SOEs a nexus of power and wealth

Monopoly status of China's state-owned enterprises gives them enormous economic power, which makes them a political playground, analysts say

PUBLISHED : Sunday, 06 October, 2013, 12:00am
UPDATED : Sunday, 06 October, 2013, 5:57am

Throughout the course of human history, no two matters have been responsible for more conflicts than power and wealth. And nowhere are wealth and power more closely entwined than in one of China's state-owned enterprises.

For years, the SOEs have attracted the ire of consumers for taking advantage of their monopoly status by offering substandard products at an excessive price. They are equally scorned for paying lavish salaries and spending on luxury entertainment and generous perks for privileged staff, all of which goes hand-in-hand with widespread corruption because of the companies' excessive profitability.

In 2011, for instance, oil refining behemoth Sinopec raised hackles on the mainland when it was revealed that its Guangdong branch had splashed a fortune on huge quantities of expensive drinks, including Chateau Lafite Rothschild wine and national liquor mao-tai. The cost of the drinks came to some 1.68 million yuan (HK$2.12 million).

A recent high-profile graft scandal involving a number of senior executives of the state oil and gas company with connections to the very top political leadership has strengthened the widely held belief that the state monopolies are not just a hive of corruption but also a battlefield for factional political conflict.

The detention of Jiang Jiemin , head of the State-owned Assets Supervision and Administration Commission (Sasac), a government body set up in 2003 to oversee the giant SOEs, is seen as symptomatic of what some academics call "bureaucratic capitalism".

Jiang, a former head of the China National Petroleum Corporation (CNPC), became the first member of the Communist Party's 205-strong Central Committee to be held for what Xinhua described as "serious discipline violations" - a euphemism for graft - since the leadership transition in November.

The move is being presented by state media as evidence of a resolve to clean up public life under the new leadership of President Xi Jinping . But this is by no means the first high-level corruption case involving state monopolies.

In 2009, former Sinopec Chen Tonghai was given a suspended death sentence after being convicted of taking 196 million yuan in bribes. The same year, Li Peiying, former president of the holding company for the Beijing Capital International Airport, was executed for taking bribes of 26.6 million yuan. The following year, Kang Rixin , former general manager of China National Nuclear Corp was sentenced to life in prison for taking 6.6 million yuan in bribes.

This year, former railways minister Liu Zhijun was given a suspended death sentence for accepting bribes of more than 64 million yuan. He had served as chief executive of the China Railway Corp as part of his role in the ministry.

Economists and political analysts believe monopoly status is the chief reason for widespread corruption in the state business sector.

"These giant enterprises are often monopolies in their industries, and the monopoly status might have facilitated the corruption," says Professor Xiaoyu Pu, a political scientist at the University of Nevada.

Professor Jingdong Yuan, who teaches political science at the University of Sydney, says: "They are huge and they make huge profits due to their domestic monopolistic position." .

China's SOEs, a legacy of the Mao era, have enjoyed rapid growth in the past decade as reform stalled under former president Hu Jintao and premier Wen Jiabao . The world's second-largest economy is characterised by government-controlled giants that dominate major sectors. For instance, between them three state-controlled giants, China Mobile, China Telecom and China Unicom monopolise the telecommunications sector, while the petroleum and gas industry is dominated by CNPC, Sinopec and China National Offshore Oil Corporation (CNOOC), to name a few.

In the 1990s, many such SOEs were struggling for survival in an increasingly open market, with none making it to the Fortune Global 500 list, a ranking of firms by revenue. But this year's edition features more than 60 Chinese SOEs, including three in the top 10 list. Sinopec Group ranked fourth, CNPC fifth, and State Grid seventh among the world'sbiggest companies.

Back in the 1990s, some two-thirds of SOEs were in the red. But by 2010, the combined profit of state giants CNPC and China Mobile was higher than the combined profit of the nation's 500 largest private firms, according to government figures.

Zhiqun Zhu, MacArthur Chair of East Asian Politics and director of the China Institute at Bucknell University, says that because of their profitability, SOEs often come under the control of people close, or even related, to high-ranking government officials.

So-called princelings - the children of revolutionary leaders - and relatives of current leaders are known to dominate the boardrooms of many SOEs. Relatives of late leader Deng Xiaoping are believed to control the huge Poly Group, and the family of ex-president Jiang Zemin has moved into telecommunications.

But the most prominent example of a princeling business dynasty is the family of former premier Li Peng , who himself is considered a princeling, having been adopted by popular premier Zhou Enlai, Mao Zedong 's long-serving right-hand man.

