Fu’s life traversed the same sweep of history as many leaders of his generation. Born in 1951, his studies were interrupted by the Cultural Revolution in the mid-sixties and he had joined the Red Guards, an exhilarating experience, he later told colleagues, with free food and travel all over China. By his early twenties, he was back on the straight and narrow in China’s north-eastern oil fields. Fu rose through the ranks to become one of China’s most cosmopolitan state CEOs, but not so worldly that he understood how to handle the international board the company appointed when it sold shares overseas in one of its subsidiaries.
Ahead of the Unocal bid, Fu had won approval from the government to proceed, and had also cleared the deal through CNOOC’s party committee, which he headed. But his decision to present the bid to the board as a fait accompli angered the independent foreign directors, poisoning CNOOC’s position from the start and shackling Fu’s ability to respond nimbly in the ensuing takeover battle. With opposition to the deal on national security grounds mounting in Congress, the Chinese complained bitterly about protectionism and dropped out. But throughout the controversy, Fu had never been able to address the deeper issue, of the way the party committee had tried to sweep the board aside. No matter what Fu said, there was enough evidence to make a case in Washington that CNOOC represented the political priorities of the Chinese state, rather than a commercial enterprise in its own right.
Most foreigners dealing with large Chinese state companies in the early days of economic reform felt much like the Japanese executives from the giant Mitsubishi conglomerate negotiating to build a power plant for Baoshan Steel, a pioneering project near Shanghai in the early eighties. The Japanese were aggrieved when the Chinese side got the better of them during the talks and they were forced into concessions. ‘Yes, you win the negotiations,’ the Mitsubishi executives exclaimed. ‘But it was your national team fighting our company team!’ Chen Jinhua, a titan of state industry who recounted this story in his biography, said the Japanese were right. ‘We had invited many capable experts from China’s electrical power system to join our negotiating team, but Mitsubishi, as a single company, had been unable to do so,’ Chen wrote. ‘This example showed the superiority of our wide socialist co-operation.’
By the time big state companies like CNOOC were heading offshore two decades later, socialist co-operation, now re-branded as China Inc., had become as much an embarrassment as an advantage. To add to the confusion, there was no longer much socialist co-operation between state enterprises in any case. In its place, the Party had instituted a form of socialist competition to get the best out of the state sector. Far from being the monolith portrayed by Chen Jinhua, China Inc. revamped for the twenty-first century was more akin to a large, ravenous school of fish. Alert to the movements of their neighbours and inclined to swim in the same direction, Chinese companies competed individually for local and offshore deals like fish chasing the same tasty morsel of feed. Collectively, under the guidance of the mother fish of the Communist Party, China Inc. was as competitive as any large creature in the sea.
The transformation of China in the last three decades owes much to the animal spirits of the ordinary Chinese, many of whom have grabbed the chance to make money for the first time in decades. Much less understood is how the Party has unleashed the state’s animal spirits at the same time, with a force few anticipated. The pendulum swung so fast and so violently that the problem the Party faced with state enterprises was turned on its head. In the nineties, Beijing had worried about keeping the companies afloat. Early in the new century, the restructured enterprises, many of them built from scratch, were so big, wealthy and ambitious that the problem now was not how to keep them alive, but how to keep them in line.
Once written off as dinosaurs of a crumbling communist system, the structure, solvency and profitability of scores of big state enterprises were transformed in a decade. The giants of communist industry were suddenly throwing off billions of dollars in profits, courtesy of government protection from competition, surging economic growth, cheap capital and efficiencies wrenched out of the companies during their overhaul. In 2007, the year which marked the historic high-point of fast economic growth in China, the combined profitability of centrally owned state enterprises reached about $140 billion, compared to close to zero a decade previously, and triple the earnings of five years before. In the Fortune 500 list, which grades companies according to revenues, Chinese enterprises now hovered towards the top, where once they were also-rans.
