just how removed from Western values China is, Yuan Senior was lauded within the country for his role in the brutal treatment of citizens.

Worryingly, his son is set to regain influence when vice-president Xi Jinping succeeds Hu Jintao as the nation’s leader.

Xiao Gang

Banking boss: Xiao Gang Banking boss: Xiao Gang

Gang is one of the young generation of officials making their rise to power through China’s institutions.

He is currently chairman of the board of directors of Bank of China Limited and Bank of China (Hong Kong) Limited. Gang is even more powerful than the bank’s president – a sign of his ambition and power.

Gang also has control over a limited number of foreign investments in the bank. Coming from the People’s Bank of China, his business philosophy is centered on the strength of the state and he is unlikely to lead open the country up to foreign competition and scrutiny as some critics would like.

Gang’s rise to prominence at such a young age suggests that he is destined for one of the coveted positions within the system.

Guo Shuqing

Oxford educated: Guo Shuqing Oxford educated: Guo Shuqing

One of the few Chinese mandarins to have received an education in England.

Shuqing went from a hardline Marxism-Lenninism faculty to Oxford University.

Upon returning to China, he began his career at the central bank, became a governor of a province and was then given a prominent position at the State Administration of Foreign Exchange.

In a career that mirrors those of many other Chinese star mandarins, Shuqing was eventually given a position in a commercial lender, where he was sure to keep state influence over foreign investors.

Shuqing is currently China’s top security regulator, though few people outside of the small elite know what the intimidating role involves.

Zhu Yanfeng

Driving force: Zhu Yanfeng  Driving force: Zhu Yanfeng

Yanfeng ensured his popularity among ordinary Chinese people by saying that every family should own a car.

But that’s not a surprising statement to come from someone who led one of China’s older carmakers, First Automobile Works, as Yanfeng did.

The grandson of renowned meteorologist Chu Coching, Yanfeng began his career in engineering.

He is the current president of China FAW Group Corporation, and in a sign that he is being primed for a top job within the regime, has been made a provincial vice-governor.

The Chinese economic expansion has been fueled by better transport, and a large part of that is down to Yanfen’s drive for profits.

Zhang Guoqing

Arms trade: Zhang Guoqing Arms trade: Zhang Guoqing

Guoqing is one of China’s ‘masters of war’.

He has spent his career at the country’s largest arms maker, China North Industries Corporation (Norinco), and attended Harvard Business School.

He is now one of the most powerful figures within China’s military-industrial complex, supplying arms around the world.

Norinco has ran into controversy with the west. Its ammunition was blocked during the Clinton Administration in 1993 after concerns about their use by criminals in inner cities. Employees were put under investigation in 1994 by the CIA.

In August 2003, the Bush Administration imposed sanctions on Norinco for allegedly selling missile-related goods to Iran.

There have also been controversies around a transport system to Pakistan and links with arms sales to Colonel Gaddafi in Libya.

Major update: An Evening With the Chinese Intelligence Service [John Thomas, ‘The Mad Hedge Fund Trader’, Sept 28, 2010]

[“John Thomas, The Mad Hedge Fund Trader is one of today’s most successful Hedge Fund Managers and a 40 year veteran of the financial markets.”]

An Evening With the Chinese Intelligence Service. I normally avoid the diplomatic circuit, as the few non committal comments and soggy appetizers I get aren’t worth the investment of time. But I jumped at the chance to celebrate the 61st anniversary of the founding of the People’s Republic of China with San Francisco consul general Gao Zhansheng.

Happy Birthday China!

When I casually mention that I survived the Cultural Revolution and interviewed major political figures like premier Deng Xiaoping, who launched the Middle Kingdom into the modern era, and his predecessor, Zhou Enlai, modern day Chinese are enthralled. It’s like going to a Fourth of July party and letting drop that I palled around with Thomas Jefferson and Benjamin Franklin.

Five minutes into the great hall, and I ran into my old friend Wen, who started out her career with the Chinese Intelligence Service, and had made the jump to the Foreign Ministry, as all their best people did. She was passing through town with a visiting trade mission.

When I was touring China in the seventies as the guest of the Bank of China, Wen was assigned as my guide and translator, and we kept in touch over the years. I was assigned a bodyguard who doubled as the driver of a tank like Russian sedan. The Cultural Revolution was on, and while the major cities were safe, we ran the risk of running into a renegade band of xenophobic Red Guards, with potentially fatal consequences.

I asked Wen when China was going to float the Yuan? She explained that this is something China knew it had to do, but it wasn’t going to be rushed into by some opportunistic foreign politicians. If it moves too soon, millions will lose jobs, creating political instability, something the central government wants to avoid at all costs. Many of the largest scale employers were only marginally profitable, and a hike in the renminbi of only a few percent would force them out of business. I pointed out that that was exactly what was happening in the US.

Worth More Than Meets the Eye

I warned that if the Middle Kingdom waited too long, Washington would force them into an appreciation through punitive import duties and anti dumping actions, as we did with Japan 40 years ago. It was Nixon’s surprise ban on textile imports in 1971 that finally persuaded Japan to float the yen, then at ¥360. If that didn’t convince the Chinese, then imported inflation would. The longer China delays, the bigger the pop when their currency is finally set free.

Wen then went on the offensive, claiming that Chinese workers were being exploited by American companies keeping wages low. The product that China made for $1, and sold for $2, was then sold by Wal-Mart (WMT) for $20, which kept all the profits. She pointed out that the Walton family had a combined net worth of $100 billion, more than the total worth of the lower 40% of the US population. This could never happen in China. I told her that by selling the product at $20, Wal-Mart wiped out another US company that used to make that product domestically and sold it for $40, throwing those people out of work.

Modern Times in China

I then asked Wen what were her country’s plans for its massive foreign exchange reserves, now at $2.5 trillion? She agreed that this was a problem because the reserves were pouring in so fast, at an embarrassingly high rate of $10 billion a month, and that it was the most rapid accumulation of wealth in history (click here for the data). While it had more than enough Treasury bonds, any attempt to sell might cause their value to collapse and freeze relations with the US. I suggested China should start hedging its gigantic holdings without selling them, or some managers would be facing a firing squad in the future.

China has therefore begun directing new reserve inflows into other instruments, like gold, Japanese government bonds, and PIIGS bonds in Europe. While the Europeans were more than happy to take the money, the Japanese were complaining that China’s modest purchases were driving up the yen, further depressing their own economy. We all know what has happened to gold.

China tried to recycle its surpluses by buying foreign companies that produce the natural resources it desperately needs. But takeover attempts were fought tooth and nail as a foreign invasion, or on national security grounds, such as the attempt to buy California’s Unocal in 2005 and Australia’s Oz Minerals last year. It was now using a strategy of buying low profile minority stakes in foreign resource companies. China took a big stake in the recent Petrobras (PBR) secondary equity offering, and Wen would not be surprised if they took a run at Potash (POT), now that it is on the table”.

Check Out This tasty Little Morsel

I asked her about the real estate bubble in China that was causing so many foreign investors to lose sleep. She said it was true that sales were slow at some luxury buildings in Beijing and Shanghai, but the great majority of developments were aimed at working people, and were filling up as soon as they came on the market. The 40% down payment demanded by the People’s Bank of China headed off the rampant speculation that brought the American financial system down.

Rooms With Views

Wen then complained about the aggressive military stance the US was taking towards China, ringing it in with the Seventh Fleet. Holding a knife so close to the country’s foreign supply line jugular vein made them nervous. China was basically indefensible. All it would take was the sinking of a few grain ships, and 100 million would starve within a year. President Bush was rattling his saber as soon as he moved into office, until 9/11 diverted his attention to Afghanistan and Iraq.

Wen told me there is a school of thought in Beijing that as the country’s economic power grows- it is passing Japan to become second in GDP this year– that the US will increasingly perceive it as a military threat. That would lead America to mete out the same hostile treatment to China as it did Russia during the cold war.

Walking Softly, But Carrying a Big Stick

I assured her that the Seventh Fleet was there to watch and listen, but to do nothing. It was really in position to provide a security blanket for allies, like Japan and South Korea, but nothing more. China wasn’t engaging in the belligerent behavior that Russia was at the height of the cold war, like blockading Berlin, basing missiles in Cuba, stationing fast attack nuclear submarines off our coasts, and invading Afghanistan.

I argued that if China truly has no expansionary intentions, the more we know about you, the better. It is always prudent for a potential adversary to conclude you are not a threat, and that no action is needed. The more you help the US do that, the better. China is decades behind the US in military technology, and you really have nothing we want. Little more than 200 nuclear weapons without an ICMB or submarine delivery systems were hardly viewed as a major threat.

Wen seemed perturbed that I was aware of her country’s nuclear stockpiles, and asked how I knew this. I said CIA director Leon Panetta told me She said “Oh.” I asked what was that test downing of a satellite in space about, anyway? She didn’t answer.

In any case, with our military fully committed fighting two wars in the Middle East, we lacked the resources for an Asian offensive if we were so inclined, even against a piddling, mismanaged, rogue state like North Korea. But looking at the world for the next 30 years, who is the Pentagon going to model and war game against, but China, with its 2.5 million man army?

Wen countered that the People’s Liberation Army was purely a defensive force. With a 12,000 mile land border, an 11,000 mile coastline, and dubious neighbors like Russia, Iran, and India, they have no other choice. Its ability to project force over great distances, as the US can, is virtually nonexistent. Its 1979 invasion of Vietnam was about reclaiming ten miles of lost territory. China got involved in Korea only after general Douglas MacArthur threatened to rain atomic bombs on the mainland, losing 2 million men, including Chairman Mao’s son. China could have done a lot more in the Vietnam War, but didn’t, limiting its participation to a supply, logistical, and advisory role.

That’s a Lot of Border to Defend

I then warned that if you really are worried about the Pentagon, you should stop hacking into our computers. She replied that the US started this by emptying out Chinese mainframes many times, and they were only responding in kind. I said yes, but that China was targeting private companies, like Google (GOOG), Hewlett Packard (HPQ), and Oracle (ORCL), that without military grade software, were unable to defend themselves. The Chinese agencies involved then used the data to their own commercial advantage.

What Did You Say the Password Was Again?

By the time Wen married, China had already adopted its one child policy. As much as she wanted more children, she understood the government’s need to adopt such a drastic policy. Without it, the population today would be 1.6 billion, not 1.2 billion, and all of the money that went into buying capital goods would have been spent on food imports instead. The country would have stagnated at its 1980 per capita income of $100/year. There would have been no Chinese economic miracle. She was very proud of her one son, who was a software engineer at Microsoft (MSFT) in Beijing.

Her husband, a mid level official at the Ministry of Commerce, fared less well, dying of lung cancer at a relatively early age. The US and Europe had exported their worst polluting industries to China to take advantage of lax environmental controls, turning the air in Beijing into a choking haze. Sometimes her son would come home from school coughing and wheezing so badly that he couldn’t play outside. The two packs of cigarettes a day her husband smoked didn’t help either.

Imported From the USA

I asked if she recalled our first trip together and a dark cloud came over her face. We were touring a section of Fuzhou when three policemen marched up. They started shouting at Wen that we were in a restricted section of the city where foreigners were not allowed. They started mercilessly beating her with clubs.

I was about to intercede when my wife, Kyoko, let go with a blood curdling tirade in Japanese that froze them in their tracks. I saw from the fear in their faces that she had ignited their wartime fear of Japanese authority, and they beat a hasty retreat. To this day, I’m not exactly sure what Kyoko said. We took Wen back to our hotel room and bandaged her up, putting ice on the giant goose egg on her head. When I left, I gave her my copy of HG Well’s A Short History of the World, which she treasured, as the book was then banned in China.

Wen mentioned that she was approaching the mandatory retirement age of 60, and soon would be leaving the Foreign Service. I suggested she move to San Francisco, which offered a thriving Chinese community and home prices that had recently dropped by half. She laughed. No matter how much prices had fallen, she could never afford anything here on a Chinese civil servant’s salary.

Wen told me that China was grateful for the billions of dollars that foreigners had poured into her country as a result of my writings. I replied that I was simply trying to show my readers where to make some money, nothing more. One of my recommendations, for Chinese search engine Baidu (BIDU), was up nearly tenfold in less than two years. Did she happen to know about any more future Baidu’s? Wen said that she wasn’t that close to the stock market, but that she would get back to me.

I asked Wen if she still had the book I gave her nearly four decades ago. She said it had become a family heirloom, and was being passed down through the generations. As she smiled, I notice the faint scar on her eyebrow from that unpleasantness so long ago.

In view of Wen’s comments, I think you have got to buy the Chinese ETF here (FXI), which is the principle lagging emerging stock market this year. You also better revisit my stock picks in the area, including Baidu, China Mobile (CHL), Build Your Dreams (BYDDF), and China Telecom (CHA).

By. Mad Hedge Fund Trader

Update: Ex-China Mobile official gets suspended death sentence [July 23, 2011]

A court in North China’s Hebei province on Friday sentenced Zhang Chunjiang, former deputy general manager of China Mobile, to death with a two-year reprieve, after he was found of taking bribes.

The Intermediate People’s Court of Cangzhou also ordered the confiscation of Zhang’s personal assets and stripped him of his political rights.

The court found that Zhang, 53, took 7.46 million yuan ($1.15 million) in bribes between 1994 and 2009 when he was deputy director of the Liaoning provincial postal administration, general manager of China Netcom Group Corporation Ltd, and Party chief as well as deputy general manager of China Mobile.

Zhang, a native of East China’s Shandong province, was given a suspended death sentence, meaning the sentence could be commuted to life imprisonment after two years of good behavior, because he confessed his crimes and all the bribe money had been recovered, according to the court.

He had previously been removed from his post and expelled from the Communist Party of China (CPC) for “severe violations of the discipline and the law.”

Zhang was confirmed to be under investigation for a “serious breach of discipline” on Dec 26, 2009, by the CPC Central Commission for Discipline Inspection, the Party’s internal anti-graft body.

He became secretary of the Party committee and deputy head of China Mobile in May 2008.

China Mobile is the country’s biggest wireless service provider and the world’s largest mobile carrier by number of subscribers.

Zhang was among a dozen ministerial-level officials, including former Shenzhen mayor Xu Zongheng, punished as China intensified its fight against corruption.

The Supreme People’s Court has vowed to continue to battle corruption by meting out harsh punishments to those who are convicted.

Sun Jungong, spokesman of the Supreme People’s Court, warned on Tuesday that for crimes involving an abuse of public office – especially cases of corruption and bribery – that are severe enough to merit the death penalty, the court will not go lightly but will instead approve executions.

Xu Maiyong, former vice-mayor of Hangzhou, and Jiang Renjie, former vice-mayor of Suzhou, were executed on Tuesday for taking large amounts in bribes and abusing their power.

Statistics compiled by the Supreme People’s Court show that 28,708 officials were convicted of abuse of power in 2010. Of them, 5,906 were sentenced to more than 5 years in jail.

I. History (pre 2008)

China’s state-owned enterprise reforms: an industrial and CEO approach (2007, By Juan Antonio Fernández, Leila Fernández-Stembridge)
Introduction (emphasis is mine)


As known by all, China is a vastly populated country that is currently undergoing one of the most particular and crucial transformations in the world’s economic history of these last 25 years. On a general level, China has been transforming itself from a command to a (bound-to-be) market economy, from an economy based on agriculture to one based on manufacturing and services, from one with high fertility and low longevity to one with low fertility and high longevity, and from a closed economy to a fairly open economy, ever more since World Trade Organization (WTO) accession in December 2001.

