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    China Business
     Aug 17, 2007
Page 1 of 2
China's elite economic double standard
By Willy Lam

While widely recognized as holding conservative ideological and political views, the Chinese leadership of President Hu Jintao has been given reasonably high marks for pushing forward economic reforms initiated by the late patriarch Deng Xiaoping.

According to World Trade Organization provisions, the Chinese Communist Party (CCP) has opened up an unprecedented number of sectors for foreign-equity participation. Yet the authorities have at the same time tightened control over other

aspects of the economy. This has resulted in the truncation, if not atrophy, of thousands of private firms. These are in danger of being edged out by powerful monopolies and oligopolies that are controlled either by the party-and-state apparatus or by senior cadres and their offspring.

Officially, the leadership under President Hu and Premier Wen Jiabao has been committed to expanding the non-state sector, which has grown exponentially because of high levels of foreign direct investment - US$69.5 billion in 2006 - as well as the massive outlays of gumin, a reference to the millions of "stocks-crazed" Chinese who have opened securities-related investment accounts with banks and brokerages. [1]

Yet it must be noted that the sector that has benefited most from what pundits call the "preliminary stage of capitalism with PRC [People's Republic of China] characteristics" consists of the so-called "aircraft-carrier-type" enterprise groupings under the CCP and government apparatus.

These giants are supervised by the powerful State Council agency, the State-owned Assets Supervision and Administration Commission (SASAC). While nearly all of these quasi-governmental behemoths, including the three oil-and-gas monopolies, the energy and electricity groups, airlines and telecoms, and most of the major banks, are now publicly listed companies, government ministries or State Council entities control up to 50% of their shares. Moreover, most of their top executives are appointed by the CCP Organization Department in consultation with the SASAC. These privileged "red businessmen" carry the official ranks of ministers or vice ministers.

Last year, total assets of these 160 or so state monopolies and oligopolies amounted to a stunning 12.20 trillion yuan ($1.6 trillion), or about 57% of the country's gross domestic product. In addition, they generated 720 billion yuan in earnings, half of which were made by the three oil giants alone. Up to 80% of the year-on-year increase in profits realized in 2006 by all Chinese enterprises were attributable to longduan (monopoly financial groups) or monopoly firms in the areas of oil and petrochemicals, electricity, coal and metals.

Thanks to their cartel-like powers, these firms are also least affected by the rise in costs of raw materials or energy. Equally controversial is the fact that their chief executive officers and senior executives are earning up to 10 million yuan a year. While China is still a putatively socialist country with egalitarian values, the paychecks of these top managers are up to 27 times those of their employees. For an administration that is committed to "putting the masses first", it does not help that a number of the bosses of the longduan firms are the sons and daughters of party elders.

The children of former premier Li Peng, for example, are running two of the electricity monopolies. This has prompted even the state media to decry the rise of "special privileges" and the emergence of a "new class of monopoly state capitalists" at a time when friction among disparate socioeconomic groupings is threatening to tear apart the social fabric. Even the official Xinhua news agency recently ran a commentary decrying the fact that "the high earnings of longduan sectors have posed a challenge to social harmony".

Beijing has consistently denied that it is protecting the big groupings - reminiscent of the keiretsu in Japan and chaebol in South Korea - while constricting private economic entities. Two years ago, the State Council unveiled a set of "36 regulations on the non-state economy", which in theory extended "national treatment" to the non-government sector.

Private firms were allowed to venture into areas such as finance, electricity, telecommunications, railways, civil aviation, oil and natural gas. In 2005, when 14 private airlines went into business, it was hailed as a high-water mark for non-state firms' debut in the transportation sector. Most of these private airlines, however, are now in dire straits for a number of reasons, including difficulty in securing loans from big banks.

More important, SASAC published a contravening set of policies last year, which said that seven sectors, including military equipment, electricity, oil and petrochemicals, telecommunications, coal, civil aviation and shipping, must be either entirely controlled or dominated by state firms. "Domination" means that the three biggest companies in a longduan sector must be SASAC-affiliated firms.

Moreover, regulations governing private companies entering state-protected sectors are deemed even more stringent than those for multinationals. For example, non-state companies that want to 

Continued 1 2 

China's unbalanced economic engine (Jul 21, '07)

China's new-old inflation paradigm (Apr 26, '07)

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(24 hours to 23:59 pm ET, Aug 15, 2007)


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