But if China was getting rich in this period, the Chinese were not. In the ten years from 1997, a period which saw an astounding economic boom, the share of workers’ wages in national income fell dramatically, from 53 to just 40 per cent of GDP. The transformation of the state sector had far-reaching benefits for the Party, just as the convenors of the Beijing Hotel meeting years before had forecast they might. The swelling profits eased the burden on the fiscal budget and strengthened the state banks’ balance sheets. But the preferential policies meted out to government companies, of cheap land, resources and energy, ensured that the profits of China’s boom were captured and kept by the state, at the expense of the population at large. The state’s accumulated war-chest was not only about self-enrichment. With an eye to soaring raw material demands decades into the future and its declining stocks of oil at home, Beijing began to push the big, cashed-up state companies to head offshore in earnest around 2002 to ‘go out and become bigger and stronger’, in the parlance of top leaders. Not surprisingly, the firms at the front of the queue, in the oil and resources sector, created controversy almost wherever they went.
Fu Chengyu’s maladroit tactics in the failure of the 2005 CNOOC deal had angered many within the system, but he kept his job, saved by the shrill and occasionally xenophobic reaction in parts of the US to the Chinese bid. By the time the next big deal came around, China Inc. showed it had learnt many lessons. The fundamental problem, though, of the Party’s lurking backstage presence in large state enterprises remained untouched and unresolved. The same veil of secrecy the Party threw over its own affairs at home obscured the government’s role in state companies as they went abroad. As a consequence, working out where the state ended in government companies and the commercial enterprise began was often nigh impossible for foreigners.
When it was formed in 2001, the Aluminium Company of China (Chinalco) had all the characteristics of the thoroughly modern, and comfortably bi-polar, Chinese state corporation. The parent company had been formed during the upheavals of the nineties by aggregating a sprawling collection of bauxite mines, alumina refineries and aluminium smelters, and their marketing arms, into a single entity, instantly creating the second largest company in the metals sector in the world. To ensure the new company didn’t develop the sclerotic habits of the old state sector, the government added the market to the mix, directing Chinalco to hive off some of its most valuable assets into a separate entity (known as Chalco) to be listed on overseas stock markets later the same year.
The ‘red machine’ sitting on the desk of the company’s chairman, Xiao Yaqing, signified Chinalco’s status as one of the fifty-odd core companies which the state regarded as essential for its national security and economic development. Next to the hotline connecting Xiao to the party elite was the new symbol of the Chinese corporate state, a screen displaying the stock price of the company’s overseas listed enterprise. Together, the two devices conveyed a mixed message. Front stage, companies like Chinalco bristled with commercial ambition and tracked their stock price as ardently as their western competitors. Backstage, however, the Party sat quietly out of sight, tugging on the reins when need be, safe in the knowledge it retained all the levers needed to control the company. Executives like Xiao juggled a difficult brief. They had to manage the company’s, and what the Party deemed to be the country’s, interests at the same time. One benchmark was business performance; the other was political; and neither of them was clear.
Very much th
e new face of Chinese state business when he became CEO in 2002, the then 42-year-old Xiao was a decade younger than Fu Chengyu and most state enterprise bosses. Like CNOOC’s Fu, Xiao carried all the political baggage of a top-level state business executive. He was a member of the Central Committee, and he served as chairman and secretary of Chinalco’s party committee. He was also a smart, aggressive businessman. He took the company in different directions, diversifying into copper and rare earths at home and getting involved personally in sensitive negotiations with indigenous landowners at a bauxite project in Australia’s deep north in the company’s push offshore. It wasn’t long, however, before his country came calling with a task that dwarfed anything that Chinalco, or any Chinese state business, had ever successfully taken on.