The literature on the significance and meaning of China’s economic reforms is quite abundant, for which we will not repeat what has been already been extensively explained. We prefer rather to focus on the SOEs reforms. It is important to stress within this context, however, a glimpse of the burden of the scale China implies. Here are just a few of the most important indicators:

  1. By the late 1990s, among China’s SOEs, there were 500 that employed more than 100,000 people – forty times the number of companies of similar size in the United States;
  2. Every year, China’s economy must create 10 million to 15 million new jobs so as to avoid an excessive unemployment rate;
  3. China has more cities of 1 million-plus population than the rest of the world combined;
  4. The floating population of peasants moving to the cities to find a job oscillates at approximately 100 million, which is 10 million short of Russia’s entire population;
  5. There is an emerging urban middle-class in China that accounts for an annual growth of more than 8% and represents a source of rampant consumption;
  6. The urban population will reach about 50% of total population by 2020, while in 2000 it was little less than 40%;
  7. China has more than 40 million retirees: by 2025 there will be as many people aged 60 or more than the rest of the world combined; etc.

The reforms launched in the late 1970s combined a general economic transformation between finance, taxation, pricing, foreign trade, foreign direct investment and, of course, SOEs reforms. After all, as an intrinsic part of the gradual draining of the economy, China’s SOEs have undergone crucial restructuring, particularly since 1993 in Shanghai and since 1997 at the national level, with a crucial turning point since the creation in March 2003 of the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council.

Indeed, after the Party’s 15th Congress in September 1997, a modern enterprise system broadened and accelerated – endorsed already during the 8th National People’s Congress in March 1993 – and pushed further for the incremental and experimental process of SOEs reforms through a new corporate governance system functioning through the motto of “grasping the big (SOEs), letting go the small (SOEs)” (zhuada, fangxiao), whereby over 10,000 large and medium SOEs would be kept under the Central Governments’s control while converted into shareholding companies; and more than 100,000 small SOEs would be privatized or merged with non-state enterprises, forming joint ventures with foreign firms, or otherwise leasing assets to their workers.

Despite the progress made at the administrative level (e.g. increasing managerial autonomy), the separation between government and enterprise remained incomplete: SOEs continued to be under the pressure of guaranteeing social services (housing, education, medical coverage) to some of their workers – including laid-off workers (xiagang zhigong) and redundant workers (fuyu renyuan) – and their productive functions were persistently weakened in detriment of higher output and productivity levels. Meanwhile, unemployment rates were threatening to increase beyond expectations – although always below 5%, according to official statistics but at approximately 15%, according to independent statistics. Then, SASAC got on stage in March 2003 after the First Session of the 10th National People’s Congress. SASAC can be briefly defined as a shareholder on behalf of the State made responsible for the supervision and management of state-owned assets, the appointment and removal of top CEOs in SOEs, with assets worth 6.9 trillion RMB (US$834 billion). [February, 2011: 121 centrally administered state-owned enterprises with their total assets worth nearly 24 trillion yuan (3.65 trillion U.S. dollars)] In theory, SASAC’s aim is to separate government administration and ownership from day-to-day enterprise management, while the guiding principle is that the state sector should withdraw from all competitive economic sectors and leave room for the development of the private sector.

During the initial stage of SOEs reforms (1978-1983), SOEs managers were given more autonomy and were allowed for the first time to retain a share of their profits. In addition, the baby-boom children of the 1950s and 1960s were entering the labor market and urban dwellers that had been sent to the countryside were returning from there, which altogether increased the pressures on job creation. In order to avoid higher levels of unemployment, or further overstaffing, local governments promoted employment out of the state-owned sector, encouraging the development of small businesses (getihu). Unfortunately, price distrotions persisted, for which levels of efficiency and resource allocation remained insufficient.

While the economy was being pushed to further marketization, a second wave of SOEs reforms was launched between 1984 and 1988, allowing SOEs to respond to market forces with an increasing autonomy in establishing wages according to their levels of productivity. In addition, SOEs were were given more freedom to hire and fire workers, following their production needs. The so-called contract responsibility system (CRS), which had emerged bí 1983 appeared as an incentive for enterprises to maximize their financial surplus, was replaced … by the tax-for-profit system (li gai shui reform) until 1986, where profits were reclassified as taxes, and enterprises emerged as residual claimants on after-tax profits. As this system proved to be inefficient, a more developed CRS re-emerged, lasting only until January 1994, when fiscal reforms took place (enterprise tax payments were re-centralized), and the CRS was replaced by an income tax.

With the dramatic surge of Township and Village Enterprises (TVEs), inter-enterprise competition emerged. Between 1984 and 1988, the number of TVEs increased from almost 6.1 million to almost 18.9 million, and the number of employees rapidly rose from almost 52.1 million to 95.5 million, whereas during the same period SOEs slowly employed from 86.4 million to 99.9 million. Although job creation does not represent a direct measurement of outtput value (after all, gross output value of industry of SOEs was almost three times higher than  the TVEs gross output value within that same period), labor costs were lower in TVEs than in SOEs, as TVEs only performed productive functions, whereas SOEs were in addition burdened with providing social services (fuli) to their workers. The competition caused by the growth of TVEs progressively changed the conditions of the SOEs reforms, narrowing the monopoly profits of SOEs.

By 1989, SOEs had progressively lost their leading position in the national economy: in the late 1970s, they contributed nearly 80 per cent to industrial production, whereas, by the end of the 1980s, their contribution had declined to little more than 55 per cent. In addition, the dual-track price system created a misleading trend of market-determined prices and incentives for corruption. The launching of an austerity program after the 1988 high inflation rate, as measured by the consumer price index (18.8 per cent), provoked a systematic risk of social unrest, for which SOEs were pressured by the Chinese government to increase their labor demand during this third wave of reforms (1989-1992) – despite their lower capacity of production – and to continue to provide, as in the past, an “iron rice bowl” to their employees. As a result, underemployement re-emrged, profits dcreased, and the demand for loans and credits increased. SOEs were again unprofitable.

By mid-1993, the situation changed, and a fourth wave of reforms was launched: job reallocation of laid-off workers had to be done through the so-called Re-Employement Project (zaijiuye gongcheng, REP), where the government not only ordered all enterprises to use the same accounting system, but in opposition to the past, it imposed a relatively hard budget constraint aimed to stop the SOEs’ indiscriminate access to bank loans, and therefore avoid the collapse of the banking system. The breakdown of the “iron ricfe bowl” system was equally suggested: as an increase of unemployment was foreseen, an institutional watchdog had to be prepared. That is why the Ministry of Labor launched the REP, instigating local governments to promote the development of training programs through the creation of re-employment service centers (zaijiuwe fuwu zhongxin) through which unemployed redundant workers could be matched with other enterprises, or otherwise encouraging them to be self-employed. By 1996 the REP proved to be effective and operational in 200 cities. As a result, the Ministry decided to re-launch new re-employment training programs for at least 4 million laid-off workers and 6 million unemployed from 2001 to 2003, as part of the Tenth Five-Year Plan.

The current wave of SOEs reforms (since 2003) is much determined by SASAC’s role in centralizing state-owned assets and pushing at least in theory for a more effective capital management system. While the private sector is rapidly growing, the remaining strong SOEs (mostly large ones, withinn an approximate total of 200) have to further transform their corporate governance system, their productivity levels and eventually their over-dependence on the banks’ generous non-performing loans.

II. Recent information from the government (2007-2011)

Central SOEs net profits up 14.2% for first five months [June 7, 2011] (emphasis is mine)

China’s state-owned enterprises (SOEs) that are administered by the central government, or central SOEs, collectively posted a net profit increase of 14.2 percent year-on-year in the first five months of 2011.

This increase was 4 percentage points lower than that of the first four months.

The combined net profits of the government’s 121 central SOEstotaled 369.51 billion yuan (56.8 billion U.S. dollars) during the period, the State-owned Assets Supervision and Administration Commission (SASAC) said in a statement on its website Friday.

The administration did not give any explanation for the profit increase or the lower growth rate.

The SASAC said revenues for central SOEs rose 24.7 percent year-on-year to hit 7.82 trillion yuan from January to May.

The SOEs had 696.7 billion yuan payable in taxes and fees for the first five months, up 27.5 percent from the same period last year, according to the statement.

Chinese SOEs ordered to hand over more profits next year [Dec 30, 2010] (emphasis is mine)

The centrally-administeredstate-owned enterprises (SOEs) were ordered to hand over 5 percent more of their after-tax profits to the central government beginning 2011, according to a statement by the Ministry of Finance (MOF) on Thursday.

According to the MOF statement on its website, 15 centrally-administered SOE giants in the resources and telecommunication sectors, including CNPC, Sinopec, CNOOC, State Grid Corporation, China Tobacco, Shenhua Group Co., Ltd. and China Mobile, should turn in to the MOF 15 percent of their after-tax profits next year, up from their current 10 percent requirement.

Also, beginning next year, 88 centrally-administered SOEs, including CHALCO, CNMC, COSCO, Air China, China Southern Airlines and China Merchants Group, will have to transfer 10 percent of their after-tax profits to the MOF, up from 5 percent this year.

Meanwhile, 33 other SOEs, including China National Nuclear Corp., China South Industries Group and China Film, will begin delivering 5 percent of their after-tax profits to the MOF in 2011. Currently, they don’t have to turn in any of their profits.

Two other SOEs — China Grain Reserve Corp. and China National Cotton Reserve Corp.– can still keep their profits for their own development next year, according to the MOF. The MOF administers China’s macroeconomic policies and the national annual budget, handles fiscal policy, economic regulations and government expenditure for local governments.

Chinese centrally-administered SOEs’ profits are expected to hit 1 trillion yuan (about 151 billion U.S. dollars) in 2010, according to the State-owned Assets Supervision and Administration Commission (SASAC).

Another 652 SOEs, mainly affiliated with the Ministry of Education, will be included in the budget system of managing state capital, which requires their expenditure be examined by national and local legislatures.

China’s central SOEs set to get smaller in size, stronger in competence
MONOPOLY OR NOT [Dec 21, 2007] (emphasis is mine)

Contributions from such central SOEs now accounted for 20 to 25 percent of China’s national fiscal revenue.

Along with jumbo revenue, which should have benefited common people, many constantly complained some SOEs were in such a monopoly position that they ate into consumer benefits.

For instance, expensive fees for making phone calls were brought up at meetings for the national congress every year. “Why should Chinese citizens be charged higher fees for making phones calls than in developed countries?” many queried.

The SASAC asked 116 pilot SOEs to turn in part of their revenue in 2006 to the government, a figure which was expected to hit 14 billion yuan. All central SOEs would hand in part of their revenue starting in 2007.

Eighteen enterprises that relied heavily on resources were required to hand in 10 percent of their revenue. Ninety nine others with a five-percent quota and two enterprises responsible for cotton and crop reserve were exempted from such obligations.

SASAC’s Li Rongrong said the revenue would be used to finance reforms of SOEs, especially to support the arrangement of laid-off workers. It could be injected into the social security fund, if possible.

The news also prompted the Chinese public to anticipate that the revenue could be included into the public budget to give more support to needy sectors such as education and medical care.

Li also said the top annual salary for managerial staff of central SOEs was 1.18 million yuan. In addition, the SASAC would publish salaries of senior SOE staff in future to introduce more transparency amid mounting speculation due to secrecy of such wages.

Central SOEs to return part of profits to exchequer next year [Sept 17, 2007] (emphasis is mine)

Central state-owned enterprises (SOEs) will begin to return some of their annual profits to the Ministry of Finance next year, according to a document released by the State Council, China’s cabinet, on Thursday.

The process will begin on a trial basis for some SOEs this year.

Since 1994, central SOEs have retained all their profits in their own coffers.

The document on State Council’s proposals on budgeting of state assets operation on a trial basis said finance authorities at all levels were responsible for budgeting. Part of the budgeted expenditure from state assets would be used for social security purposes.

It says returns on state capital include profits to be returned to the state by wholly-state-owned enterprises, dividends of enterprises with state holdings and proceeds from transfers of state-owned property rights and of state equities.

Budgeted expenditure from state assets would be mainly used for central SOE operation, development and restructuring, and be used to pay for cost of state-owned enterprises reform.

According to the National Bureau of Statistics, from 2003 to 2006, central SOEs saw their profits increase by 151.1 percent from 300.6 billion yuan (40 billion U.S. dollars) to 754.7 billion yuan.

There are 168 central enterprises under the supervision of the State-owned Assets Supervision and Administration Commission.

China orders major state-owned firms to report large investments [Aug 2, 2007] (emphasis is mine)

China’s state assets watchdog on Wednesday ordered all central state-owned enterprises (SOEs) to report their major investment activitiesin a bid to shun investment risks.

Some SOEs continue to increase their investment despite their high asset liability ratio and some even embezzle bank loans to invest in stocks and real estate, the State-owned Assets Supervision and Administration Commission(SASAC) said.

The China Banking Regulatory Commission announced on June 18 that two SOEs, the China Nuclear Engineering and Construction (Group) Corporation and the China Shipping (Group) Company, have misappropriated 4.46 billion yuan in bank loans to invest in the equity market and real estate projects.

The SASAC stated that the 155 central SOEs under its supervision should timely report their major overseas investment and investments in real estate, stocks, and insurance.

Senior officials of the major SOEs will be punished or even face criminal charges if they fail to report their major investments or cause heavy losses, the watchdog said, urging the firms to enhance their investment risk management and control.

China solves 76 commercial bribery cases in SOEs [July 12, 2007] (emphasis is mine)

China has solved 76 commercial bribery cases related to large state-owned enterprises (SOEs) in an intensive inspection campaign, with about 18 million yuan (2.4 million U.S. dollars) involved, according to the country’s state-owned assets watchdog.

Sixty-six people have been given criminal punishments and 28 administrative penalties, said the State-owned Assets Supervision and Administration Commission of the State Council.

The cases came to light after the commission ordered large state-owned enterprises to carry out self-inspection of commercial bribery between April and December last year.

Commercial bribery usually refers to bribes offered by companies to government officials or state-owned enterprises in exchange for special favors.

The campaign mainly targeted property right transfer, construction projects and material and equipment procurement, the commission said.

Property right transfer has been a major target in the fight against commercial bribery among state-owned enterprises in China.

“The self-inspection campaign reviewed all the 1,198 property transfers from the beginning of 2005 till the end of last year,” said an official with the commission.

Last year, the commission and the Ministry of Financejointly issued a notice to further regulate the approval of state-owned property right transfer and bottom prices.

In addition, regional state-owned assets watchdogs have sanctioned 65 property right trading centers in a bid to regulate property right transactions.

A monitoring system linking these trading centers with state-owned assets watchdogs in Beijing, Shanghai and Tianjin has been established to enable the watchdogs monitor all the transactions and unified release of property right transfer information in the future.

China’s SOE supervisor vows to boost transparency after violations aired in audit [May 22, 2011] (emphasis is mine)

China’s state-owned enterprises (SOEs) supervisor on Saturday said it would work to make the SOEs management more transparent after China’s top auditor publicized irregularities among a number of famed SOEs.

The release of the audit results will help the public to monitor the SOEs and help the SOEs to redress loopholes, said the State-owned Assets Supervision and Administration Commission of the State Council in a statement on its website.

The supervisor said the SOEs have made progresses in management, risk controls and social responsibilities in the past years, but they still lag far behind top-level international enterprises and should take advantage of the disclosures to enact further changes, the statement said.

Heads of the enterprises will be asked to take the lead in saving, fighting against squandering, controlling “irrational spending” and reducing management costs so that limited funds and resources can be invested in enterprise development, the statement said.

The National Audit Office (NAO) on Friday publicized some irregularities and disciplinary violations in the financial statements of 17 SOEs for the 2009 fiscal year.

By March this year, 735 cases of irregularities have been corrected and 65 people responsible for the irregularities or violations have been punished, according to the office.

Last year, the NAO audited the financial statements of 17 centrally-administered SOEs, including CNOOC, CHALCO, COSCO and China Unicom, primarily for the 2009 fiscal year.

China introduces collective decision-making for state companies to curb corruption [July 15, 2010] (emphasis is mine)

China announced Thursday it would introduce a new collective decision-making procedure into its powerful and profitable state-owned enterprises (SOEs) in a bid to strengthen anti-corruption efforts and guard against financial risks to those companies.

All important decisions, appointments of key officials or executives, arrangements of major projects, and the use of large quantities of capital inside the SOEs must now be jointly decided by their collective leadership, said a statement released by the General Office of the Central Committee of the Communist Party of China (CPC) and the General Office of the State Council, or China’s Cabinet.

