Kelon adds sad chapter to bigger tale of woe

When Guangdong Kelon Electrical Holdings announced on Tuesday that its own auditor was qualifying its annual results for the second year running - forcing a suspension in the trading of its shares - it seemed to be just another sorry chapter in the firm's chequered history and yet more evidence of poor corporate governance standards in Hong Kong.

However, Guangdong Kelon's comeuppance also tells a larger tale of woe - that of China's township and village enterprises (TVEs), which have fallen precipitously from grace over the past five years. Guangdong Kelon, once the highest-flying TVE of them all, is particularly emblematic of the sector's decline.

TVEs exploded onto the scene in the 1980s, when they recorded average annual growth of 30 per cent. In 1983, one million TVEs employed 29 million people.

Eight years later, 20 million TVEs counted 95 million workers on their payrolls, thus providing an important safety net for the country's surplus rural labour and laid-off workers from the state sector. At their height in the mid-1990s, TVEs employed 120 million workers and were credited with 40 per cent of China's industrial output.

Owned by lower-level county, township and village governments but lacking the explicit support structures enjoyed by more established state-owned enterprises (SOEs) - such as access to state bank credit - TVEs lived and died by their wits. As such, many observers saw in them the seeds of a dynamic private sector in all but name.

In certain areas of the country - such as Zhejiang province and southern Jiangsu - TVEs were in fact often private enterprises in disguise. By hanging a 'TVE' shingle outside their privately owned enterprise - a practice known as 'donning the red cap' - entrepreneurs could secure a measure of ideological cover at a time when naked capitalism was still frowned upon.