Business

Chinese private enterprise; communist party seeks greater control

Published

4 years ago

2020/11/22

At a summit with China’s richest entrepreneurs in late 2018 Xi Jinping sought to allay concerns that the state had declared war on the country’s private sector. Although officials in Beijing had spent the previous year bringing to heel unruly tycoons, China’s president insisted that rumours of a forceful push for party influence in the private sector were untrue. He exhorted the business leaders to “take a pill of reassurance”.

The medicine has been hard to swallow. Since then the Communist Party has sought a more active hand in recruitment and business decisions. And after subduing a band of headstrong bosses at overextended financial conglomerates, the state is now taking aim at China’s tech billionaires, making it clear that outspoken critics will not be tolerated.

Mr Xi’s preoccupation has always been maintaining China’s social and financial stability. Keeping big business in check is part of that plan. It should come as no surprise that the state is now homing in on tech, which has expanded rapidly. Six of China’s 20 most valuable listed companies are tech firms and with billions of users they touch the lives and wallets of almost all citizens.

A reckoning for the sector began with what looked like a shot across the bows of China’s largest financial-technology group. The suspension by regulators on November 5th of Ant Financial’s $37bn initial public offering with less than 48 hours’ notice was at first interpreted merely as a warning to its founder, Jack Ma, who had previously criticised China’s state-owned banks. But on November 10th the publication of an extensive draft of new rules for technology groups laid bare the state’s ambitions to bring to heel not just Ant, but the whole of China’s tech industry.

Mr Xi’s relationship with China’s tycoons has always been troubled. When he became president in 2013, he inherited a corporate system replete with fraud, patchy regulation and surging debt. After the success of an anti-corruption campaign that mostly targeted officials, Mr Xi took aim at a group of businessmen who were ploughing huge sums into risky overseas investments. Purchases included SeaWorld, an American amusement-park group, and the Waldorf Astoria, a swish hotel in New York. Officials argued that many of these acquisitions were thinly disguised means to divert capital out of China.

Many of the businessmen who once fancied themselves as a Chinese Warren Buffett are in prison or worse. Wu Xiaohui, the chairman of Anbang, which bought the Waldorf among other assets, was handed an 18-year prison sentence in 2018 for financial crimes. Ye Jianming, who attempted to buy a $9bn stake in Rosneft, a Russian oil producer, was detained in early 2018. His whereabouts is still unknown. Xiao Jianhua, a broker for China’s political elite who once controlled Baoshang Bank, was kidnapped by Chinese agents from his flat at the Four Seasons Hotel in Hong Kong in 2017 and is thought to be co-operating with authorities in the unwinding of his financial conglomerate.

The crackdown has put an abrupt end to a boom in global spending by Chinese firms: in 2016 there were $200bn-worth of overseas mergers and acquisitions, the figure in 2019 was less than a fifth of that. And under government pressure private groups have divested assets worth billions of dollars. hna, an airlines and logistics group that bought a large stake in Deutsche Bank and Hilton Worldwide, a hotel group, has sold assets worth over $20bn in recent years. Anbang Insurance was nationalised, putting the Waldorf under the ownership of China’s Ministry of Finance. Baoshang was taken over by the state and allowed to file for bankruptcy in August. Acquisitions of European football clubs by Chinese groups have all but ended.

Analysts have praised the way in which systemic risks posed by companies such as Anbang and hna appear to have been reduced on Mr Xi’s watch. Within China few dare to criticise him for his failings. Those who have done so have been dealt with severely. Ren Zhiqiang, a senior member of the Communist Party who once ran a state-owned property firm, penned a missive to friends earlier this year in which he referred to Mr Xi as a “naked clown”. He was sentenced to 18 years in prison in September for bribery and embezzlement.

The party has also been increasing its influence over private firms in more subtle ways. Under a strategy referred to as “party building”, firms have been asked to launch party committees, which can opine on whether a corporate decision is in line with government policy. The number of committees in publicly traded but privately controlled companies is still low. According to a survey of 1,378 Chinese listed firms by Plenum, a consultancy, of the 61% that were privately controlled only 11.5% had party-building clauses in their charters compared with 90% of state-owned firms.

