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Chinese SOEs

Comments on Yongsheng Zhang “Does Australia really benefit from the rejection of the Rio-Chinalco deal?” 16/06/2009, http://www.eastasiaforum.org/2009/06/16/does-australia-really-benefit-from-the-rejection-of-the-rio-chinalco-deal/

I am a bit confused after reading the article. It is unclear the so called monopolistic positions of some Chinese SOEs would benefit Rio or not. Chinalco is not a monopoly in the Steel industry. It is not a firm in the steel industry. Further, Zhang has argued that further reforms may further reduce their monopolistic powers.

I thought the potential advantages to Rio if that deal had gone through would be it has a closer strategic partner in China to work in its interest, since Chinalco would benefit more if Rio benefit from increased share of the Chinese market. That would be very important. The Rio board had pointed out this point when it supported the deal.

That aside, I find some arguments in this article confusing.

First, I don't believe that all SOEs are monopolies, like firms in the steel industry where I had some experience, and in the non-ferrous metal industry which Chinalco belongs, if my understanding is correct (if there are any SOEs in the steel industry). Yes, in some sectors, SOEs are monopolies, possibly like in the post and communications sectors. So it is not always the case that SOEs exist due to their monopoly positions. The Chinese government deemed them important to its economy.

Second, I don't think the performances of SOEs were as bad as Zhang described. It is true that some and maybe many of them were subsidised at sometimes before most of them were privatised. But as far as I understood, they were also taxed (including their profits were mostly taken away) very heavily, during the time I was working in the now defunct former ministry of metallurgical industry. Besides, they carried a huge burden of social responsibilities, like housing for employees, providing schools and hospitals, and even urban infrastructures, etc.

There have always been different views regarding how SOEs performed. People wishing to push for changes or reforms would have been painting a picture of very bleak and inefficient SOEs, while on the other extreme people may have been arguing the opposite. I don't believe that any of those extremes have been correct. It is no different from the current debate on the building industry watch body in Australia - you have two extreme views – neither of them is totally right or completely wrong.

Another point that struck me as surprising is the argument that "the motivation of China’s SOEs is actually quite simple: to secure a supply of resources". I am not sure that is always the case. It somehow implies that the SOEs act like one China Inc. That itself is an illusion. The SOEs are separate entities and each of them has its own interest, and that interest differs from one to another. They don't act like a China Inc. Quite the opposite, they act for their own interest.

In the Chinalco - Rio case, for example, Chinalco was unlikely to act to secure the supply of resources. It was acting in its own interest. It is an aluminium firm. Rio's most valued assets in Australia are iron ore. Iron ore is not a resource for Chinalco per se. It was motivated by perceived values of the assets and expected returns from investment. It had the funding capacity and Rio had the need to raise capital and reduce debt at the time the proposal was made. Chinalco was a shareholder of Rio, so it understood the situation. It appeared that it wanted to increase its interest in Rio to maximise its own profit, possibly to 19%. I am not sure 19% holding can secure the supply of resources from Rio.

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