It will be business as usual at SOEs despite reform noises
Call it an investment platform or whatever you like, but any new structure won't alter cosy world at top so long as party picks the team
For better management of state assets, the authorities are studying the establishment of three kinds of state capital management platforms: an industry investment company, state asset investment holding company and state asset operating company
China Securities Journal
Don't bother trying to understand these confusing names and how exactly they are going to make China's state-owned enterprises competitive as pledged at the third plenum.
The fact is, they won't. While the Communist Party continues to retain its tight control over SOEs, the establishment of government-owned and board-led investment platforms to manage them is unlikely to bring any fundamental change.
Yes, Temasek Holdings - the Singaporean government's investment arm on which Beijing is modelling its state-asset management platform - has an ex-minister as its chairman and the prime minister's wife as its chief executive.
But in China, the party's control over its corporate managers goes way beyond that. First, the party's Organisation Department picks not only the chairman of SOEs but also the executive directors, general manager, chief accountant, chief legal officer and even deputy general managers. It's in charge of appraisals and dismissals as well.
How is the board of an investment platform going to control a subsidiary or ask for returns when it doesn't get to pick even the latter's deputy general manager?
Second, in deciding who gets what jobs, experience, relevance and track record often count for less than political correctness and connections.
This problem is illustrated by the Organisation Department's experiment with credential-based hiring. It has put up about 70 top jobs for open recruitment both at home and overseas in the past 10 years. Some career managers stepped forward. Yet, on the first day of work, they were told to surrender their passports to the department, meaning they could not leave the country without the department knowing about it.
At the end of their first year, they received no corporate-style "appraisal". Instead, the department invited them to a "seminar" where different people, stakeholders or not, discussed their behaviour.
Whatever the department claims, the system has no room for career managers.
Needless to say, the proportion of career managers hired in the open recruitment dropped from 40 per cent in 2006 to zero in 2010.
How good could an investment platform be in managing state assets if it can't hire the best manager for itself or its subsidiaries?
Third, all the appointments are made independent of each other. That means the chairman or the general manager didn't get to choose his or her team. Neither can they fire underlings for poor performance.
A very well-connected chairman may be able to get one or two of his favourites on board or remove one or two blockheads. But that's about it.
The only exemption known is the hiring by some of the window companies in Hong Kong where it's technically impossible for the party to do the hiring. After much lobbying, their chairmen got to choose the deputy general managers.
How is an investment platform to hold a chairman of a subsidiary accountable for the result when they can't control their subordinates?
Fourth, the party rarely removes a manager for making a loss. After all, how much can you blame a chairman for failing when he or she was placed in a job without the relevant experience and much say over his or her team? Social stability and job creation have always been the priority of the party over profits. In this sense, the case of Chalco is most illuminating.
While its privately owned competitors were making a fortune, this state-owned aluminium producer lost 8.23 billion yuan (HK$10.4 billion) last year. It is heading towards another year of losses despite a rescue plan costing the state billions of dollars. Its chairman, Xiong Weiping, was promoted to become the chairman of its parent company.
How can an investment platform push a subsidiary for a return when it can't fire a chairman or general manager for making a loss?
Fifth, even when someone does lose his or her corporate job, there is no punishment, at least financially. What determines their pay and benefits is their rank in the government hierarchy, not the corporate ladder. Just keep your friends in the Organisation Department or higher up and a new job will soon arrive.
Meaningful punishment happens only in cases of corruption or disciplinary issues. How is an investment platform going to "incentivise" its own management or that of a subsidiary when losing a job is not going to mean real pain?
Without answering these questions, any investment platform - whatever fanciful name it is given - is nothing but a white elephant or an exit strategy for ex-bureaucrats.