Party invitation

Yet the prevalence of such committees looks likely to grow. In September Mr Xi asked for the private sector to “unite around the party”. A day later Ye Qing, vice-chairman of the All-China Federation of Industry and Commerce, a powerful organisation controlled by the Communist Party, issued a more detailed list of demands. He called for private groups to establish human-resources departments led by the party and monitoring units that would allow the party to audit company managers.

This might not affect all firms equally. “For big companies, there’s no negotiation. The party approaches you and you say yes,” says Joe Zhang, a business consultant who has sat on the boards of Chinese private and state corporations. However, he also argues that for most smaller firms, less visible and not as economically important, party cells are little more than a rubber stamp as profits will trump state influence on decision-making. Their influence may not necessarily be unwelcome either. One executive, whose company has a party committee, argues that by growing closer to the thinking of the party leadership, “we can steer the company accordingly”. This heads off potential clashes with the state.

So far there is little evidence to suggest that party committees have hurt profitability, says Huang Tianlei of the Peterson Institute for International Economics, a think-tank. But increased party influence could inhibit some operations. “Innovation may be suppressed. More red tape can emerge. A firm can turn from profit-driven to goal-driven, sacrificing profitability,” says Mr Huang.

It is possible that party committees may soon play a larger role in tech firms. A raft of new regulations presents a more immediate threat. Ant is connected to hundreds of millions of people through its payments and lending platforms. Like other Chinese tech giants it holds precious data on customers as well as controlling a pipeline through which hundreds of billions of dollars are lent and spent. That such power lies in private hands is a source of tension between the party and entrepreneurs.

“These resources need to be tightly controlled and the political loyalty of the firms and entrepreneurs, not only to the regime but also to individual political leaders, needs to be strictly maintained,” says Sun Xin, an academic at King’s College London. “The case of Ant is just one manifestation of this underlying logic.”

The halting of Ant’s ipo was triggered by new draft regulations aimed at online micro lending. For Ant, the rules can only be interpreted as an attack on the firm’s lending platform, its biggest source of revenue. Mr Ma may regret comparing China’s banks to pawnshops in a speech in October. The comments infuriated senior officials and played a part in the hasty suspension of Ant’s ipo. But Mr Ma is not to blame for the latest onslaught of antitrust rules, although he may have sped up their arrival.

vie-ing for influence

The new rules, under consideration for some while, will for the first time explicitly apply monopoly controls on internet and e-commerce firms. For many years China’s antitrust laws have not exempted the groups but they have also not been targeted in monopoly cases. This has allowed a few companies to control large swathes of the digital economy. They also take aim at the structures that have allowed Chinese tech firms to raise capital overseas. Barred from allowing foreign investors to take direct stakes, for two decades virtually all capital-hungry tech groups have skirted the rules by using a “variable-interest entity” (vie) to link foreign cash to the Chinese market. The structure creates an offshore holding company into which foreigners invest. That company has a contractual agreement with an onshore firm to receive the economic benefits of the underlying assets.

The vie structure has long been tolerated by Chinese authorities, but without full legal recognition. Foreigners have virtually no recourse in China to claim rights to the assets they have invested in. Foreign funds have long been wary of the framework but most Chinese tech companies still use it to structure their overseas listings. The new antitrust rules could require companies to seek approval for such arrangements, calling into question whether vies will be permitted in the future and so the way that foreign capital will reach Chinese tech firms. The threat of withdrawing tacit approval for a vie is another way the state can intimidate firms and their owners.

Perhaps the new rules will humble the outspoken Mr Ma. He has not spoken publicly on the matter, but Ant has bent the knee and agreed to embrace the new regulations. Mr Xi has made clear that no company is too big, and no ipo too valuable, to be allowed to challenge the state. (Economist)

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Business

Public finances put the government in a tight spot

Published

24 hours ago

2025/01/20

Thilina Walpola

Prof. Anil Jayantha Fernando

‘Can’t spend more than Rs. 4,219 billion for 2025’

‘Low GDP forecast is one of the main constraints’

Minister says,’govt is navigating the challenges’

By Sanath Nanayakkare

The management of public finances in 2025, has thrown a huge challenge at the government, according to Prof. Anil Jayantha Fernando, Minister of Labour and Deputy Minister of Economic Development.He went on to say that the government is taking a broader perspective of the prevailing situation and is navigating the challenges well.

