SAIC scandal confirms continuing sorry state of commerce
Recent revelations about debt-troubled Shanghai Agriculture, Industrial & Commercial Group (SAIC) raise fresh concerns about mainland business practices and the widespread influence of entrenched political interests over economic decision-making at state-owned companies.
SAIC, a wholly-owned investment vehicle of the municipal government that claims a vast business empire of hundreds of companies, is teetering on the brink of collapse. Group debts are outstripping assets of more than 10 billion yuan (about HK$9.36 billion).
How SAIC executives managed to squander a municipal government mandate and sink the group in an ocean of red ink draws compelling comparisons to Guangdong International Trust & Investment Corp (Gitic), the bankrupt fund-raising arm of the Guangdong provincial government.
SAIC emerged in the middle of last decade as the leading business arm of the Shanghai farm administration bureau. Bureau investments had expanded with Shanghai's economy and by 1996, when the corporate group was formed, SAIC claimed interests in more than 100 subsidiary companies, including supermarkets, department stores and property development. However, it appears many of the group's investments were made at the behest of government sponsors.
They used SAIC to maintain a patronage network nurtured with politically mandated projects. Due diligence was rarely considered as was proper legal formality, which has caused SAIC endless problems, especially in obtaining title to property developments which were never officially registered.
As with Gitic, SAIC also used short-term bank lending to finance long-term investments. But, by contrast to Gitic, whose executives went to international markets to raise their cash, SAIC officials instead spun a vast web of interlocking subsidiaries which raised and guaranteed loans. These were then lent-on for business development purposes.
At the centre stood SAIC's stock market listed subsidiaries, which acted as fund-raising vehicles for their corporate parent.