The statement highlighted China’s increasing pressure to keep executives of its profitable SOEs under the public’s direct supervision.

Thirty-five senior executives of China’s large SOEs, such as former Sinopec chairman Chen Tonghai, faced corruption charges last year and 31 of them were found to be connected to cases involving an average of 110 million yuan (16.2 million U.S. dollars).

With the new procedures, SOEs are expected to improve their decision-making mechanism by modifying the rules of procedures that include public participation, expert consultations and collective decisions concerning major issues, according to the statement.

Development strategies, filing for bankruptcy, restructuring, mergers and acquisitions, transfers of ownership and overseas investment plans by SOEs are all to become subject to such collective decision making practices, said the statement.

The SOEs’ annual investment plans, financing, financial derivatives such as options and futures, imports of key equipment and technologies, bulk purchases and construction of major projects also would now need approval from their collective leadership, according to the new procedures.

Corruption watchdog promises closer supervision of China’s SOEs [Jan 7, 2011] (emphasis is mine)

China’s discipline and government watchdog Thursday pledged to tighten supervision on state-owned enterprises and fight corruption among their executives.

“We will push hard investigations into and punishment of corruption in the restructuring, merger, property transactions, capital operations and construction projects of state-owned enterprises,” said Vice Minister of Supervision Qu Wanxiang at a meeting in Beijing.

The watchdog would focus on cases involving executives and employees in senior positions, said Qu, also a member of the Standing Committee of the Communist Party of China (CPC) Central Commission for Discipline Inspection (CCDI).

Severe measures would be taken to curb commercial bribery and the illegal practice of setting up “small coffers,” referring to funds, securities and assets that should, but frequently are not, listed in account books in a bid to escape supervision.

The inspectors would also target malpractice that harmed common employees’ legal rights and interests in the restructuring of state-owned enterprises, Qu said.

Last year, China saw a string of serious corruption cases in state-owned enterprises.

According to a report Tuesday by Faren Magazine, affiliated to the Legal Daily and overseen by the Ministry of Justice, 35 senior executives of China’s large state-owned enterprises (SOE) faced corruption charges last year.

Among them was Kang Rixin, general manager of the China National Nuclear Corporation(CNNC), who has been under investigation for alleged grave violations of discipline since August.

Another prominent case involved Chen Tonghai, former general manager of China Petrochemical Corporation, who was found to have taken almost 200 million yuan in bribes and given a death sentence with a two-year reprieve in July.

“Efforts should be made to incorporate corruption prevention in enterprise governance and risk control systems,” Qu said.

The government should further reform SOEs to help build sound corporate governance with proper decision-making, operations and supervision, he said.

Over the past three decades, China has been trying to introduce a modern corporate management in its state-owned enterprises, but faced problems with a lack of supervision and restricting the authority of managers.

China to watch out for corruption in SOE stimulus projects [Feb 8, 2009] (emphasis is mine)

China’s state assets watchdog will closely watch over projects implemented by state-owned enterprises(SOEs) in the country’s massive stimulus package to prevent corruption, an official said in BeijingSunday.

The State-owned Assets Supervision and Management Commission (SASAC) will strictly look into the progress and fund use of projects by SOEs directly under the central government, said the SASAC director Li Rongrong.

Many projects are estimated to see over tens of millions of yuan put in, making it a more important task to fend off corruption, he said at an SOE meeting on disciplinary inspection work.

China unveiled a stimulus package with a total investment of 4 trillion yuan (586 billion U.S. dollars) in November to boost domestic demand and offset the world economic slowdown.

Of the total, 100 billion yuan had been allocated by the central government by the end of last year.

Li said inspectors will particularly focus on projects in such sectors as power grids, telecommunications, transportation, equipment, construction and metallurgy.

The SASAC will also check whether the projects cause environmental hazards, consume too much energy and resources or result in excessive capacity, said Li.

A total of 4,960 Chinese officials above the county level were punished in a year ending November 2008, data show. They were involved in corruption and commercial bribes, hurting people’s interests.

China state executive posts attract rising number of applicants [Sept 12, 2008] (emphasis is mine)

More than 2,700 people have applied for 16 executive positionsof the centrally-administered state-owned enterprises (SOEs) open for public competition this year, the State-owned Assets Supervision and Administration Commission (SASAC) said.

The 2,745 applicants more than doubled that of those applying for last year’s 22 posts.

Of this year’s available posts, six received 200 to 300 applicants for each.

SASAC said the positions included three general managers, 10 deputy general managers and three chief accountants from different industries. They covered electricity, metallurgy, electronics, chemical engineering and tradefirms.

China FAW Group Corporation, China Baosteel Group and China Southern Power Grid, all ranked among the world’s top 500 companies, were also recruiting.

SASAC also said 383 applicants, 12 from overseas and four from Hong Kong, Macau and Taiwan, met the qualifications. They have been notified to sit for a written exam to be held soon.

Most qualified applicants have post-graduate degrees and are aged under 45, while 140 currently are heads of enterprises. In addition, 69, or 18 percent, have overseas working or study experience.

In 2003, SASAC started to recruit from both home and abroad. The agency hoped such managers could help improve the competitiveness of SOEs in the global market.

China considers cap on salaries at state monopolies [June 30, 2010] (emphasis is mine)

Chinese authorities are considering putting a ceiling on the total amount of salaries distributed at profitable state-owned monopolies amid government efforts to narrow the widening wage gaps between the rich and poor.

The Ministry of Human Resources and Social Security (MHRSS) said in a report that it would proceed to map out specific measures to “strictly control” the total payments distributed at state-owned monopoly businesses. The report was obtained by Xinhua Tuesday.

The report, which was written after a working group from the Standing Committee of the National People’s Congress (NPC), China’s top legislature, put forward written proposals on the enforcement of the country’s Trade Union Law, did not spell out the upper limit of the payment aggregate.

In China, the monthly salary for an average employee at state-owned monopolies, such as telecommunications and natural resources, could be as high as three times compared to those working in the private sector, most of whom earn about 3,000 yuan (about 440 U.S. dollars) per month.

This widening gap has resulted in some public complaints and driven millions of college graduates to seek jobs at state-owned monopolies, where employees are assured of better healthcare insurance and a more stable income.

To establish a “normal wage growth mechanism”, the ministry said in its report it would continue to address wage gap problems through a procedure to “put a ceiling on high-income, expanding the medium-income class and ensuring minimum wages.”

The ministry would also continue to push for the establishment of a mechanism that grants workers more decision-making power in formulating salary policies and enables their wages to fluctuate in line with the ups and downs of businesses, according to the report.

It said the income of executives, especially those in the senior ranks, in centrally administered state-owned enterprises should be regulatedand authorities should ensure minimum wage standards be altered in a reasonable and timely manner.

The Standing Committee of NPC has assigned a working group to review the enforcement of the country’s Trade Union Law from July to August last year.

Based on investigations and research, the working group sent forward written proposals on the implementation of the Trade Union Law.

The MHRSS, in collaboration with the ministries of commerce and health, the All China Federation of Trade Unions, as well as the Legislative Affairs Office of the State Council, or China’s cabinet, mapped out the report based on these proposals.

The report was then submitted to the State Council and forwarded to the top legislature at the 15th session of the Standing Committee of the 11th NPC, a four-day meeting that ended Friday.

Copies of the report were distributed to members of the NPC Standing Committee during the meeting.

China strives to readjust income distribution to stop yawning gap [March 5, 2011] (emphasis is mine)

Readjusting income distribution in a reasonable manner is both a long-term task and an urgent issue to address at present, Premier Wen Jiabaosaid Saturday in his government work report delivered at the parliamentary annual session.

According to Wen, three major measures will be taken in 2011: increasing the basic incomes of low-income people in both urban and rural areas, putting more effort into adjusting income distribution, and vigorously overhauling and standardizing income distribution.

“We will steadily increase the minimum wage of workers, basic pensions of enterprise retirees, and subsistence allowances for both urban and rural residents,” Wen said, noting that a sound mechanism of regular pay raises for workers and strictly enforce the minimum wage system will be established.

The government will also raise the individual income tax threshold on salaries, reasonably adjust the tax rate structure, and genuinely reduce the tax burden on low- and middle-income people.

“We will effectively regulate excessively high incomes, strengthen the dual controls on total wages and wage scales in industries in which incomes are excessively high, and strictly standardize the management of executive pay and bonuses in SOEs and financial institutions,” the premier said.

Wen added that illicit income will be resolutely prohibited and a system for monitoring income distribution will be quickly established.

“Through unremitting efforts, we will reverse the trend of a widening income gap as soon as possibleand ensure that the people share more in the fruits of reform and development,” he said.

Special Report: NPC, CPPCC Annual Sessions 2011

Political advisor expects more competitiveness of SOEs [March 8, 2011] (emphasis is mine)

A Chinese political advisor on Tuesday suggested that state-owned enterprises (SOE) raise their competitiveness only in the key sectors that bear on the lifeline of the national economy.

Large SOEs had benefited from the country’s loose monetary policy in recent years and taken the bulk of banking loans, and excessively expanded into sectors such as real estate and non-ferrous metals, said Ou Chengzhong, a member of the National Committee of the Chinese People’s Political Consultative Conference (CPPCC).

Among the 398 economic sectors, SOEs were present at 380 and about 40 percent of them were involved in commonplace manufacturing, processing and commercial and trade sectors, according to the figures quoted by Ou.

Although China is regarded as one of the leading industrial manufacturers in the world, China has to import key equipment in some fields, the political advisor said at the on-going annual session of the CPPCC National Committee.

In this sense, SOEs have to raise their competitiveness with the focus on innovation, high technology, core manufacturing know-how and world-class brands, Ou said.

On the other hand, he suggested that SOEs exit from non-essential economic sectors to make room for the growth of private businesses.

SOEs employ less than 30 million people, while 160 million people work in non-governmental businesses, according to Ou.

China to let 20 more SOEs fully exit real estate business this year [Feb 22, 2011] (emphasis is mine)

More than 20 centrally administered state-owned enterprises (SOEs), whose core business is not property, will fully exit the real estate business this year.

Shao Ning, deputy chairman of the State-owned Assets Supervision and Administration Commission of the State Council(SASAC), the SOEs regulator, said Tuesday.

Fourteen SOEs exited the real estate sector last year, Shao told a press conference.

He said some companies need time to finish ongoing projects before they could fully retreat from the real estate business and focus on their core operations.

To curb asset bubbles, the SASAC banned 78 SOEs from investing in property in March last year as property was not their core business.

Shao also said the SASAC would make public the income of the SOEs’ executives when necessary.

Currently, China has 121 centrally administered state-owned enterprises with their total assets worth nearly 24 trillion yuan (3.65 trillion U.S. dollars).

Chinese vice premier urges SOEs to boost growth mode transformation [April 12, 2011] (emphasis is mine)

Chinese Vice Premier Zhang DejiangTuesday called for state-owned enterprises (SOEs) to make greater efforts to boost economic development mode transformation.

Zhang made the remarks during his inspection tour of some SOEs in Beijing, including China MinmetalsCorporation, China State Shipbuilding Corporation and the State Nuclear Power Technology Corporation Ltd. (SNPTC).

SOEs are the backbone of the national economy and it is very important for them to maintain a stable and relatively fast growth momentum to ensure the continual and healthy development of the economy,” Zhang said.

“With impacts of the global financial crisisstill lingering, China’s economic growth faces not only historic opportunities, but also risks and challenges,” Zhang said.

More efforts should be made to expand overseas markets, improve management, boost scientific innovations and highlight production safety, Zhang also said during the inspection tour.

Full text: Report on China’s economic, social development plan (2011)
5. Reform and opening up were further intensified. [March 17, 2011] (emphasis is mine)

In terms of enterprise reforms, the reform to institute a corporate system or a stockholding system was carried out in over 70% of the central state-owned enterprises (SOEs) and enterprises subordinate to them, and the pilot project for standardizing boards of directors was extended to 32 central SOEs. We made further progress in reforming the power industry, postal services and public utilities. We also promulgated and implemented a number of supporting policies to promote the development of the non-public sector and small and medium-sized enterprises.

In terms of reforming the fiscal and taxation systems, we implemented the reform to place county finances directly under the management of provincial governments in 970 counties across 27 provinces; conducted trials in the western region on the reform of resource taxes on oil and natural gas; and extended the urban construction and maintenance tax and education surcharge to foreign enterprises and nationals.

The development level of the open economy was raised further. We adhered to the strategies of diversifying markets and competing on quality; tightened control over exports of resource products and products whose production is energy-intensive or highly polluting; increased imports of raw materials in short supply on the domestic market, energy-intensive products, advanced technology, and key spare parts and components; and eased the trade imbalance. Total import and export volume reached US$2.97276 trillion in 2010, an increase of 34.7%. Exports rose 31.3%, imports rose 38.7%, and the trade surplus was down 6.4% from the previous year. We introduced the guidelines on better utilizing foreign investment and guided foreign investments toward high-end manufacturing, high-tech industries, modern service industries, new energy sources, energy conservation and environmental protection industries, and the central and western regions. Utilized foreign direct investment in 2010 (excluding the banking, securities and insurance sectors) totaled $105.74 billion, up 17.4%. Disbursed foreign loans reached $20.5 billion, up 57%. We vigorously implemented the “go global” strategy and made further progress in a number of major outward investment projects. Non-financial outward direct investment for the year amounted to $59 billion, an increase of 36.3%. Receipts from overseas project contracting operations reached $92.2 billion, an increase of 18.7%.

China’s central SOEs perform well abroad: regulator [Feb 22, 2011] (emphasis is mine)

China’s centrally administered state-owned enterprises (SOEs) had posted healthy profits in foreign markets since they adopted the strategy of going global in recent years, government official said Tuesday.

In 2009, China’s SOEs’ overseas assets took up 19 percent of their total assets while profits made in foreign markets accounted for 37 percent of the total, Shao Ning, deputy chairman of the State-owned Assets Supervision and Administration Commission of the State Council(SASAC), the SOEs regulator, said at a press conference.

While noting the commendable performances, Shao also warned of the potential risks.

“China’s SOEs generally lack international management skills. Moreover, they are not familiar with the foreign laws and market standards there,” Shao said.

He said the SASAC is working on a range of proposals to better regulate asset management of the SOEs in overseas markets.

Currently, China has 121 centrally administered SOEs with their total assets worth nearly 24 trillion yuan (3.65 trillion U.S. dollars).

Central SOEs sign contracts worth 293 bln yuan with Guizhou [Dec 26, 2010] (emphasis is mine)

Representatives for a number of centrally-administered state-owned enterprises (SOEs) signed 47 contracts worth 292.9 billion yuan (about 44.38 billion U.S. dollars) with authorities of southwest China’s Guizhou ProvinceSunday.

The 47 projects included industries such as minerals intensive processing, manufacturing, electricity, as well as transportation, said Wang Yong, director of the State-Owned Assets Supervision and Administration Commission of the State Council.

Thirty-three of the 47 projects will begin construction in 2011, with the investment totaling 237.6 billion yuan. The other 14 projects will start construction in 2012.

In recent years, a number of central SOEs, including the country’s oil giants PetroChina and Sinopec, have invested in Guizhou, a land-locked and poverty-ridden region in west China, which has boosted the local economic development and also helped the companies to expand in terms of strength and scale, Wang said.

“I hope central SOEs will continue to participate in Guizhou’s social and economic development and seek strategic cooperation with the province to push forward its leapfrog development,” Wang said.

China launches new state asset management company to accelerate reshuffle [Dec 22, 2010] (emphasis is mine)

China on Wednesday unveiled a new asset management company, with the aim of restructuring uncompetitive state-owned enterprises (SOEs) through stepped-up mergers.

The new firm, named China Reform Holdings Corporation Ltd., will focus on “reorganizing small SOEs which have no bearing on national security and are not crucially important to the national economy,” the State-owned Assets Supervision and Administration Commission (SASAC), the country’s regulator for SOEs said in a statement.

