Highlights from the last week of China business news: Cathay’s attempt to block SIA’s deal with China Eastern gets blocked by the big boys in Beijing; Foreign investment banks are finally allowed to buy stakes in local securities firms.
Highlights from the last week of China business news: A minister calls a mining accident a “natural disaster”; the Shanghai Composite Index crosses the 5,000 mark while new securities regulations are introduced
Highlights from the last week of business news in China: A-share action, laws under review and the National Audit Office’s latest findings (more…)
It appears the Chinese management merry-go-round is turning once again. Sinopec Chairman Chen Tonghai has resigned, citing “personal reasons,” which may or may not transpire to be “serious breaches of discipline.”
Meanwhile, China Banking Regulatory Commission employees Tang Shuangning and Xu Feng are to become chairman of China Everbright Group and president of Shanghai Pudong Development Bank respectively. Xiang Junbo, a deputy governor at the People’s Bank of China, is taking over as president of the Agricultural Bank of China.
No underhanded behavior tied to these last three personnel changes – they’re being made, well, because the government feels like it.
I wrote an article recently (for the upcoming July issue of CER) about the role of non-executive independent directors on the boards of listed Chinese companies. The appointment of senior executives cropped up because it is one area where – at state-owned enterprises, at least – independent directors can’t expect to have much of a say. On issues like this, the Communist Party delegates on the board rule the roost.
It makes for interesting situations in terms of governance.
First of all, it doesn’t do wonders for corporate transparency and serves as a reminder that, particularly in sensitive industries, policy is set by Beijing. One would like to think that an increasingly business-minded Beijing’s thinking is increasingly in tune with Western corporate philosophy, but there are no guarantees.
Secondly, who comes in as the replacement? The guy taking over from Chen at Sinopec is Su Shulin, a former vice-president at key rival PetroChina, which naturally leads to questions about strategy and relations within the top echelon of management.
People I spoke to for the article gave a range of responses. One foreign independent director on the boards of a number of Chinese firms argued that the state, as major shareholder, was entitled to have the main say on appointments. And this merry-go-round isn’t necessarily a bad thing at Chinese firms …
“Companies can become bureaucratic and stale over time. A change-around in leadership is not without its merits. You might come to one answer because it is the standard approach but look deeper and there might be some rationale there. You have to look at it on a case-by-case basis.”
A foreign banker, responsible for overseeing his employer’s investments in China, was more concerned about the unpredictability factor. He also had a horror story to tell:
“They [another foreign bank] heard rumblings that the chairman of the Chinese bank they had invested in was not getting full support and so flew to Beijing to speak to the bank and the regulators, saying ‘This is our guy’. They were given reassurances but then the chairman was sacked while they were on the plane going home.
“Senior management positions are not a real board issue in China.”
A short but interesting debate unfolds in the letters page of the current Foreign Policy magazine. One of its overarching messages is the critical role family plays in the stability of China.
Families, even extended families, provide a safety net that enables people to weather problems - periods of unemployment are easier to handle, forced relocations can become less of a burden. Family members can also band together to fight legal or regulatory injustice, pitch in for unexpected health care bills or buy land as a group or provide loans to start a business.
In short, families can provide the social safety network that the government does not provide.
In many ways, families balance out the damage that local government causes through corruption and a disproportionate emphasis on economic growth over welfare.
One way to help this is to allow for the faster development of civil society. Non-governmental organizations (NGOs), both domestic and foreign, are not yet allowed in China but there are signs of change.
On May 25, China Daily reported that the government is to create registration policies for NGOs (foreign NGOs have to operate as businesses in China) and streamline registrations for their domestic equivalents.
All this is part of an effort to deal with a very basic problem that Beijing: how to maintain its authority and legitimacy if economic growth begins to waver. As long as more people make more money than they did last year, all is good. If that changes, there are fears of social unrest. Nobody wants that.
Families can provide some stability in bad times but their ability to act as the country’s surrogate social safety provider only goes so far. A strong civil society can give people more recourse in times of trouble but Beijing needs to let go of some of the reins.
Students in Guangdong province that have to work to support themselves are not protected by labor laws.
New legislation that kicked in earlier this year sets minimum wages for part-time workers at a less-than-princely US$0.95 or RMB7.5 per hour but, as it turns out, these rules can be really more like guidelines or suggestions as far as students as concerned. Reporters from a local newspaper in Guangzhou, the Kuai Xin Bao, reported in March that McDonald’s and Yum! Brands (owner of Pizza Hut and KFC) pay their part-time student employees about US$0.52 or RMB4 per hour.
The scoop prompted much discussion and comments of abuse while the companies maintained they had done nothing legally wrong.
As it turns out, they were right. The labor protection bureau in Guangdong cleared them last week, Forbes reported. Provincial officials declared that the relationship between employer and student worker is not a formal working relationship.
Let’s see. One imagines that said student must have to show up on time. He or she is probably expected to work while at the restaurant that employs him. He or she supposedly receives a salary for his or her work. Yup, can’t see how that is an official working relationship. The students in question are probably flipping burgers in between long study sessions because it’s fun, a distraction from physics, engineering or arts.
At the end of the day, most of these guys don’t need the work, not really. They put on those stylish red KFC caps because they look cool. They could just as easily finance their silly hobbies like the (very) occasional night on the town, eating and sleeping under a roof through myriad other activities like… well… hang on… something will come to me.