The alarm bells went off in Beijing the moment BHP-Billiton, the largest mining company in the world, launched its takeover bid for its Anglo-Australian rival, Rio-Tinto, in November 2007. China saw the $127 billion bid, later lifted to $147 billion, the second biggest takeover in history at the time, as an unambiguous threat, because of the way it could create a near monopoly in the seaborne iron ore trade in particular. The international price of iron ore, used to make steel, had increased fivefold in the five years to 2008. The exponential growth in Chinese demand was one driver. But so was the lack of supply, which China believed had been manipulated through under-investment by the big miners. The Politburo quickly decided to oppose the BHP-Billiton bid, a decision which would push China Inc. on to the world stage as never before.
In a matter of hours on the London stock market, Chinalco made China’s biggest ever overseas investment, a $14 billion share raid on London to scoop up 9 per cent of Rio-Tinto. With CNOOC’s mistakes in mind, Xiao went on the front foot immediately, giving interviews to the foreign media in a fashion unprecedented for the head of a Chinese state company, and flying down to Australia to reassure nervous politicians in person about Chinalco’s intentions. Xiao’s message in public was consistent. Chinalco was a state-owned company, but run without interference from the state. ‘All management and commercial decisions are taken independently,’ he said. From the outset, to Xiao’s chagrin, and that of his political masters, his assertions of independence during the two stages of the bid for Rio-Tinto kept running into the same wall of disbelief that confronted CNOOC at Unocal. As the extra-commercial aspects of Chinalco’s tilt at Rio-Tinto added up embarrassingly as the deal progressed, it was not hard to see why.
For starters, Chinalco had emerged as a bidder for Rio-Tinto only after going through what investment bankers call a beauty parade, so called because of the way corporate contestants line up to pitch their wares to win business mandates. In this case, the contest had been conducted in secret by the Chinese government itself. So many state companies in the energy and steel sectors had responded to the Politburo’s patriotic call to take on BHP-Billiton that the government put the choice of the Chinese bidder to an internal tender. Chinalco won because of the commercial competence the company had displayed at home and its steady game abroad. But the government’s interest meant that Xiao had the leadership’s hand on his shoulder at all times.
Critics also pointed out how Chinalco had chosen its parent company to make the bid, instead of the overseas listed subsidiary in the case of CNOOC. The decision had compelling commercial reasons, as Chinalco was a diversified mineral group like its target, Rio-Tinto. But there was also a strong political incentive. The parent company was 100 per cent state-owned, which made for rapid decision-making, without the kind of interference from the pesky international directors that had tied up CNOOC’s tilt for Unocal. Then there was the way Chinalco’s bid had been financed. The money came from a consortium led by the China Development Bank. Initially established to fund local infrastructure projects, CDB had lofty ambitions to follow China Inc. abroad. The political heft behind the Rio-Tinto bid was evident from the way the financing was approved, directly by the State Council, or cabinet, without CDB’s board even discussing the loan.
Finally, there was Chinalco’s ability to sustain its bid at a time its international rivals had to retreat because of the global credit crunch. In barely half a year, a once-in-a-generation bull market in commodities had turned sharply sour with the world economic downturn. The giant BHP-Billiton retreated, dropping its takeover offer for Rio-Tinto in late 2008, and momentarily withdrawing from the battlefield to reassess strategy. When it launched its offer to double its shareholding in Rio in February 2009, Chinalco was bleeding as badly as other resources companies around the world. On paper, Chinalco was down a cool $10 billion on its initial $14 billion outlay on Rio-Tinto shares. The Chinese company’s core businesses were losing money as well. With the backing of the flush Chinese state, however, Chinalco still had the firepower to press ahead, offering $19.3 billion to lift its stake in the debt-laden Rio-Tinto and gain control of prize mining assets.