The first-phase registered capital of the new company, which is wholly owned by SASAC, is 4.5 billion yuan (681 million U.S. dollars). SASAC has not yet revealed which companies will be involved in the reshuffle.

Xie Qihua, former chairwoman of the Baosteel Group Corporation, China’s largest steel maker, has been appointed as board chairwoman of the new company. Liu Dongsheng, an SASAC official, will act as the general manager, it said.

“The launch of the new company marks an important move to advance an optimized restructuringof the distribution concerning state-owned economic entities,” Wang Yong, deputy director of SASAC, said at the launching ceremony.

The new company will participate in the share-holding reform of those centrally-administered enterprises featuring lesser importance or smaller scale, and will also invest in emerging industries with strategic importance, he said.

China’s SOEs include SOEs directly controlled by the central government and SOEs supervised by local governments, but exclude state-owned financial enterprises.

Profits of China’s state-owned enterprises (SOEs) in the first 11 months hit 1.81 trillion yuan (271.92 billion U.S. dollars), up 43.1 percent year on year, according to figures released by the Ministry of Finance (MOF) on Dec.17.

CRHC announces China Huaxing Group deal [May 26, 2011] (emphasis is mine)

State asset management company China Reform Holdings Corp (CRHC) announced Wednesday that it has formally acquired its first central government-controlled State-owned enterprise (SOE), China Huaxing Group.

In a meeting held Monday, the State-owned Assets Supervision and Administration Commission (SASAC) announced that China Huaxing Group, which is active in sectors including chemicals and real estate, had been integrated into CRHC, the company said in a newsletter published on its website.

“Integrating Huaxing into CRHC is the commission’s strategy to promote the restructuring and reform of central government controlled SOEs by leveraging the platform of CRHC. It marks the formal kick-off of asset management operations by CRHC,” Shao Ning, the commission’s vice director, said.

CRHC holds the property rights over State-owned assets in the SOEs it merges and exercises the rights as an investor in these companies.

The restructuring of central government-controlled SOEs will speed up following the Huaxing acquisition, observers predicted.

Launched at the end of last year with 4.5 billion yuan ($692.91 million) in registered capital, CRHC, the third asset management company formed under SASAC, is mainly targeting small and underperforming SOEs in sectors that do not affect national security or core economic areas.

Founded in 1995 with registered capital of 819.66 million yuan, Huaxing is active in sectors as diverse as chemicals, real estate, IT and trade.

However, the conglomerate has been a loss maker. In 2009, it posted a loss of 40 million yuan and was one of very few SOEs running in the red, according to a report by China Business News Wednesday.

China has in recent years stepped up efforts to restructure central government controlled SOEs following initial SOE reform between 1998 and 2003. The number of central government-controlled SOEs has fallen from 196 to its current total of 120 following Huaxing’s integration into CRHC.

The key to reforming these SOEs is making them more market-oriented, Ding Yifan, a researcher with the Development and Research Center of the State Council, told the Global Times. Simply reducing their numbers does not amount to real reform, he said.

The Chinese government currently maintains absolute control of companies in key sectors such as electricity grids, oil and gas.

Profits of local SOEs continue dropping but declines narrow [Dec 24, 2009] (emphasis is mine)

Profits of China’s state-owned enterprises excluding those administered by the central government continued to drop in the first 11 months from a year ago, but the rate of decline narrowed sharply.

The SOEs posted combined profits of 258.39 billion yuan (38 billion U.S. dollars), down 6.5 percent year on year, the State-owned Assets Supervision and Administration Commission (SASAC) announced Thursday.

The rate of decline was 11.7 percentage points lower than that for the first ten months, the country’s assets watchdog said.

Business revenue of the SOEs grew 2.8 percent year on year to 5.9 trillion yuan in the first 11 months.

The SOEs include enterprises affiliated to 82 central departments, and those administered by provincial, regional and municipal governments but exclude 131 enterprises administered by the SASAC.

Profits in China’s gov’t firms continue to fall but decline eases [Dec 18, 2009] (emphasis is mine)

Profits in China’s state-ownedenterprises (SOEs) continued falling in the first 11 months from a year earlier, but the rate of decline eased markedly because of a lower comparison base.

The SOEs posted combined profits of 1.19 trillion yuan (174.1 billion U.S. dollars) in the first 11 months, down 1.9 percent compared with the same period of last year, the Ministry of Finance announced Friday.

During the January-October period, profits in the SOEs declined 10.6 percent year on year, compared with a 17.6-percent annual drop during the January-September period.

In November, SOE profits edged up 0.8 percent from the previous month to 124.6 billion yuan. Business revenue of the companies rose 9.6 percent to 2.3 trillion yuan in November from October.

In the first 11 months last year, China’s SOEs experienced a sharp year-on-year drop in profits of 15.7 percent, as the impact of the global financial crisisstarted to weigh on the country’s economy with falling enterprise output and profitability.

The SOEs covered by the ministry statistics included 131 enterprises administered by the State-owned Assets Supervision and Administration Commission, on behalf of the central government, enterprises affiliated to 82 central departments, and those administered by provincial, regional and municipal governments.

Non-SOEs employ 80% of workforce in China’s industrial sector [Nov 23, 2009] (emphasis is mine)

Non-state-owned enterprises (non-SOEs) employed 70 million people, or 80 percent of China’s total workforce in the industrial sector in 2008, the National Bureau of Statistics(NBS) said in a statement Monday.

Despite the global economic downturn, non-state-owned industrial firms still hired 15 percent more people in 2008 than the previous year, the NBS said on its website.

Profits of these enterprises jumped 31.4 percent from 2007 while the figure for state-owned industrial firms dropped 16 percent.

There were 28 percent more non-state-owned industrial enterprises in 2008 than 2007.

The NBS gave no further details about the figures.

The non-public economy has developed rapidly since the State Council promulgated the first governmental document in 2005 to support and facilitate the growth of non-public enterprises.

According to the document, non-public enterprises enjoyed the same kind of market access with foreign capital and the same kind of treatment in project approval, financing, taxation, land use, foreign trade and economic cooperation as other businesses.

The number of people working in non-state-owned industrial firms had reached 70.4 million in 2008, a rise of 40 percent from 2005, said the statement.

Profits of non-state-owned industrial firms were up 160 percent in the four years to 2008. They represented more than 70 percent of the total profits created by Chinese industrial enterprises, up from 56 percent in 2005.

The number of non-SOEs in the industrial sector was up 65.7 percent from 2005 to 404,800 in 2008, accounting for 95 percent of the country’s total industrial enterprises.

The statistics were based on industrial enterprises with annual sales revenue of more than 5 million yuan (732,064 U.S. dollars), said the statement.

Two thirds of China’s SOE giants become share-holding companies [Aug 26, 2008] (emphasis is mine)

Almost two thirds of China’s centrally-administered state-owned enterprises (SOEs) and their subsidiaries become share-holding companies after three decades of reform, the country’s top state assets regulator said on Monday.

Li Rongrong, director of the State-owned Assets Supervision and Administration Commission (SASAC), said 64.2 percent of the SOEs and their subsidiaries had undertaken share-holding reforms, compared with 30.4 percent in 2002.

A number of large SOEs had gone public in both domestic and foreign stock markets. Of about 1,500 listed companies in China’s A-share stock markets, more than 1,100 were wholly or partly state-owned, he said.

Seventy-eight centrally-administered SOEs were listed in Hong Kong, New York and Singapore stock markets.

Meanwhile, the country’s state-owned economy was gradually converging into critical sectors that bore great significance to state security and the national economy.

Critical sectors such as oil, petrochemicals, power, national defense, telecommunications, transportation, and mining comprised about 83 percent of the total assets of centrally-administered SOEs, according to the SASAC.

These SOE giants had shouldered almost all the production of crude oil and natural gas and provided all the basic telecommunications and 55 percent of the country’s power supply, while 82 percent of civil aviation servicesalso came from those SOEs.

With deepening reforms, the number of China’s SOEs were declining, but they were growing.

The country has 149 centrally-administered SOEs, down from 196 in 2003, and the number is expected to shrink to between 80 and 100 by 2010, through merger and restructuring, according to SASAC.

Though declining in numbers, the major SOEs accounted for 35.91 percent of total assets, 61.54 of sales revenues, and 63.25 percent of profits of all the SOEs in the country.

From 2002 to 2007, centrally-administered SOEs saw their assets rise by 1.5 trillion yuan (218.95 billion U.S. dollars), sales by 1.3 trillion yuan, and profits by 150 billion yuan each year.

Cabinet approves 3 technological projects [Dec 26, 2007] (emphasis is mine)

China’s State Council, or the cabinet, approved three national technological projects in the fields of telecommunications, water pollution control, and pharmaceutical manufacturing and innovation, during Wednesday’s meeting.

Premier Wen Jiabaopresided over the executive meeting that deliberated the three projects. The three are a next-generation broadband wireless mobile communication network, water pollution control and treatment, and the manufacture and innovation of key new drugs.

“These technological projects, all set in the national medium- and long-term science and technology development plan, are of great significance to boosting China’s independent innovation capability and industrial competitiveness,” the meeting pointed out.

It said that “after a scientific, democratic and strict demonstration”, the three schemes had become ripe for inauguration.

The next-generation communication network represents the main direction of communications development. Applying it will greatly enhance the overall competitiveness and innovative capacity of China’s wireless mobile communication, and lift the industry to a more advanced world level, according to the meeting.

It said that the water pollution control projectwould provide solid technological support to address environmental woes of major water sources including the Yangtze River and Yellow River, to achieve an “energy saving and emission reduction” goal.

The drug innovation projectwould target the treatment and prevention of serious diseases and innovation of key drugs so as to offer the public safe, effective and cheap medical products, the meeting said.

The meeting also heard a report on the inspection and supervision of central enterprises, made by the State-owned Assets Supervision and Administration Commission, which was directly under the cabinet.

Central enterprises have deepened the reform, accelerated restructuringand maintained a sound momentum of sustainable and fast development,” it said.

However, violation of laws and regulations occasionally occurred due to relatively high debt and poor profits.

The meeting said that greater attention should be paid to SOE reform and management and supervision of state assets to promote sound development. It also asked enterprises to invest more in innovation, deepen SOEs’ shareholding reform, and safeguard state asset security.

China’s first state asset law, designed to protect state-owned assets from being illegally seized and to maintain the country’s basic economic system, was submitted last Sunday and is being given initial consideration by the top legislature.

China’s central SOEs set to get smaller in size, stronger in competence
REFORMS LEAD TO GROWTH [Dec 21, 2007]

statistics revealed that the total assets of central SOEs had already jumped 146 percent. In addition, profits increased two-fold when the number of SOEs dropped to about 160 last year from 196 in 2002.

Reforms were at the core of these impressive improvements of the SOEs, previously known for their “plump size and slack performance”.

After China’s SOEs were separated from administrative government bodies to exist as independent enterprises, a major shift from the planned economy, these enterprises went through further shareholder reforms to build themselves into real corporate entities.

In 2007, the pace of such reforms accelerated amid the country’s efforts to further promote the leading role of these large enterprises, the “backbone” of the national economy, said Vice Premier Zeng Peiyan.

As an important part of shareholder reform, another nine central SOEs offered initial public offerings this year, adding to the 33 SOEs listed domestically and abroad since the listing scheme launched in 2003.

Li Rongrong, head of the SASAC, was supportive of the overseas listings of Chinese enterprises, saying overseas markets had more sophisticated approaches that could help improve management of Chinese SOEs.

In a pilot move, the SOEs began to have outside directors. This was meant to make decision makers more detached from executive staff to better protect the interests of the company and common shareholders.

Currently, 19 such SOEs, including China Baosteel Group and China Shenhua Group, have picked up 66 outsider directors. The outside directors at 17 companies consisted of half or more of their board of directors members.

Since 2003, the SOEs started to recruit senior managerial staff in a more open way, whereas in the past these posts were not publicly available.

This year, 22 vacancies for high-level positions in central SOEs attracted 1,603 applicants. These included 25 foreigners and 10 from Hong Kong, Taiwan and Macau.

Li Fangyong, deputy general manager of China Aviation Industry Corporation I (AVIC I), and Jiang Zhenxin, deputy general manager of China Netcom Group, were among those who finally beat their rival competitors. No foreigners have been recruited yet.

“Reforms have pushed central SOEs onto the front-line of the market to compete with other enterprises, including international companies. It is this kind of competition that has marked up the competitiveness of these SOEs,” said SASAC analyst Peng Huagang.

BRIGHT FUTURE AHEAD? [Dec 21, 2007] (emphasis is mine)

Chinese SOEs are still dwarfed in strength and core competitiveness when compared with multinationals and first-class international companies, said SASAC head Li Rongrong. He cited development imbalance among these enterprises, even within a single enterprise.

Nearly 70 percent of aggregate profits were generated by nine leading enterprises, including China Mobile, China National Petroleum Corporation, China Baosteel and the State Grid in 2006.

Corresponding information for this year was not revealed by the SASAC. It only said that shipbuilding, automotive and shipping enterprises were becoming new, significant profit earners, joining those in the petroleum, power generation and telecom sectors.

However, Li did express concern over the financial conditions of central SOEs at a working meeting recently held in Beijing. “Profitability of some enterprises was not well-grounded as their profits were concentrated in a few subsidiaries. Some enterprises reported a lower profit rate in core businessescompared with a year earlier,” he said.

About 31.2 percent of newly-earned profits of central SOEs were in the category of non-regular revenue. “This non-regular revenue usually comes from return from investment in other than core businesses, largely investment in securities,” said Liu Cheng, a University of Science and Technology Beijing professor.

Yet, experts believed the growth of enterprises was undoubtedly behind the profit surge of central SOEs, and investment returns from securities had made limited contribution to their profitability.

Profits earned by central SOEs have been increasing steadily since 1998, and there was no such fluctuation as to copy that of the stock market, said World Bank (WB) economist Zhang Chunlin.

SASAC’s Li also pointed out some SOEs relied too heavily on bank loans to expand their businesses. This increased their exposure to financial risk. The SASAC statistics showed that 18 enterprises expected to cover more than 70 percent of their investment budget with bank loans.

“These are ‘life and death’ issues of enterprises, and they deserve due attention from top management,” Li said.

Li said SASAC would further deepen reforms to build a modern corporate system into central SOEs in the coming year, upholding the goal of building “larger and stronger” individual enterprises.

The SASAC planned to cut the number of SOEs under its supervision to less than 100 by 2010. At the same time, it would get 30 such enterprises ranked among the world’s top 500 companies by 2015 at the latest, up from 16 for 2007.

Despite arguments saying large and well-performing SOEs should get listed on the domestic market to avoid sharing profits with foreign investors that were largely a result of government support and monopolized access to state resources, Li said SASAC encouraged qualified SOEs to list as a whole in 2008, and to list on both domestic and overseas markets.

III. Current situation: mostly related to the China Mobile

Chinese media report flight of state assets [June 16, 2011] (emphasis is mine)

On its front page today, the New Express newspaper, a spin-off of Guangzhou’s Yangcheng Evening News, reports figures released by an enforcement division of China’s central bank showing that since the mid-1990s an estimated 16-18,000 Party, government, police and state-owned enterprise officials from China have disappeared overseas with approximately 800 billion yuan, or roughly 123.6 billion US dollars.

This news was first reported yesterday by Beijing Youth Daily reporter Cheng Jie (程婕), in a piece re-posted widely across the internet [HERE too].

The basis for the reports from Beijing Youth Daily and the New Express is a document released on the internet by the Anti-Money Laundering Bureau (Security Bureau) of the People’s Bank of China, China’s central bank. The report is called, “Research on the Channels and Detection Methods for the Transfer Overseas of Asset by Corrupt Elements in Our Country” (我国腐败分子向境外转移资产的途径及监测方法研究).

Audit reveals more financial indiscrepancies and fraud [May 23, 2011] (emphasis is mine)

State-owned enterprises (SOEs) were once again thrown into a fresh image crisis over the weekend. The turmoil came after China’s audit watchdog published irregular practices and disciplinary violations in the financial statements of 17 SOEs operating directly by the central government.