Li's family controls the nation's energy sector. Daughter Li Xiaolin is chairwoman of state-run electricity giant China Power International Development, and son Li Xiaopeng used to head Huaneng Power, another heavyweight, before being appointed vice-governor of Shanxi province.

Analysts say the huge economic interests involved have made SOEs the scene of ferocious political infighting. They say the crackdown on the so-called "petroleum gang" is also targeting former security tsar Zhou Yongkang, who retired from the innermost Politburo Standing Committee during November's power transition. Zhou, who rose through the ranks after working for CNPC, is seen as a key political patron of disgraced former Chongqing party chief Bo Xilai .

Indeed, this is the largest shake-up of the petroleum sector in the last two decades, with four top CNPC executives, including Zhou's associates, being detained and more than 250 mid-level executives summoned to help in the investigation.

Nevada academic Pu says factional politics is often at the root of corruption investigations, especially in cases linked to senior politicians. "This time might be the same, although Zhou has an unusual status," he says.

Professor Steve Tsang, director of the China Policy Institute at the University of Nottingham, says: "This is not so much about anti-corruption as about power politics."

Professor Dali Yang, a political scientist at the University of Chicago, says the recent purges of Zhou's followers show that his wings are being clipped and clout weakened.

Analysts say that, in a system of one-party rule that puts business under a unified, party-led management structure, a lack of public oversight means corrupt activity carries few risks for officials - unless they end up on the wrong side of a power struggle.

"The relationship between enterprises and government is complicated. Many executives of these enterprises are powerful officials with wide political connections, and they are not entrepreneurs. There is lack of appropriate accountability and supervision," Pu says.

Collective corruption is not unique to CNPC. Outsiders have long struggled to get a handle on the executives who control trillions of US dollars in assets while enjoying the same political status and privileges associated with their peers in the party, military and government organs.

Many senior executives in the top 100 companies - the ones that fall under the umbrella of Sasac - have long enjoyed a status on a par with a vice-minister or vice-governor, with a handful of very senior executives considered equal to a minister or governor.

The executives have also acquired seats either as full members or alternates on the Communist Party's Central Committee, or as delegates to the ceremonial legislature - the National People's Congress - or top advisory body the Chinese People's Political Consultative Conference.

Their real bosses, as their peers in party and government organs, are the Central Committee's Organisation Department, and they are regulated by internal rules set by the Central Commission for Discipline Inspection.

"At issue is the fact there is no really effective supervisory institution in China that can independently monitor companies and enforce rules with sufficient authority and without interference or retribution should their investigations lead to so-called big tigers," says the University of Sydney's Yuan.

Ho Wing-chung, associate professor of sociology at the City University of Hong Kong, says money has emerged as a source of political power in today's China. "Under a system I call 'bureaucratic capitalism', struggles in the business field reflect struggles in the political field," he says.

The University of Chicago's Yang says the SOEs represent not only the commanding heights of China's political economy, but are also natural playgrounds for political patronage. They have also often evolved into complex, far-flung conglomerates with intricate networks of subsidiaries not subject to tight monitoring.

"They are therefore great vehicles for discretion by the corporate leaders, who often have a relatively short time horizon while at the helm," Yang says.

Some analysts view the recent crackdown as part of an SOE reform drive being pursued by reformist Premier Li Keqiang . The widening investigation into corruption linked to the oil sector has raised hopes that it could be the trigger for a reduction in the role of the SOEs. Economists say state monopolies' control of market power in strategic economic sectors is an obstacle to sustainable growth that should be scrapped to give the private sector a greater role.

Yuan believes Beijing's new, no-nonsense anti-graft tsar Wang Qishan is clearly up to something, and that there will be more rigorous and routine monitoring of people in leadership positions. "You don't see a lot of fanfare … but things are happening and this may be a good sign," he says.

Scott Kennedy, director of the Research Centre for Chinese Politics & Business at Indiana University, believes the leadership under Xi and Li will pursue serious economic reforms, including SOE reform and liberalisation of the service sector.

"They've expanded implementation of the anti-monopoly law, anti-corruption, environmental protection, and other areas. Some of this has led to CNPC being targeted, and in other cases, [other] SOEs," Kennedy says. "This makes me more optimistic about what may come out of the third plenum in November," he added, referring to the Central Committee's third plenum, meeting, an occasion associated in the past with key economic announcements.

But Bucknell University's Zhu believes the leadership is unlikely to start radical reforms in the near future. "Even if Xi and Li are determined to do so, they'll need to consolidate power first before initiating those reforms," he says.

Ho, the City University academic, is not optimistic either. "China's bureaucratic capitalism portrays a pessimistic picture for China's real political reform, which implies that its economic reform is and will be very difficult, if not impossible," he says.