Chinalco’s costly tilt at Rio-Tinto was already the target of internal sniping within the government. Lou Jiwei, the head of China’s fledgling sovereign investment fund, then under attack for making poor offshore investment, had been flailed on the internet after defending his fund’s initial offshore investments, then sharply down on paper. ‘Corrupt, despicable and shameless, he has used money earned from the blood and sweat of the people to realize his personal objectives,’ scrawled one netizen after Lou’s speech at Tsinghua University in late 2008. Privately, Lou complained that people should examine Xiao Yaqing’s record at Chinalco instead. They are down $10 billion, he said, and I am being attacked for losing a fraction of that! In the public market place, Xiao had fallen flat on his face. Backstage, however, Xiao had been nimble enough to play up his political achievements and take credit, however misleadingly, for derailing BHP-Billiton’s bid. ‘Xiao has said repeatedly that his goal was to stop a merger of two [foreign] mining giants,’ reported Caijing magazine, ‘and that he had succeeded.’
The most blatant public display of Chinalco’s cosiness with the state was yet to come. While Xiao, the businessman, was negotiating to double Chinalco’s investment in Rio-Tinto, news began to leak out that Xiao, the politician, was also in discussions over promotion onto a powerful new government job attached to the cabinet in Beijing. Foreign advisers to Chinalco noted Xiao’s nerves in the final tense days of talks with Rio-Tinto in London. If the deal didn’t get done, Xiao joked darkly, it mightn’t be worth his while to return home to Beijing at all. The moment it was sealed, Xiao’s promotion to the cabinet position was formally confirmed. In China, the deal and the promotion were tied together. Without the second agreement to increase Chinalco’s stake in Rio-Tinto, Xiao would have lost billions of dollars in state funds and failed to secure a new resource base for both his company and his country at the same time. In other words, he would have fallen short on both commercial and political grounds.
Chinalco’s attempt to double its stake in Rio-Tinto foundered a few months later, in June 2009, on largely commercial grounds, but it might have run aground anyway, for reasons similar to those for the CNOOC debacle. Xiao’s promotion to the cabinet position was the last straw, ensuring that any genuine commercial rationale for Chinalco’s investment in the Anglo-Australian miner was overshadowed by suspicion about the hidden hand of the Chinese state. Chinalco had been hand-picked to do the deal by the government; its funding had been approved directly by the cabinet; its bid had come from the parent company to minimize outside scrutiny; and its CEO had left the company for a party-approved government position days after negotiating the final deal, to be replaced by another state business executive also chosen by the Party. Not long after the deal collapsed, four of Rio’s China-based executives were arrested in Shanghai by state security on allegations of bribery and commercial espionage. It was no wonder that political opponents of the deal in Australia were able to portray Chinalco as an agent of the state. For a Party on a mission to convince sceptics that Chinalco was an independent entity, it was another wrenching own goal.
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Chinalco executives at least tried to engage with their critics and respond publicly to their concerns. Not all state enterprises endeavoured to make their case in public, however misleading it may have been. For companies like the China National Petroleum Corp., better known as PetroChina, thumbing its nose at its detractors at home and abroad had long been second nature. PetroChina is best described as the Exxon-Mobile of China, a big, bad oil company with an aggressive corporate swagger, tight political and military connections and a couldn’t-care-less attitude about the views of others. The company’s rough-and-tumble streak had been bred producing oil in some of the most inhospitable parts of the country, far from the bureaucratic confines of the capital, in Xinjiang, in the distant west, and in Daqing, in the north-west.
At the start of the enterprise’s restructuring in the late nineties, PetroChina had been ten times bigger, by employee, than any other oil company in the world. ‘The best way to describe PetroChina, as it was then, was the Ministry of Petroleum,’ said Paul Schapira of Goldman Sachs, which underwrote the global listing in 2000 of China’s largest oil producer. In the process of repackaging itself to sell a portion of its shares to foreign investors, the group shed one million staff and the ministry disappeared altogether, leaving the company with little direct oversight from the government. Many of the once powerful ministry bureaucrats took new positions staffing the revamped company’s executive ranks, making the enterprise more independent than ever.
The Party: The Secret World of China's Communist Rulers Page 9