According to reports released by the National Audit Office on Friday, the irregular practices include overstating earnings, understating assets with improper accounting procedures, concealing information about investment activities overseas, evading taxes, excessive bonuses and forged invoices.

The office said in a statement on Friday inadequate investment decisions, which led to losses or potential losses of State-owned assets and improper management of their subsidiaries, are the key problems contributing to irregularities in the financial statements of these SOEs audited. Second and third tier SOEs were found to be guilty of the most infractions.

Sinosteel Corporation overstated 1.99 billion yuan ($306.48 million) of sales earnings between 2007 and 2009. The company was also found to have more problems related to investment overseas.

Sinosteel International Holding Co, a subsidiary of Sinosteel Corporation, failed to adequately report three investment projects overseas.

Provident Faith Investment, a subsidiary of Sinosteel International Holding Co, was found unable to recover 1.85 million yuan in overseas futures transactions made through overseas illegal futures brokers.

During the time when the company was charged with managing the capital of the Sinosteel Corporation overseas, Golden Prosperity Development Co, another subsidiary of Sinosteel International Holding Co, withdrew large sums of cash to pay commissions to individuals.

The company also transferred part of the funds to the personal accounts of working staff in other parts of the group for daily expenditures for the institution.

Days before the audit report was released, the State-owned Assets Supervision and Administration Commission (SASAC) announced it would remove Huang Tianwen, president and deputy Party Secretary of the Sinosteel Corporation, from his position without giving details.

Other SOEs including the China Three Gorges Corp, China Unicom and China National Nuclear Corp were also found to have problems managing their funds.

The audit, conducted last year, once again threw into the limelight the SOEs who have long been made the target of public attacks due to their monopolies, high incomes and privilege.

A spokesman for the SASAC said Saturday they would increase transparency of SOE operations.

Wang Yukai, professor of governance at the Chinese Academy of Governance, said the irregularities and violations exposed problems in the governance of SOEs, making them hard to supervise.

“Besides, some SOEs’ leaders are too eager to impress their supervisors by making instant profits through investments overseas during their tenure, but lack proper investment expertise,” he said.

China’s state-owned firms mired in scandals [June 16, 2011] (emphasis is mine)

China’s state-owned enterprises have been hit by scandal after the country’s supreme audit office announced in May that it had uncovered several acts of misconduct such as tax evasion and the inappropriate use of company money by officials in 17 state-owned firms.

The National Audit Office of the People’s Republic of China (CNAO) made the announcement after reviewing the financial statements of these companies, which included the China United Network Communications Group Co and the China Three Gorges Corp, which operates the Three Gorges Dam on the Yangtze.

A total of 65 company representatives are currently under investigation, according to the office.

Prior to the investigation, China Petroleum & Chemical Corp (Sinopec)was revealed to have squandered millions of yuan on expensive wines and illegally awarded bonuses to its employees.

In addition, China’s state-owned Xinhua news agency reported that the Anhui branch of the State Grid Corporation of Chinahad illegally provided 300 of its senior employees with private cars.

Several officials from leading telecom firm China Mobileare also said to have been under investigation since 2009 for inappropriate corporate behavior.

The scandals, which were initially discussed intensively on the internet, have now become a nationwide subject of debate after coming under the media spotlight for over a month.

After the Sinopec “expensive wine” scandal, the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) convened a meeting with the companies to discuss public opinion — and discontent — as well as ways to resolve the issue, according to the Chinese-language Beijing News.

At a meeting to explain the company’s extravagant spending on wine, Sinopec director Li Chunguang complained that he could not understand why the public was criticizing companies that contribute billions of yuan in taxes to the country each year.

In an effort to improve industry’s image, SASAC released the contact information of the spokespersons of 120 state-owned companies to the public in February this year.

Furthermore, sources said that some companies had also hired public relations companies in recent years, and invested several million yuan to improve their interactions with the media and public.

Economist Hua Sheng said that the public’s anger towards state-owned companies is a reflection of their dissatisfaction about the unequal distribution of income and government finances.

Liu Cheng, a professor at the University of Science and Technology in Beijing, noted that the reason these companies have become targets for public anger is because they had not fulfilled their social responsibility of serving the national interest. Instead, they have become tools for personal gain, he said.

Chinese professionals prefer domestic firms [June 9, 2011] (emphasis is mine)

SHANGHAI – With the growth of the national economy and the continuous development of Chinese enterprises, more middle- and high-level professionals in China now prefer to work for domestic companies rather than foreign-owned enterprises, human resources experts said.

“Multinational companies have long been in a favorable position in the recruiting market due to their liberal reward and advanced management culture,” said Chen Jiewei, senior consulting manager with China International Intellectech Corporation (CIIC), a Shanghai-based HR services company.

“But over the past five years, Chinese companies have been doing excellently and many of them have been listed abroad. They have demonstrated their competitive strength,” Chen told China Daily, “Now they can offer salaries and bonus plans that are competitive with foreign companies, which makes them increasingly attractive for high-level management professionals.”

A report from CIIC said that the annual salary for management positions in Chinese enterprises is basically equal to that in Japanese enterprises, about 200,000 yuan ($30,880) a year (before tax), while for European and US enterprises it is about 250,000 yuan a year. For director positions, European and US enterprises generally provide an annual salary of more than 400,000 yuan, while Chinese enterprises offer more than 300,000 yuan and Japanese enterprises about 300,000 yuan.

For senior management positions, the annual salary in a European or US enterprise is about 800,000 yuan, while large Chinese enterprises offer about 600,000 yuan and Japanese enterprises about 500,000 yuan.

But Chen said that it is not only the salaries that are driving high-level talent toward Chinese companies. It is also a better personal career path.

“Multinational companies have developed for a long time in China, and practiced a localization strategy, but even so, a lot of senior management positions are still dominated by foreigners. High-level Chinese staff often find it’s hard to break through the bottleneck and advance,” Chen explained. “They have no scope for their particular talents.”

“Some large Chinese companies, on the other hand, can provide sufficient room for people’s career development,” Chen added.

“Chinese enterprises have developed very fast and improved effectively over the past years in terms of the management level, working environment, compensation packages, as well as the promotion system. They have competitive advantages over their foreign counterparts in recruiting staff,” said a 33- year-old man, surnamed Wang, who declined to give his full name.

Wang currently works as a department manager in a US technology company but he hopes he can move to a Chinese company, especially a State-owned company.

State-owned enterprises have improved their market performance and have comprehensive competitiveness. That means there may be more opportunities for self-development,” Wang said.

State-owned enterprises overtook foreign and private enterprises as the top destination for job-seeking graduates in 2010, according to a survey of 200,000 students conducted by ChinaHR.com. Eight of the top 10 companies named in the survey are State-owned.

Chinese companies are more popular among students born between 1980 and 1990, majoring in science and engineering, according to a survey by Aon Hewitt, a global human capital consulting company.

Aon Hewitt polled graduates over the past two years and found that China Mobile, Alibaba and Haier have overtaken Google and P&G to become the most popular employers among graduates.

Expansion of Central SOEs Causes Concern [June 9, 2011] (emphasis is mine)

Many of China’s provincial governments have been enthusiastic about getting investments from the country’s most powerful enterprises to spur development of their local areas.

Local officials have signed agreements with companies controlled by the central government, adding up to trillions of yuan.

These mega contracts have triggered concerns among both economists and economic regulators.

At the latest signing ceremony in Beijing, representatives from Henan Province signed more than one hundred agreements with enterprises controlled by the central government. The contracts are worth some 300 billion yuan or more than 40 billion US dollars in total.

These projects involve scores of state-owned enterprises, including China Mobile, a giant in the telecom industry.

Wang Jianzhou, Chairman of the company’s Board of Directors, reveals that China Mobile’s investment in Henan will reach 20 billion yuan over the next three years.

“We are planning to install new equipment in Henan to build a call center and an internet data center.”

Shi Jichun, Deputy Governor of Henan Province, explains the motives behind the cooperation.

“Our cooperation with the state-owned enterprises can benefit local economic development in terms of upgrading our industries and introducing new economic growth patterns.”

During the past year, similar motives have driven a dozen provincial governmentsto send delegations to Beijing, where they scramble for the favor of state-owned enterprises.

So far, the total value of agreements signed between them has amounted to more than six trillion yuan.

However, Dong Yuping, an economic researcher with the Chinese Academy of Social Sciences, says he’s concerned about the negative impact of the massive expansion of state-owned enterprises.

“The state-owned enterprises have been holding sway in sectors concerning national economic security, however they still want to engage in other sectors where they compete with private enterprises. This surely puts the private operators at a disadvantage. Meanwhile, I don’t think those multi-billion agreements will necessarily bring about the intended benefits to local governments.”

The country’s top regulator of state-owned enterprises has expressed similar concerns.

Wang Yong is Chairman of the State-Owned Assets Supervision and Administration Commission.

The companies’ cooperation with local governments should not deviate from their core businesses. They should adjust their own structures to become stronger in that area, instead of blindly expanding in size and quantity.”

Chinese enterprises are basically divided into two categories: state-owned and private. The central government directly controls more than 100 of the powerful state-owned companies. These elite enterprises control the nerve centers of the national economy, like oil industries, telecommunications and power generation.

Telecoms Carriers Put Under Anti-Corruption Review [May 27, 2011] (emphasis is mine)

Investigation teams from the party disciplinary commission were sent to China Mobile, China Unicom and China Telecom.

The government has launched an anti-corruption investigation over China’s big three state-owned telecom carriers that monopolize the industry, Caixin learnt from with several sources.

The Central Commission for Discipline Inspection of the Communist Party of China sent investigation teams each to China Mobile, China Unicom and China Telecom, targeting middle-level managerial staff and above, according to the sources.

These executives have been ordered to turn in their passports temporarily, said the sources.

Over the past year, many senior executives at China Mobile have been found to be involved in major corruption scandals, with several cases surrounding behind-the-scenes deals with the company’s service providers.

In late 2009, Zhang Chunjiang, China Mobile’s former vice chairman, was sacked and placed under investigation on allegations of corruption.

China launches probe into alleged graft at telcos [June 2, 2011]

The government and telecom firms have refused to comment on the investigation. But public commentary on dismissed executives at China Mobile has spread like wildfire. The investigation will last until June, during which all middle-level and above administrative staff have been asked to submit their passports.

Seven high-ranking China Mobile executives have been punished since 2009. Former Party chief and deputy general manager of China Mobile Zhang Chunjiang has been removed from his official post and expelled from the CPC for taking bribes. Shi Wanzhong, general manager of human resources at China Mobile, was detained for accepting bribes from Siemens. Lin Donghua, former deputy general manager of China Mobile’s Hubei branch, was also punished for serious corruption.

In March 2010, several regulatory authorities opened an investigation of Li Xiangdong, former general manager of China Mobile Sichuan’s wireless music base. After meeting with central government auditors to discuss his assets and the allocation of company funds, he disappeared into the night with hundreds of millions of RMB. Luckily, he was caught by police before he could flee the country.

China Mobile recently confirmed that Ma Li, deputy general manager of the company’s data division, was under investigation on suspicion of “serious disciplinary violations.” Ye Bing, former CEO of ASPire Holdings, a subsidiary of China Mobile, had also been taken away by authorities for investigation. Ye Bing was appointed as CEO of ASPire Holdings in 2008, which provides data services for China Mobile.

“Lack of efficient supervision on high-profile executives of governments and companies has led to rent seeking behavior,” said Fu Liang, an independent telecommunications analyst.

China’s Seizure of China Mobile Executive Leads to Wider Probe [June 1, 2011] (emphasis is mine)

China’s seizure of a China Mobile Ltd. executive on graft allegations in March led to a probe of more than 60 people that may involve 350 million yuan ($54 million) of “illegal money,”the official Xinhua News Agency said.

China Unicom (Hong Kong) Ltd., and China Telecom Corp., the nation’s second- and third-largest carriers after China Mobile, are included in the investigation, according to today’s Xinhua report, which didn’t say what the alleged corruption entailed.

The three operators are adjusting their business- cooperation policies “to reduce the corruption risk,” Xinhua said. The allegations come amid Chinese media reports that the government will overhaul leadership at the nation’s biggest telecommunications carriers.

The corruption probe may be an attempt to clear up any problems before new management takes over to allow them to start with a clean slate, Jim Tang, an analyst at Shenyin Wanguo Securities Co. in Shanghai, said in a phone interview today. If the investigation means China Mobile is addressing problems, it’s a good thing in the long run, he said.

Tang rates China Mobile and China Telecom “neutral,” and China Unicom “outperform.”

China Mobile gained 0.6 percent to HK$71.45 at 10:45 a.m. in Hong Kong Stock Exchange trading. The shares have dropped 7.5 percent this year, compared with a 2.7 percent advance in the benchmark Hang Seng Index. China Unicom fell 1.3 percent to HK$17.04 while China Telecom was unchanged at HK$4.66.

Executive Reshuffle

Sophia Tso, a Unicom spokeswoman, and Jacky Yung, a spokesman for China Telecom, yesterday denied reports about planned management changes at their respective companies. Tso and Yung didn’t immediately return calls today regarding the Xinhua report on the corruption probe.

Rainie Lei, a spokeswoman at China Mobile, didn’t return calls or e-mailed requests for comment on the reports about management changes.

Caijing magazine reported yesterday that Xi Guohua, vice minister at the Ministry of Industry and Information Technology, will replace Wang Jianzhou, 62, as chairman at China Mobile. China Unicom Chairman Chang Xiaobing will have his post taken by President Lu Yimin and become chairman of China Telecom Corp., while China Telecom Chairman Wang Xiaochu will become governor of Yunnan province, according to the magazine.

Zhao Yi, a spokesman for China Mobile, said he couldn’t immediately comment on today’s Xinhua report or provide contact information for Ma Li, the data department deputy manager who the official newswire reported was seized by anti-graft officials.

China Mobile’s value-added data such as mobile music services “were an essential driver of total revenue growth” last year, accounting for 31 percent of operating revenue in 2010, Chairman Wang said in March.

China Mobile said 549 million customers made use of value- added services in the first quarter of this year, and 476 million used its wireless music service. The value-added services were “the driving force” of sales growth in the first quarter, the company said in April.

On Way to Beijing, China Mobile Chief Crashes [July 16, 2010]

A financial misconduct probe at China Mobile’s Sichuan branch has shattered executive Li Hua’s promotion dream

Li Hua worked hard and waited years for the career leap that he triumphantly announced to friends at a banquet on the eve of Spring Festival.

Very soon, Li told the dinner guests earlier this year, he would be transferred from Chengdu to the telecom group’s headquarters in Beijing.

Moreover, Li said he would rise from his current job as Sichuan Province general manager and regional party secretary for China Mobile to a coveted front-office position as a group vice president.

A month later, however, a nightmare overwhelmed Li’s career dream. A subordinate named Li Xiangdong, who directed the company’s digital music and data department, grabbed company cash and fled the country after a government audit found discrepancies tied to the company’s business with a value-added service provider.

Within weeks, Communist Party investigators looking into further evidence of malfeasance at China Mobile were knocking on Li’s door. Now, no longer in line for a headquarters post, Li is being detained on charges of financial misconduct.

In addition, Li’s case may be connected to the detention by party investigators in December of executive Zhang Chunjiang, a former China Mobile vice president and the company’s national party secretary.

A source at China Mobile told Caixin that Li’s case is being handled by provincial party officials in Sichuan but directly supervised by the party’s Central Commission for Discipline Inspection, which rarely gives such close attention to provincial matters.

Caixin also learned that his most serious charges may be connected to deals with an equipment supplier. Before Li’s case was made public, the Sichuan office of China Mobile sent an internal memo stating Li had offended a powerful, well-connected equipment supplier.

“It’s quite possible that Li fell into trouble because of this” supplier issue, said a source.

Several equipment suppliers are currently assisting authorities in their investigation. But some officials from equipment companies reportedly have, like Li Xiangdong, fled China.