“Although we have enough money now, we can’t spend more than Rs. 4,219 billion for the fiscal year 2025”, he stated on January 17, 2025, delivering the keynote address at the 11th edition of the First Capital investor Symposium, held at Cinnamon Grand, Colombo.

“The period available for us to come up with the Budget creates a lot of constraints, and in addition, system embedded constraints are also there. The main constraint is the forecasted GDP for 2025. It has been calculated based on economic variables and past trends. The growth rate in 2024 was 2.1% and the expected real GDP growth for the next 4 – 5 years is around 2-3%. Because of these low expectations, the GDP expectations for 2025 have been confined to Rs. 33 trillion rupees. Other primary spending is subject to this cap. 13% of expected GDP is the cap for revenue expenses. No matter we have enough money now, we can’t spend more than Rs. 4,219 billion for 2025,” he said.

“That is a bit of a challenge for us. There is a ceiling for capital expenses which is 4% of the GDP. It comes to about Rs. 1,320 billion. We can increase that by reducing revenue expenses. But you can’t reduce each expense that much because the bulk of the revenue expenses comprise state salaries, pensions etc. So, there is very little fiscal space, but when it comes to capital expenses, there is some space there. Some of these expenses are incurred by ongoing projects. We were able to repurpose some of the ongoing projects for this year, and we managed to incorporate some [new] capital expenditure; in other words, the items that we had presented in our manifesto, into this space. Anyway, I would like to mention that 2025 will be a challenging year. After all, depending on the success we are going to achieve in 2025, there will be a comfortable position for us at the next [IMF]review and discussions in the future,” he said.

Speaking about the investment landscape, he said, “Our government was given a different mandate. It has been perceived differently by different segments of the country. The individuals of society is oriented towards maximizing their own wealth from investments, but not all individuals in society can gain from them in an equitable manner. So, the government wants to act as an instrument in striking a balance between individual interests and public interests. We will take that mandate from that perspective and act as true agents of the masses without creating any conflicts of interest. Our policy decisions and activities will be driven towards upholding the public interest over private interests.”

“People may have different perceptions about our government. That may be why sometimes there is a sentiment in society that the new government is not doing anything. They talk about the price of commodities remaining at the same levels, or even higher. Of course, we need to solve these. However, as a responsible government, we need to look at things in a broader perspective.”

“Political stability is now in place. We have been managing fiscal stability as per the [IMF] benchmarks. But we still need to broaden the taxbase and optimize tax administration. When it comes to financial stability, we are seeing a normal yield curve and the interest rate is also coming down gradually. That is reflected in the forex market as well.”

“We have a big target for foreign exchange reserves this year and in the coming years. The signs indicate that we will be able to achieve it despite challenges in the way. Allowing motor vehicle imports is necessary as the economy is reviving and that will be another challenge that we have to deal with.”

“Social stabilization also needs a lot of focus as a large majority of the masses are struggling. We have taken measures to iron out this situation to some extent. We are contemplating on giving more targeted benefits to the vulnerable segments.”

“The Opposition would say that we are inexperienced, but we have that political experience, and we are in a learning process. And that learning would help us take things in the right direction.”

“A rift can occur when the financial system stability is not connected to the real economy and when it is not driven by the economic fundamentals. We need to bring about a robust and vibrant capital market in the future. When we have an alienated financial sphere and operate it in such a manner, it could lead to market bubbles and consequently to inevitable crashes. So, we need to see how best we can share accurate and credible market information without leaving room for irregularities, insider trading and so on. The government’s objective is to create a capital market where accurate information is freely available and with one’s competence and talent, they can identify suitable investment vehicles and channel their savings into the right portfolios. When only a few have exclusive information about the goings-on in the capital market, that is not democratic. This is where new technology should be deployed to bridge that gap.”