There is an interesting legal case in India where Novartis, a Swiss multinational drug company, is suing the Indian government over a declined patent application.
The application is over a cancer drug called Gleevek which Novartis has already patented in 40 countries. India, which is the world’s second-largest producer of generic drugs, has a huge generic industry. (Belgium is the top producer but India produces more drugs used in developing countries such as AIDS treatments.)
As usual with the cases, the dispute is really over a minute point of law, namely a section of India’s patent legislation that says only entirely new drugs can be patented. To over-simplify, variations of old processes cannot be copyrighted.
The case has drawn worldwide attention and spurred a petition from international medical organization Doctors Without Borders for Novartis to drop the case, saying it could ultimately hinder access by the world’s poorest to essential medicines.
Novartis says that’s not the case, that Gleevek is only used by 1-2 out of 100,000 cancer patients and that the lawsuit is about clarifying India’s patent laws.
From an emotional standpoint it is difficult to argue with people who say the world’s poorest need more access to drugs. Generics have been responsible for lowering the prices of antiretroviral treatments used to treat HIV/AIDS from the tens of thousands to just hundreds of dollars per course.
On the other hand, it is also worth considering that companies like Novartis spend hundreds of millions on R&D to get these drugs to market while generic drug makers simply reverse engineer them.
The case will likely continue over the next few months and possibly years. It is one worth following as it will likely impact people around the world.
The US and the EU are stepping up their efforts to curb China’s pollution problem.
The Europeans are tripling their funding for environmental projects in China to 60 million euro; a much-needed beginning but only a drop in the bucket of what’s required to seriously tackle the problem at a national level.
What’s more surprising, and encouraging, is the US Senate sending a delegation to China to talk about environmental solutions. America has been slow to join the global warming debate, and the current administration’s statements on the issue have been mostly empty rhetoric. But cooperation between China and the US is essential for effective climate policy.
Although research on climate change does not point to any simple answers, it is clear that cutting carbon emissions will be a useful step. One way forward would be a global market in carbon emissions, where companies from, say, the US could pay for improvements in energy technology and infrastructure in China. Carbon cuts in China would count as reductions in the US company’s own emissions.
The total amount of global CO2 emissions is what matters most, so it makes the most sense to improve the worst emitters first. China’s energy intensity is one of the lowest worldwide, thus improvements in the way it processes, uses, and conserves energy will have some of the lowest investment costs.
With any luck, a sensible policy that includes a global emissions exchange, as well as caps on emissions imposed by individual governments on their different domestic economic sectors, will emerge soon.
About this time last year, China Economic Review was planning a telecom story to roughly coincide with the issue of the next generation 3G mobile licenses.
“They’ll come in the first quarter of 2006,” people were saying, sending the Hong Kong share prices of Chinas Mobile, Unicom, Telecom and Netcom into a frenzy.
Needless to say, the licenses were not forthcoming and the peak and trough in the telecom stock prices was merely the first in a series of expectation-followed-by-disappointment fluctuations.
And now we discover that China has launched the world’s first 4G standard while its 3G counterpart still sits in the blocks. Apparently, the 4G “FuTURE Project” - which allows data transmission at 100 megabytes per second - will soon start trials running to 2010.
And then what? Will this standard eventually see the light of a commercial day?
By most accounts, 3G has been delayed due to problems with TD-SCDMA, China’s homegrown version of the telecom standard. Apparently the kinks are now ironed out and it is ready for deployment - and it can compete with the established 3G standards WCDMA and CDMA2000.
But is this really the point? China cannot allow TD-SCDMA to fail due to the political and financial capital that has been shoved behind it. White elephant or not, someone is going to be landed with the dubious honor of carrying this national technological torch.
It’s quite possible that the continued delays in the issuing of licenses is not so much driven by system hiccups as fierce lobbying by the telecom operators over who doesn’t get TD-SCDMA.
What does this mean for 4G? The risk is it will simply be a repeat performance of 3G - a standard that came to the market hopelessly late because it was developed behind closed doors, away from the commercial forces that should direct its evolution.
China is intent on keeping its markets under control. In a couple of simultaneous events Thursday, Beijing underlined a ban on personal loans to buy stocks and state media aired an interview with a well known investor who said the market is approaching a bubble.
As expected, the markets went tumbling down. Shanghai slid, breaking a week-long bull run, while Shenzhen and Hong Kong also dropped. (By midday on Friday the Hang Seng Index was down more than 400 points, negating hard-earned gains throughout the week.)
Still, it will take more than a couple of announcements to break the fevered pitch. In Shanghai, people are lining up to buy shares, now confident in local markets following years of disappointment. In Hong Kong, as capitalist a city as there ever was, investors are as willing to dip a toe in as they always have been.
The pitch hit me in the face when I walked into a branch of the smallish Wing Lung bank in downtown Hong Kong. Few foreigners use their services, as evidenced by the literature in Chinese and lackluster customer service. What was unique was the open area in the back of the branch under a sign “securities services”.
The square space was lined by five computers that displayed stock quotes. Groups or six or seven people crowded each machine, cheering stocks up or down much like one would cheer a horse at the track.
Judging by the state of the market at closing time on Thursday (the Hang Seng went up and down to close in negative territory), the cheering did little. But the ultimate reality of feverish investment is hard to ignore.