Li, who earlier hand-picked Li Xiangdong for a promotion, had been barred from leaving China after the disappearance on grounds that he was needed to help investigators looking into the case.

Li earlier told Caixin the disappearance was “not related to any other person” at China Mobile’s Sichuan division. Yet financial misconduct linked to the digital music and data department also apparently involves Li, who worked closely on its development with Li Xiangdong.

The company launched the moneymaking division four years ago with about 1 billion yuan. Today, its annual operating revenues exceed 22 billion yuan.

Ladder Climber

In his long quest for a promotion to headquarters, Li built a network of personal contacts so extensive that he may have seemed untouchable. He was known in the industry for being outspoken, but took a low-key approach toward the news media and shared little personal information with the public.

Li was born into a high-ranking military family in 1959 in Chengdu. Raised on a military compound, he was strong and competitive from an early age.

Li loved to read and returned to school in his 40s, earning a master’s degree in management at Sichuan University’s business management school in 2005. Two years later, he received an advanced degree from Hong Kong Polytechnic University.

Influenced by his father, Li grew up with a military disposition. He earned a reputation as a brave, loyal yet domineering company boss. Some at China Mobile liked his personality, others did not.

“Li had a rare talent as a field commander, one that I have hardly seen within the China Mobile system,” a company source said. “He had strong leadership ability, and was pragmatic and competent.”

Mid-level cadres whom Li handpicked for promotions were also often aggressive and sharp-witted – and did not fit the standard, cautious mold of a state-owned enterprise executive.

Li loves traveling, photography and fine wines. He’s known for a high alcohol tolerance and would drive a black Volkswagen Phaeton between work and his family’s luxury villa in Chengdu, which he apparently could afford thanks to what some said was an annual salary of around 2 million yuan.

Workmates called Li bossy, saying he was never satisfied with income levels from ordinary projects. “He wasn’t short of money, nor was he a greedy person. He handled matters justly, believing that if he could help you he would, and if he was unable to help he would say so,” a source said. “It wasn’t about how much money could be made, but rather whether he thought you were the right person, or whether or not he liked you.”

Li served in the army before retiring from the military in the early 1990s. He took a job at the Neijiang post office and was later transferred to a provincial post office management department, where he was appointed director.

Li later joined the newly formed Mobile Communications Bureau, which divided government and enterprise functions and established China Telecom Corp. An internal mobile communications department was created, and Li was hired to serve as director.

By the late 1990s, national telecom industry reform led to the separation of China Telecom’s mobile business operations. China Mobile’s Sichuan division was established in 1999, and Li was appointed to his current position as general manager.

Li was restless at China Mobile yet repeatedly fended off transfer orders to cities such as Shanghai and Guangzhou. Instead, he waited for a call to Beijing.

While waiting, he became a provincial magnate and held his Sichuan post longer than anyone in similar positions. Ordinarily, China Mobile transfers high-level executives every four to six years.

While avoiding transfers, Li also dodged several controversies during his tenure. Many thought he would always successfully survive hints or even accusations of misconduct.

But because of an outspoken and domineering personality “the investigation of Li Hua was both expected and unexpected,” a China Mobile source told Caixin. Many at the company thought he would “get in trouble sooner or later.”

1 yuan = 14 U.S. cents

Shutdown for a Gatekeeper of Telecom Gold [July 30, 2010] (emphasis is mine)

Connections, ‘consulting’ and art collecting helped telecom insider Zhang Rui play a profitable game before authorities moved in

Equipment and IT services that sell for hundreds of billions of yuan, advertising contracts worth billions of yuan, and huge piles of cash for value-added services and special projects: It’s all in a pot of gold at the end of China’s telecom rainbow.

Many have found the gold, from multinational equipment manufacturers such as Siemens and Ericsson to small construction companies that build infrastructure for the nation’s state-owned telecom empire.

But access to this glistening pot is restricted; only a limited number of executives at giant telecom companies, like leprechauns, know the secret way.

One of the gold gate-keepers was businessman Zhang Rui(张锐), according to investigators who have spent several months tracing corruption in China’s telecom industry. Zhang was a key industry insider who apparently helped suppliers and contractors find those gold nuggets, while pocketing quite a few for himself.

Zhang moved freely through the executive suites of China’s telecom world, giving advice to operator chiefs who called him an “industry sage” and quietly cutting deals for contractors in ways that earned him the nickname “invisible man.” Only executives at the industry’s highest echelons knew his name and his game.

Beijing art lovers, however, best knew Zhang Rui as the owner of a swank restaurant on the city’s near-east side and a collector of contemporary art.

He might have held on to his art-lover front while continuing to run his advisory business Beijing Ruizhi Telecommunications Consulting Co. Ltd. behind the scenes if not for an investigation that exposed a corruption trail leading to his desk.

The first step on the trail, numerous sources close to China Mobile told Caixin, was the sudden dismissal and detention of China Mobile Group’s former party secretary and vice president Zhang Chunjiang(张春江) in 2009. Authorities tied him to bribes worth more than 10 million yuan.

A pair of China Mobile leaders were the next to fall: the president of Sichuan Mobile, Li Hua(李华), who has been detained since June; and the president of both Sichuan Mobile’s data department and China Mobile’s wireless music operations, Li Xiangdong(李向东), who fled China earlier this year with an unknown amount of money.

Zhang and his wife, Raynetwork Advertising Co. President Yang Ruining, were recently detained by authoritieson charges that remain unclear.

In the wake of the investigations, China Mobile has launched a major personnel shuffle involving several subsidiaries. And according to a telecom industry veteran, Zhang’s trouble led to an exodus of Chinese executives working for several multinational telecom suppliers. They apparently left the country to avoid trouble.

The snowballing affairreflected the breadth and depth of the telecom industry’s spending habits, and the enormous incentive for contractors to do whatever may be needed to find that pot of gold.

“I never imagined that telecom server-room air conditioning systems and alarm systems could be so lucrative,” said one equipment supplier. “But telecom company fixed asset investment is really big, and even a small portion from the cup is still a lot.”

‘Consulting’ Fees

Opposite Workers Stadium in Beijing is a peculiar building that combines a modern steel structure with ancient ornamentation. It’s said this is a 200-year-old house that was moved from Jiangxi Province and is now the home of Le Quai, an upscale restaurant owned by Zhang.

Local officials, foreign diplomats and celebrities alike feel at home here. Over the years, Zhang has hosted a slew of high-profile events revolving around his reputation as an art collector. Some say his home is a veritable Guggenheim Museum, with nearly 1,000 works of art.

Few art fans know, however, that Zhang made his fortune in the telecom business. He got a start in Dalian in the 1990s as a representative for switchboard makers and eventually built an empire through firms offering “consultant” services to foreign companies seeking business with state-owned telecoms, advertising deals and mobile phone services.

In Dalian, he met his rainmaker and future government-business insider Zhang Chunjiang, then-deputy director of the Dalian Post and Telecommunications Administration, who later became, among other things, the youngest vice minister ever when the Ministry of Information Industries was formed in December 1999.

Zhang kept good relations with this rising star through a period of rapid growth for the nation’s telecom industry.

Since 1992, the number of fixed-line subscribers in China has increased to 1.1 billion from 10 million, while the number of mobile subscribers grew to 800 million from almost zero. Regulators and telecom operators have had to expand networks quickly and on a massive scale. Paying for all this growth required a pot of gold that equipment and service providers were eager to tap, creating enormous opportunities for insiders such as Zhang.

Foreign telecom equipment manufacturers that joined local suppliers lining up for contracts soon learned about the importance of relationships in the Chinese business world. But foreigners who found themselves caught between overseas regulatory constraints and the need to cultivate relationships signed up with Chinese agents and consultants who acted as middlemen.

Zhang signed up numerous telecom equipment and software companies who hired him as a consultant. In fact, though, authorities say he functioned as a third-party representative by transferring payments from contractors to telecom company insiders. He called the payments “consulting fees.”

What Zhang did is common in the industry, insiders say, especially when foreign companies are involved. Middlemen often enjoy close ties to telecom executives and government officials.

Zhang was “a middleman for many foreign companies,” a close associate said.

Gold Rush

Yet Zhang was more than a middleman. As his friend Zhang Chunjiang climbed his career ladder, Zhang expanded his business scope.

Zhang established Beijing Huamai Electronic Technology Co. Ltd. with registered capital of 2 million yuan in July 1995. His wife Yang Xuxia (who later changed her name to Yang Ruining) put up 800,000 yuan, and Zhang and Zhang Chunjiang’s now ex-wife Ji Rong each put up 600,000 yuan.

This became a foundation for Zhang’s other platforms, such as a company with a Hong Kong connection that made alarm systems for clients including China Telecom, China Mobile and China Unicom. But mainly these entities built relationships and shuffled documents; Caixin found only a few employees recently working at the alarm company’s office in Beijing.

Zhang established his first telecom company – Beijing Siruide Computer System Integration Co. – in 1997 and became its legal representative. The company handled computer communication network technology and project integration, but also sold telecom equipment. Huamai Electronic was a shareholder. Others were Sichuan Galaxy Technology Co. Ltd. and Sichuan businessman Li Xinze.

Apparently, one of Zhang’s first business ties to Sichuan was Li, who later worked up to Sichuan Mobile value-added and data services posts, and became a core member of the mobile phone music services provider Sichuan Mobile Music Base.

Zhang established Beijing Ruizhi in 1998, offering communications products as well as computer software and hardware. In 2001, the company invested in another outfit called Raynetwork.

Raynetwork was valuable because it held a telecommunications business license. Such a license requires approvals from multiple government departments and applications are tightly controlled by the government. Zhang sold it in 2007 for 7.2 million yuan.

These and other deals underscored the advantages Zhang enjoyed thanks to Zhang Chunjiang, who became director of MII’s Telecommunications Management Office in 1998, and other friends in high places.

Advertising Whiz

Advertising profit potential caught Zhang’s eye in 2001 after China’s telecom sector had completed its first reform step, which separated companies from government administrations. Telecom operators began to spend more money on image promotion, for example, and so Zhang and his wife set up Beijing Raynet Advertising.

In the first year, the ad company’s sales topped 14.7 million yuan thanks to big clients such as China Mobile and Sanyo. By 2002, revenues had soared to 56.4 million yuan.

The agency won a national contract from China Netcom in 2004, the year after Zhang Chunjiang took a job as Netcom’s president.
By 2007, Raynet had expanded its client base to provincial departments of telecom operators in Shanghai, Liaoning, Changchun, and other regions. Money poured in.

“After getting the Netcom project, we basically didn’t need to do ads for other telecom companies,” a Raynet executive told Caixin.

“A single provincial telecom can support a large advertising company, which can live well,” said a former provincial director of a mobile advertising agency.

A senior advertising source said it’s not uncommon for telecom executives to invest in advertising and advertising production companies, some of which can be half-owned by a telecom company chief or his family. Because production companies have no equity links to advertising companies, it’s difficult to trace the ownership links. They are also less risky than under-the-table gift-giving.
“Everyone avoids directly giving ‘red envelopes’ (cash payoffs),” said one industry insider. “Travel packages, Louis Vuitton bags, jewelry, etc., are too low brow.”

Raynet’s performance opened a door to cooperation with the global ad giant Ogilvy & Mather. The companies established a joint venture in 2007, with Zhang’s wife serving as legal representative.

Sichuan Trio

Another moneymaking venture for Zhang started in 2003, when he and Li each put up 250,000 yuan to establish We Think, a telecom technology company based in Sichuan. Its downtown Chengdu headquarters opened two years later.

The plan was to grab some of the gold available in value-added services (VAS), which had become the fastest-growing sector for the country’s major telecom operators. A rapid increase in mobile phone and Internet users gave birth to an army of VAS providers.

First came text message services, and then mobile music services through places such as China Mobile’s Mobile Music Base in Sichuan. Again, revenues surged.

China Mobile elevated the successful Sichuan Mobile’s music business, giving it oversight of the company’s nationwide music business. Numerous wireless VAS providers like We Think sprang up, and a Caixin survey found several names appeared frequently in the list of these companies’ shareholders: Zhang, Li and Tan Chunling.

Sichuan Mobile became We Think’s largest customer, but the Zhang-Li venture also did plenty of business with Sichuan Telecom.

We Think increased its capitalization to 5 million yuan in October 2004, with Zhang and Li increasing their share of the capitalization to 2.25 million yuan each through non-patented technology. The phrase “non-patented technology” refers to a mobile operator data service analysis system developed by the pair called Comprehensive Evaluation System for the Operational Strength of Mobile Operators.

Zhang and Li’s said the system’s sales revenues would rise to 6 million yuan the first year, 12 million yuan the second, and then climb to 20 million yuan, 26 million yuan and 30 million yuan respectively over the following three years. This forecast allowed them to assess intangible assets of their technology at 4.51 million yuan.

Similar technology assessments-for-investments are described in documents at other companies run by Zhang.

Service and content providers who wanted business on China Mobile’s network platform had to go through the Sichuan Mobile Data Department and Mobile Music Base. We Think waltzed through the door through Zhang’s connections at Sichuan Mobile.

Annual operating revenue rose to tens of millions of yuan by 2005, and in 2007 We Think reported 72.4 million yuan in revenue and net income totaling 27.1 million yuan.

These days, We Think has lost its sheen. Unpaid bills were found recently taped to the company’s Beijing office gate, which is shut tight. Caixin noticed Zhang’s name on one bill.

Another company registered at the address of We Think’s Sichuan branch – Sichuan Heze Technology Co. Ltd. – is in the business of communications equipment consulting and equipment sales. Established in 2004, investors included Zhang, Li and Tan.

Tan was originally a director at Sichuan Television. He later opened an advertising company whose major clients were Sichuan Mobile and other telecom operators. Li and he were the shareholders.

Tan’s main gig was an independent digital music support platform company for the Sichuan Mobile Music Base called Myoo Music Entertainment. He started it in 2005 and, with Li, bought the company in 2007 just as Sichuan Mobile Music Base was starting to provide mobile music services.

Myoo is currently near to launching an initial public offering on China’s Growth Enterprise Market. It’s already completed two rounds of fund-raising.

Wang Feng, an executive at Bond Advertising, said he invested more than 10 million yuan in Myoo. But the recent shakeup in the telecom world, the detention of Zhang, and the exposures of shady business ties linking Tan, Li and others has left him feeling uneasy about the investment.

Wang has good reason to be nervous. It appears the listing plan of Sichuan Mobile Music Base’s most important service provider Myoo now hinges on the outcome of the cases against Zhang and the rest of the telecom insiders who found a way to the pot at the end of the rainbow.

1 yuan = 14 U.S. cents

China’s Bad Signal for Mobile Phone Investors [May 26, 2011]

Myoo, Ultrapower and NetQin won investor hearts and then broke them by relying on China Mobile’s monopoly

Some 18 months after putting 10 million yuan on what appeared to be a sure bet, Chinese media investor Wang Feng is coming to terms with a disturbing truth.

“We still cannot get our money back,” lamented Wang, chairman of Bond Global International Media Advertising (Beijing) Co., in a recent interview with Caixin. “The assets of Myoo Music Entertainment Co. are all frozen, and there’s nothing we can do.”

Nothing, that is, except painfully watch China’s largest mobile phone operator China Mobile seal Myoo’s coffin in the wake of an executive corruption scandal.

Moreover, Caixin learned from sources close to China Mobile’s Sichuan Province subsidiary, Wang is now standing by helplessly as the telecom giant switches its music content business to a new provider named China Straits Global.

China Straits replaced Myoo in late April as China Mobile’s official and sole provider of music, hollowing out Wang’s investment.

The demise of Chengdu-based Myoo was dramatic and unexpected. The company looked good when it launched a start-up fund-raiser in 2009, attracting Wang and others with a promise to corner the mobile phone-wireless music market through an exclusive deal with China Mobile. It planned to launch an initial public offering in 2010, giving foundation investors a chance to cash in their chips.