“It appears that the political, economic, financial and techno spheres are making their own separate journey. Our vision is to converge these spheres as much as possible, so that the capital and financial markets can link to create capital formation by attracting more savings.”

“The government will create such a conducive environment for capital formation to help energize the economy where national savings will be channeled into investments.”

“The capital market’s efficiency should not be compromised by the adverse elements I mentioned earlier. We think that market efficiency is not up to the mark at present. For example, the extraordinary performance of the stock market shows increased confidence in investors because of the policies of the government, but I won’t say that this was only because of government action,” the minister said candidly.

At the dinner-time networking following the First Capital Investor symposium, a participant was heard telling a friend, “We’d better have some money ready to invest in short-tenor government securities which might generate rising yields.”

Business

IIBM Campus recognised as Best Emerging Education Institute of the Year

Published

24 hours ago

2025/01/20

Thilina Walpola

IIBM Campus, a rapidly growing private educational institution, has been awarded the prestigious “Best Emerging Education Institute of the Year” award, a testament to its innovative approach to learning and its unwavering commitment to student success. The award, presented at the People’s Excellency Awards 2024 at BMICH on 29th December 2024, recognizes the institute’s exceptional contributions to the field of education and its significant impact on the lives of its students.

IIBM provides comprehensive support for students aspiring to study abroad. Recognizing the transformative power of international education, the institute has developed a robust study abroad program that guides students through every step of the process, from choosing the right country and university to securing a student visa. The institute’s commitment to student success is evident in its remarkably high student visa success rate. Expert student counselors work closely with each student to identify their academic goals, budgetary constraints, and personal preferences, assisting them in finding the perfect fit in terms of program, university and country.

Business

First Capital Colombo Investor Symposium broadens investors’ horizons

Published

24 hours ago

2025/01/20

Thilina Walpola

Dilshan Wirasekara, MD/CEO - First Capital Holdings PLC

First Capital Holdings PLC successfully hosted its 11th Edition of its First Capital Colombo Investor Symposium on 17th January, at the Cinnamon Grand, Colombo. Drawing over 300 invitees and 400 participants online, the event proved to be one of the largest and most influential investor gatherings in the country, further solidifying First Capital Holdings’ leadership in fostering economic discourse and empowering investors with strategic insights. The focus of this year’s symposium was Sri Lanka’s Economic Outlook for 2025, with an in-depth analysis of market forecasts, strategic investment approaches and emerging opportunities within the country’s capital markets.

The highlight of the event was the keynote address delivered by Professor Anil Jayantha Fernando, Minister of Labor and Deputy Minister of Economic Development.

The event also featured a distinguished panel discussion, moderated by Deshani Ratnayake, Vice President Corporate Finance at First Capital Holdings. The expert panel included Gihan Cooray, Deputy Chairman/Group Finance Director of John Keells Holdings PLC; Hasitha Premaratne, Managing Director of Brandix; Rachini Rajapaksa, Independent Non-Executive Director of Nations Trust Bank; and Dimantha Mathew, Chief Research and Strategy Officer of First Capital Holdings PLC. The panelists offered a wealth of experience and expertise, providing attendees with comprehensive insights on how to navigate Sri Lanka’s evolving market landscape and capitalize on emerging investment opportunities. The symposium also featured a comprehensive presentation by Dimantha Mathew together with Ranjan Ranatunga, Assistant Vice President – Research at First Capital, who delved deeper into market dynamics and key trends that investors should closely monitor in 2025.

Dilshan Wirasekara, Managing Director/CEO of First Capital Holdings PLC, emphasized the institution’s unwavering commitment to shaping Sri Lanka’s investment landscape: “At First Capital, we are dedicated to creating value for our clients by providing them with deep market insights and actionable strategies. Events like the First Capital Colombo Investor Symposium allow us to bring together thought leaders and investors to not only share knowledge but also to foster a collaborative approach to achieving sustainable investment success.”