Persons close to Myoo told Caixin the company booked 80 million yuan in revenues and 50 million yuan in profits for the first nine months of 2009. Revenues and profits were forecast to rise to 100 million and 60 million yuan, respectively, for 2010.

The dream started falling apart in mid-2010, however, shortly after Li Hua, former general manager of manager of China Mobile’s Sichuan branch, was placed under investigation for alleged financial misconduct. That move followed the disappearance in March of Li Xiangdong, then the general manager of China Mobile’s Sichuan Mobile Wireless Music Base, who apparently fled the country with a sizeable amount of money and is currently at large.

The investment in Myoo was a fraction of the large amount of private money that’s been rushing into the telecom industry in China in recent years. Even today the players keep coming, despite the industry’s status as a state-owned sector monopolized by state companies such as China Mobile.

Neither the Myoo investment debacle nor business troubles now facing China Mobile contractors Ultrapower and NetQin curtailed investor interest in telecom businesses. But these cases are now serving as a wake-up call for players such as Wang, and a reminder that business foundations can be fragile for second-tier telecom service providers in China.

By teaming up with a state monopoly and massaging official connections, a private telecom service provider initially may find it easy to overcome technical and policy barriers for doing business. But success often hinges on orders from companies at the mercy of ever-changing government policies and subject to fallout when management troubles, such as a corruption case involving a high-ranking executive, bubble to the surface.

Death by Scandal

The troubles in Sichuan followed the late 2009 sacking of Zhang Chunjiang, China Mobile’s vice chairman, who had been placed under investigation for alleged corruption.

These high-profile corruption cases at China Mobile laid the groundwork for Li Yue’s appointment as China Mobile CEO last August and a broad reshuffling among executives at provincial branches. Li Yue’s predecessor Wang Jianzhou gave up the CEO job but retained his post as company chairman.

Li Yue adopted a strong stance with promises to reform business models of the company’s value-added services. These measures are designed to restructure internal and external interests. But the process has threatened a large number of “related parties” – sometimes called “parasites” – that cannot live without China Mobile.

Just a few months before the Sichuan executive scandal broke, Wang decided to put his money on Myoo. He made the decision after reading an investment report issued by CITIC Securities, whose direct investment arm Gold Stone Investment Ltd. had also joined in financing Myoo.

In December 2009, Myoo hired a broker, accountants and a legal team to help steer the company toward a listing on the Shenzhen exchange’s high-tech start-up board ChiNext by 2010.

Myoo’s equity capital started at 1 million yuan and quickly swelled to 46 million yuan after two financing rounds. The company attracted support from more than 20 individual and four institutional investors.

Some investors, such as Wang, were lured by Myoo’s growth prospects outlined in the CITIC report and impressive financials. Others had various inside connections to the new company.

Sources close to Myoo Chairman Tan Chunling said more than 10 players in the first round claimed special connections with the company and even “deep government” ties.

Myoo had fewer than 70 people on its payroll but an exclusive contract to support China Mobile’s Sichuan-based wireless music base, which generates tens of billions of yuan in revenue every year.

Moreover, the company had a monopoly. Like other well-connected service providers in China’s state-dominated sector, it enjoyed an exclusive sales channel and stable cash flow. Plus, its growth potential seemed immense.

One source said the investor group included some Myoo backers whose unique connections or official backgrounds offered the company special advantages.
After the corruption probe started, however, Myoo lost its contract with China Mobile. Sources close to Sichuan Mobile said Myoo’s Tan visited Beijing in July 2010 in hopes of salvaging the deal with China Mobile.

But Tan was unsuccessful. And he was later implicated after telling police he gave Li access to a 2 million yuan bank account. He later discovered that the balance had ballooned to 20 million yuan. Myoo’s accounts were subsequently frozen by authorities.

Risky Business

The dangers inherent for investors in monopoly-related service providers such as Myoo are also evident in the recent histories of China Mobile contractors Beijing Ultrapower Software and NetQin Mobile Inc.

Ultrapower and NetQin were both successfully listed. Both companies are now on the rocks, along with their start-up investors.

Ultrapower operates China’s Mobile’s Fetion instant messaging service, which links mobile phones and computers on the Internet. It’s almost exclusively dependant on the telecom giant.

Ultrapower’s foundation investors included CITIC Securities’ Gold Stone and venture capital firm Huijin Lifang Capital Investment Co., which bought respective 2.2 percent and 2.8 percent stakes five months before the 2009 IPO. They paid only 20 percent of the IPO launch price of 58 yuan a share.

Just before the listing, China Mobile extended its contract with Ultrapower to three years, encouraging investors. And within four months of going to the stock market, Ultrapower’s share price surged 500 percent.

Then came the corruption scandal and China Mobile’s decision to reorganize value-added services. In connection with the ongoing overhaul, the company may decide to let its Fetion contract with Ultrapower run out when the current deal expires in November.

Ultrapower’s future is now uncertain, since it does not own the Fetion brand nor the intellectual property rights. Investment funds have been pulling out of Ultrapower since the first quarter, and its share price has declined nearly 20 percent so far this year.

NetQin is also heavily reliant on China Mobile, having signed a contract in 2010 to provide security scanning and authentication for all software, games and files uploaded to China Mobile’s application store.

Caixin found that while NetQin’s prospectus says most revenue comes from mobile carriers and value-added service providers, including China Mobile and Tianjin Yidatong Technology Development Co. But China Mobile is by far the biggest moneymaker.

Yidatong accounted for 52.7 percent of NetQin’s net revenues in 2008, but that portion shrank to no more than 21 percent in 2009 and 2010. In fact, 9-year-old Yidatong merely functions as a bridge between China Mobile and NetQin.

But investors loved NetQin and participated in four rounds of financing between 2007 and 2010. Sequoia Capital and GSR Ventures jointly invested US$ 3 million in June 2007. Ceyuan Ventures and Fidelity Asia Venture added undisclosed amounts in October 2007, while GSR and Ceyuan invested a combined US$ 20 million in April 2010. NetQin increased its stock in November 2010, attracting Taiwanese mobile phone maker HTC Corp., which invested US$ 2.5 million, and Gaintech, a subsidiary of Taiwanese chip maker MediaTek, which provided US$ 2.2 million.

Investors knew all about NetQin’s inside connections. The company made no secret of its being favored by “leaders” and “revolutionary predecessors.”

A NetQin press release last November announced a company visit by General Zhou Erjun, a nephew of the late premier Zhou Enlai and former political department director at the National Defense University. The company called itself “a revolutionary offspring” and “a new generation of technology worker that grew up under the red flag.”

NetQin’s walls started collapsing March 15, a day before the company planned to submit its IPO application, when the official China Central Television (CCTV) reported that the company was forcing consumers to use its software. The report labeled company products “rogue software.” And according to the report, consumers were being forced to pay service charges through Yidatong.

After the CCTV story appeared, China Mobile temporarily suspended its business with NetQin, but it did not penalize Yidatong.

NetQin then submitted its New York Stock Exchange IPO application to the U.S. Securities and Exchange Commission (SEC) as planned but lowered its asking price, scaling back the fund-raiser to US$ 75 million from US$ 100 million.

NetQin expanded its SEC report April 9 to cite risks tied to the CCTV exposure, adding that the company should reduce its reliance on mobile carriers such as China Mobile.

On launch day May 5, NetQin’s share value fell 19 percent from the initial asking price, exposing another dimension to the risks inherent among China Mobile’s contractors and across the board for monopoly sectors in China.

China Mobile names new manager [May 31, 2010]

China’s biggest mobile carrier China Mobile announced Monday that Wang Jianzhou, the current general manager of China Mobile has been nominated chairman of the firm, and Li Yue, the deputy manager of the company will be appointed as the general manager of the corporation.

Wang used to be the deputy secretary of CPC leadership group of China Mobile.

At the request of the State Assets Supervision and Administration Commission (SASAC), the firm will set up a board of directors with a chairman and general managers.

Wang said that the firm has made great achievements in the past years, but faces many challenges ahead. Li stated that the development of the internet would bring new opportunities for the firm and it will strive for more.

Ericsson Employee Probed for China Mobile Scandal [Nov 18, 2010] (emphasis is mine)

The probe is related to corruption charges surrounding two high-ranking executives from China Mobile over telecom equipment procurement

(Beijing) – An equipment procurement officer from Ericsson, the international mobile equipment supplier, was brought in for questioning to assist in the investigation of the ongoing China Mobile scandal in Southern China.

The investigation is related to corruption charges surrounding two high-ranking executives of China Mobile’s Sichuan branches who stand accused of accepting bribes in exchange for equipment deals. Li Hua, the general manager of China Mobile’s Sichuan branch, and Chen Binglan, the deputy general manager of China Mobile’s Sichuan branch responsible for equipment and project procurement, have been placed under custody of the party’s disciplinary agency.

Caixin learned from sources close to the situation that just after the corruption case of Li was exposed, the focus of investigation has since moved to Chen.

China’s telecom industry has seen a huge expansion of networks in recent years and equipment procurement deals have become a hotbed for corruption. Since the 1990s, fixed line telephone subscribers have increased from 10 million to 1.1 billion, and mobile phone subscribers grew to 800 million from zero. The huge volumes involved in telecom equipment purchases and related services have become an important source for global equipment suppliers to grow their profits.

Equipment suppliers from different countries have employed strikingly creative tactics to grab a bigger share of the pie.

Previously, the corruption case of Shi Wanzhong, former chairman of China Mobile’s Anhui branch, this year brought to light the involvement of Siemens Telecommunication. (See Century Weekly’s cover story of “Shutdown for a Gatekeeper of Telecom Gold” in the 30th issue for details. http://english.caing.com/2010-07-30/100165466.html)

Another person detained for investigation by related authorities was Shen Changfu, the Party chief, chairman and general manager of China Mobile’s Chongqing branch, for his dealings in equipment procurement from foreign suppliers, including Ericsson.

Similar to the career path of Li Hua in the telecom sector, Shen Changfu was formerly the director of Chongqing Telecom Administration, and later in charge of China Mobile’s Chongqing branch when the company was founded along with reforms in the telecom sector.

Both Sichuan and Chongqing are important regions for Ericsson’s presence in China. In 2004, Ericsson established its Western China headquarters in Chengdu. Ericsson had four regional units in China at the time: the Northern region, the Southern region, the Central regions and the newly-established Western region. The Western region of Ericsson China covers markets in Sichuan, Chongqing, Yunnan, Guizhou and Tibet. The company has on several occasions reiterated Ericsson’s strategic development in Sichuan, saying that it is one of the most vigorous telecom markets in China. The company is counting on the central government’s active support of infrastructure development in Western regions for greater demand in telecoms platform building.

Chongqing is yet another important base for Ericsson. Founded in 1998, Chongqing Ericsson Technology Co., Ltd. is the sole subsidiary of Ericsson in Western China, providing professional telecom services, primarily responsible for the delivery of telecom services and technical training to operator customers of Ericsson in China’s Southwestern areas. In 2006, a center for supply, procurement and telecom services was opened by the subsidiary in Chongqing, offering procurement, integration and backup services to Ericsson China and its global products.

Although Ericsson has remained the No. 1 telecom equipment provider in the global market for quite some time, its performance has disappointed many this year. As revealed in its third quarter financial report in October, net sales were SEK 47.5 billion, up 2 percent year-on-year but down 1 percent from quarter-on-quarter. In the first nine months of this year, Ericsson reported total sales of SEK 140.6 billion, down 5 percent year-on-year, and an operating income of SEK 16.1 billion, down 6 percent year-on-year. Its profit margin this quarter was 39 percent, up three percent year-on-year.

In contrast to the fast growth of Chinese equipment manufacturers such as Huawei and ZTE, Ericsson, as one of the global telecom giants entering the market of China at an early stage, has been relegated to daily diminishing market presence in China. Ericsson ranked next to last place among all the suppliers in terms of successful bidding during the fourth round of TD-SCDMA bidding this year.

Former Telecom Executive to Face Charges [Jan 7, 2011] (emphasis is mine)

China Mobile’s former deputy manager and party secretary will be handed over to judicial authorities now that the almost year-long party disciplinary investigation has been completed

(Beijing) — A former executive of China’s largest telecom operator, China Mobile, may face official charges after the completion of a Communist Party investigation, according to Gan Yisheng, deputy secretary of the Central Commission Discipline Inspection (CCDI).

The case of Zhang Chujiang, China Mobile’s former deputy manager and party secretary, has been handed to the country’s judicial system by the party’s disciplinary agency to be formally charged, said Gan.

Caixin learned that a provincial prosecutor in Northern China will process Zhang’s case of alleged corruption.

The Party investigation into 52-year old Zhang’s dealings at China Mobile was launched in December 2009. On September 10, 2010, Zhang was expelled from his position and the Communist Party of China.

Zhang has spent most of his career in the telecom industry at China Mobile and China Netcom. In addition, he has worked for the central government and at one point held the position of vice minister at the Ministry of Industry and Information Technology.

After the Party investigation opened into Zhang early last year, several other officials at China Mobile’s Sichuan branch were implicated in similar allegations of official wrongdoing. Li Hua, president of Sichuan Mobile and Li Xiangdong, head of China Mobile’s wireless music operations, as well as a procurement officer from global mobile equipment provider Ericsson was also found to be involved in the crimes.

Sources familiar with the situation told Caixin that the investigation headed by the CCDI has come to a close.

Chief Engineer of MIIT Under Probe [March 24, 2011]

An industry insider said the case may be linked to the China Mobile corruption scandal

(Beijing) — Su Jinsheng, chief engineer of the Ministry of Industry and Information Technology (MIIT), is under investigation on alleged disciplinary violations, Caixin has learned from sources close to the situation.

A source familiar with the matter said Su had been absent from work since he was taken away for questioning by disciplinary authorities.

The exact cause of his detention has yet to be revealed. An industry observer said Su is suspected of involvement in China Mobile’s corruption scandal, currently under investigation by the Communist Party’s disciplinary agency.

An initial probe into China Mobile brought down a group of China Mobile’s high-level officials on corruption charges last year, including Li Hua, the general manager of China Mobile’s Sichuan branch, and Chen Binglan, the deputy general manager of China Mobile’s Sichuan branch. The investigation has yet to be concluded.

Su was named the chief engineer of MIIT in April 2009. He was also the director of MIIT’s Telecommunication Management Bureau, and the director general of the Telecommunications Administration Bureau of the Ministry of Information Technology. In June 1999, he was appointed temporary Communist Party secretary and the head of a working team in charge of preparation work for establishing the China Mobile Communications Corporation.

Su made his last public appearance on March 16 when he attended an industry conference in Beijing.

Wrong Key Fumble for China Mobile in Pakistan [May 23, 2011]

Last place among Pakistani carriers was not what China Mobile expected when it started a global expansion

Ramble around Islamabad and you’ll find the word Zong plastered on walls everywhere, and prominently displayed on signboards near the city’s most popular Chinese restaurants.

But Islamabad’s familiarity with Zong, the brand name for China Mobile Ltd.’s overseas operations, need not be interpreted as a sign of success for the Chinese mobile phone service in this crowded capital city, or anywhere else in Pakistan.

China Mobile has been struggling to build a Pakistani business since buying the domestic carrier Paktel, today known as CMPak and the brand name Zong, in early 2007 – four years after Pakistan opened its telecom market to international competition.

The acquisition marked a proud beginning for the Chinese carrier’s global expansion, which continues today. China Mobile paid US$ 560 million for what was then Pakistan’s fifth-largest mobile operator.

But today, Zong is still in fifth place – at the bottom of the heap among mobile carriers in Pakistan, where the mobile phone penetration rate has stabilized at about 60 percent.

Zong’s user base has increased from less than 1.5 million in 2007 to 6.92 million by the end of 2009, but its major competitors have picked up far more customers, according to the Pakistan Telecom Administration (PTA).

Among the 97.6 million Pakistanis with mobile phones in 2009, PTA says nearly one-third were serviced by Mobilink, a subsidiary of Egypt’s Orascom. The Pakistani subsidiary of Norway’s Telenor counted 22.5 million customers, while Warid Telecom had 18.8 million users and Ufone 18.5 million.

Neither is Zong getting the kinds of revenues enjoyed by its competitors. Among all carriers, PTA says, average revenues per user are about US$ 2.50 per month. But a Zong user generates only an average US$ 1.50 for the Chinese company.

Because Pakistan and China are political allies, Zong’s struggle has been particularly painful for China Mobile, the world’s largest wireless service in terms of subscribers.

“If we cannot succeed in Pakistan, we’d better not go anywhere else” outside China, the company’s Chairman Wang Jianzhou declared after the Paktel acquisition.

Door Knocking

PTA data obtained by Caixin says Pakistan’s mobile phone user coverage rate was only around 8 percent in 2004 and 22 percent the next year. China Mobile bought into the market when the coverage rate had reached 54 percent. The rate continued growing rapidly as the Chinese company settled into its new territory and, in 2008, launched the Zong brand.

By the time Zong arrived, its four competitors had already secured market positions, and the coverage growth rate had slowed considerably.

China Mobile first knocked on Pakistan’s door in 2005, after the Pakistani government offered to sell a 26 percent stake in Ufone, a subsidiary of Pakistan Telecommunication Co., to the highest foreign bidder.

China Mobile was one of 13 international players that participated in the auction, but lost with an offer of US$ 1.4 billion. The winner was Etisalat of the United Arab Emirates, which paid US$ 2.6 billion.

Afterward, Wang said he had no regrets. “Market pressure would have been too great had we offered a price that was too high,” he said.

Nevertheless, Ufone’s strong performance in the following years brought Etisalat satisfactory returns. According to PTA, Ufone’s subscriber list has grown nearly 11-fold since 2004, stabilizing at around 20 million in 2010.

Negotiations with Nasdaq-listed operator Millicom gave China Mobile another opportunity in 2006. The Luxembourg-based company then had about 10 million subscribers in 16 emerging countries in Latin America, Africa and Asia, including Pakistan.

And at the time, Paktel was a Millicom subsidiary – as well as the worst performer in the multinational’s portfolio.

China Mobile hired China International Capital Corp. (CICC), China’s largest investment bank, as a financial advisor to prepare a bid for Millicom in collaboration with Bain Capital, a private equity firm.

The deal was close to signing, a source told Caixin, and Millicom’s market capitalization was around US$ 5.6 billion when CICC suggested China Mobile offer US$ 4 billion. The advisor had valued the Paktel portion of the company at zero.

The Chinese eventually abandoned the Millicom deal due to concerns about political risks in emerging countries and potential management issues. But in the end, China Mobile got Paktel.

More recently, minus Paktel, the market capitalization of Millicom has risen as high as US$ 15 billion.

China Mobile tried to open the Pakistani market door with the same key that worked in China. But the key didn’t fit because each market functions under a different regulatory framework, with a different business environment.

For example, China’s telecom market is monopolized by state-owned China Mobile and two other carriers, while Pakistan’s market is open to price-cutting competition.

A PTA report said the Pakistani mobile industry generated US$ 2.8 billion in total revenues in the 2009-2010 fiscal year, up 11 percent from a year earlier, even though tariffs decreased up to 20 percent.

Pakistan is also one of the few countries that heavily taxes telecom operators. And Pakistani mobile phone subscribers are typically price-oriented, say industry experts, with a habit of chatting on the phone for long periods of time.

Another difference is that mobile phone numbers are freely transferable in Pakistan, allowing customers to switch service providers at will. So if Zong tries to raise prices, its subscribers are likely to leave for another operator with a better tariff.

This business environment means user coverage rates are crucial for operator profits in Pakistan, and so far Zong’s rate has fallen far behind its rivals.

China Mobile tried to win more Pakistani customers by applying a rural market strategy that succeeded in China. It was Wang who had won China Mobile a huge rural customer base starting in 2004 – a move that’s underpinned the company’s high growth rate for years since.

But the strategy failed in Pakistan, partly because rural land needed for telecom bases and equipment is not cheap. Rural property in China, on the other hand, costs far less than urban parcels. In addition, carrier network operations and maintenance have been impeded by weak infrastructure in Pakistan, especially in rural areas.

China Mobile’s lackluster performance in Pakistan can also be attributed to human resources. An investment banker familiar with the company told Caixin that China Mobile executives rejected the advice to retain a Pakistani management team after buying Paktel, and instead dispatched a team of Chinese managers to oversee operations and control critical areas such as human resources and finance.

“The first batch of people sent to Pakistan came from domestic provincial branches of China Mobile,” the banker said. “They did not have good language skills, and therefore encountered serious communication problems.”

China Mobile gradually withdrew its Chinese managerial staff starting in 2009 and switched to a localized approach. The Zong marketing staff, whose job includes overseeing an army of signboards in Islamabad, is now entirely Pakistani.

Another Try for Telecom-Broadcast Reform [March 11, 2011]

Last year’s plan to integrate the nation’s telecom and broadcast operations is dead, but the reform push is still alive

A plan to integrate China’s media networks ground to a halt last year as broadcasters and telecom operators failed to settle their differences.

This year, however, a fresh start may be coming soon as policymakers get involved with new efforts to integrate operations, particularly broadband Internet, through top-down restructuring orders.

Ministry of Industry and Information Technology (MITT) chief Miao Wei recently declared the pilot integration plan will not expand this year, telling legislators at the National People’s Congress and the Chinese People’s Political Consultative Conference sessions that an ambitious project aimed at blending networks had breathed its last.

A source told Caixin that each of 12 cities and provinces involved in the pilot project’s initial stage last year later submitted detailed plans to the central government to push forward the integration. But none received a reply, thus underscoring the government’s interest in trying a fresh approach.

In another signal that the government wants to move forward, Caixin learned MITT recently urged telecom operators to explore possibilities for a new round of restructuring.

That call was followed by a plan floated by telecom operators to break up the nation’s largest mobile phone company, China Mobile, and divide its assets between two telecoms – mobile provider China Unicom and landline giant China Telecom – as well as the nation’s broadcasters.

In a March 7 interview, China Mobile Chairman Wang Jianzhou told Caixin he’s heard the arguments for a new round of telecom reshuffle. But Wang called the idea impractical. And MITT officials denied the existence of a breakup plan.

The nation’s telecoms had strongly opposed an earlier plan to shift some telecom responsibilities to broadcasters floated by the Chinese Academy of Social Sciences. It called for transferring all 100,000 Internet data facilities run by China Telecom and China Unicom – facilities which see annual revenue at about 6 billion yuan – to cable television companies operating under a proposed, new National Broadcasting Television Network Co.

Broadband Battle

This proposed national broadcast company would operate a broadband cable network supervised by the State Administration of Radio Film and Television (SARFT). That’s because to many in broadcasting industry, broadband issues pose the greatest barrier to telecom-broadcast integration.

China Telecom and China Unicom currently dominate China’s Internet services by providing broadband networks, the international access, data centers and content flow.

The government lets broadcasters and telecoms alike operate broadband services, and it’s given broadcasters certain advantages. But only telecoms offer international broadband access and intra-network settlement.?

Broadcasters argue that relaxing the telecoms’ monopoly grip on Internet broadband should be a first step toward network integration.

Under the academy of sciences plan, China Telecom and China Unicom would appraise the values of their data center businesses before breaking them up to hand over to the National Broadcasting Television Network Co.. The proposed network company would be responsible for operating and servicing all content on the Internet and TV in China.

Under the plan, MITT would focuses on regulating telecom operations and competition among the country’s three operators – China Telecom, China Unicom and China Mobile. And the operators would be responsible for building and operating the broadband and Internet access networks.

Meanwhile, SARFT would become responsible for monitoring broadband media content and issuing permits for operating, monitoring and managing the broadband market.

Among those objecting to the plan is Kan Kaili, a professor at Beijing University of Posts and Telecommunications, who argues that network and business operations must be separated in a way that breaks up the monopoly in broadband market. He said any restructuring that creates a larger company with a vertically integrated monopoly would make a bad situation even worse.

Yang Peifang, a telecom expert from the MITT, also opposes the academy’s plan. He said broadband woes are mainly a business problem that would not be resolved through a new administrative monopoly. Yang said service businesses should be developed to encourage orderly competition and make the communications market more profitable.

The central government has long supported giving SARFT responsibility for an integrated broadcast-telecom platform, but telecoms consistently objected.

Luo Mingwei, an official with China Telecom’s Department of Regulatory Affairs, recently wrote in an article for the industry publication People’s Posts and Telecommunications News that the plan to “centralize broadcast and control rights under the broadcasting sector” triggered concerns among network operators. These concerns centered on “whether market operation and industry development is moving toward the market, or rather toward a model integrating politics and business,” he wrote.

Luo’s article underscored the argument that any telecom-broadcast reform will require clearly separating politics and business, and building an industry regulation model that satisfies market needs as well as supports national security.

Yang told Caixin a current priority should be to build and coordinate a regulatory body that oversees broadcasting and telecom management. The next reform moves should create “a complex system that cannot be simplified,” he said.

“It’s hoped that this reform can follow more technological and economic principles, and refer more often to opinions from industry experts,” Yang said.

China Mobile, SPDB Join Hands in Mobile Payment [Nov 26, 2010]

The size of the mobile payment market in 2010 will reach 2.84 billion yuan, while customers are expected to hit 150 million

(Beijing) — Shanghai Pudong Development Bank (SPDB) and China Mobile Ltd. announced a strategic partnership on November 25 in which the two will jointly develop financial services through mobile phones.

According to Wang Jianzhou, chairman of China Mobile, the mobile carrier’s equity investment in SPDB was completed in October. China Mobile now holds a 20 percent stake in SPDB.

Xue Jianhua, general manager of SPDB’s electronics department, said that the biggest obstacle for China’s electronic payment services market is the lack of technological and regulatory standards. Backed by the partnership, the two will try to push forward a national standard for mobile payments for mainstream use.

According to Xue, China Mobile and SPDB will launch new products or services under the partnership as early as the second quarter next year.

In 2009, China’s mobile payment market was valued at 1.97 billion yuan with 82.5 million customers. According to consulting group iResearch, the size of the mobile payment market in 2010 will reach 2.84 billion yuan, while customers are expected to hit 150 million.

Xue said that the two will also jointly explore more business cooperation opportunities related to ATM machines and other payment terminals.

How Jack Ma’s Mistake Damaged China’s Market [June 14, 2011]

By secretly transferring Alipay, the Alibaba founder violated contract rights that China should reinforce

Business contract principles and property rights together form a basic cornerstone of the market economy. But contract violations can crack the cornerstone and undermine an entire market structure.

Few people ever thought China’s Jack Ma, the highly successful Internet entrepreneur who frequents international events speaking fluent English, would ever secretly transfer the online payment service Alipay, a core asset of Chinese-foreign joint venture Alibaba Group, to a private firm he controls.

But Ma and his management team, an Alibaba minority shareholder, did indeed transfer Alipay starting in June 2009 and closed the deal in August 2010. A low price was paid, and the process went unreported until recently.

In the face of this outcome, Alibaba’s foreign stakeholders Yahoo and Softbank have two options: They can sit down at the negotiation table with Ma and work out a compensation package, or they can pursue a legal course by suing Ma and his management for maliciously infringing on shareholder interests, and hopefully bring Alipay back to the Alibaba fold.

Yahoo and Softbank together control 70 percent of Alibaba. Currently, Yahoo wants to bargain for compensation while Softbank has refused to talk with Ma, leaving room for maneuvering.

No one knows what will happen next, but public opinion has already rendered judgment. We agree with the majority who say Ma is wrong. He made a mistake by violating contract principles that support the market economy, and his error is having dire consequences.

Ma founded Alibaba and took most of the credit for Alipay’s commercial success. He has every reason to be fully committed to and concerned about the company’s future outlook. And he is well qualified to benefit from Alibaba’s growth.

However, by acting without the consent of Alibaba’s leading shareholders, Ma was presumptuous to transfer the company’s core asset to a concern under his name, for a price too low to be fair. He seriously violated a contract between Alibaba’s shareholders, and the contract between shareholders and management.

Yahoo and Softbank lost a valuable asset. Yahoo’s share price slumped as a result, and now the company faces a class-action lawsuit filed by U.S. shareholders. Unless there was some other kind of agreement that hasn’t been revealed, also seriously damaged were the interests of other members of the managerial staff with stakes in Alibaba.

The ostensible beneficiaries of the transfer were Ma and another Alibaba founding member, Xie Shihuang. Ma owns 80 percent and Xie 20 percent of the private firm that took over Alipay.

Even if Yahoo, Softbank and Ma work out a compensation agreement that’s approved by Alibaba’s board of directors, a basic fact cannot be denied: Management led by Ma took unilateral action and violated a basic principle of commercial society by failing to abide by a contract.

A contract requires credibility and integrity. A violation leads to imbalance and weakens an enterprise. So Ma is paying a heavy price: The international business reputation that he has been building for years has been tarnished, and prospects for Alibaba’s long-term growth have been diminished.

The damage does do not stop there. In economic terms, the move points to a great “negative externality.” If contracts are not respected, an entire society could face an increase in commercial risk that unnecessarily drives up business costs.

Honoring contracts is often a weakness for Chinese companies. It’s not uncommon for insiders to re-appropriate assets. But this old black eye becomes even more pronounced when it involves someone like Ma, an internationally respected figure who’s seen as a representative of Chinese entrepreneurship and, as the Alibaba chief, a success story China can be proud of.

The Alipay transfer at a discount likewise delivered a direct blow to overseas investor confidence in Chinese companies, sapping their trust. That may explain why many who once loved Ma and pinned their hopes on him now feel so much regret.

Of course, Ma’s mistake is not simply a matter of personal integrity. He is an entrepreneur with good credit, as his track record proves. And one reason why he went against contract principles on the Alipay issue is connected to the hesitancy of regulators at the People’s Bank of China.

The central bank for years delayed a regulatory decision on licensing third-party payments businesses such as Alipay. The vague process reflected a less-than-open-minded attitude toward foreign investors in third-party payment operations.

The central bank started soliciting opinions on proposed rules for third-party payment systems back in 2005. In the regulations finally enacted in June 2010, the central bank said foreign-funded third-party operators would have to follow special rules to access the Chinese market and would need State Council approval.

Yet at this point, China can and should open its third-party payment services to foreign investors. It’s unnecessarily complicated to make Chinese and foreign companies follow different sets of rules. So it is regretful that the Alipay transfer by Ma was not only an unwise move but motivated by unwise policy.

Contract fulfillment hinges on a complete institutional arrangement. The planned economy unfortunately disrupted China’s long-standing commercial traditions. Even today, we are still traveling a long, arduous road to build a market economy. In the next stretch, we should create a system in which independent mediators, arbitrators or a judicial force can be summoned to settle contract disputes. Such a legal system is needed to support the market economy. Currently, if Softbank or Yahoo sue Ma in China, the impartiality of Chinese judicial officials would be tested.

The Jack Ma success story is perhaps more famous in today’s China than the original Arabian Nights story of Alibaba. We hope that eventually Ma’s tale has a happy ending. We also hope to see more wealth stories for Chinese companies.

But this is no fairytale scene. There is a real need to uphold the spirit of contractual agreements with honor and integrity, and thus reinforce a solid market economy in China. Reaching this goal has much to do with the future of China’s vibrant commercial system.

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3 Comments

  1. […] direct investment relationships between the US and China? [Experiencing the Cloud, Aug 19, 2011] – SOEs and state coexistence in China [Experiencing the Cloud, July 13, 2011 – Jan 31, 2012] – All of the Experiencing the Cloud posts […]

  2. […] goal with that was to complement my two earlier posts on:- SOEs and state coexistence in China [June 19, 2011 – Feb 24, 2012]and- Entrepreneurial global brand building by the founder of the […]

  3. […] “misterious” [Oct 12, 2012] – ICT Top-100 in Mainland China and the #1 Huawei [June 4, 2011] – SOEs and state coexistence in China [June 19, 2011 – Feb 24, 2012] – Entrepreneurial global brand building by the founder of the […]

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