This is the Chinese expression for the shift in the balance of economic dynamics that has been occurring in recent years. It means that as State Owned Enterprises (SOEs) advance in power, the private sector is retreating.
This phenomenon will gain increasing voice in the coming years, including in the primary aluminium sector, as I shall explain.
The rapid growth of SOEs had its roots in the November 2008 economic stimulus package, which pumped RMB4 trillion into the economy. The government used SOEs as vehicles for deploying a lot of that cash in the first instance. The Ministry of Railwys, for instance, doubled its planned program of railway construction, using its engineering and construction firms in the process.
More recently, as money queued up at the big (State-owned) banks waiting to be loaned out, banks found it safer to loan money to the big State-owned companies, such as Chalco. From the banks’ point of view, an SOE is a safer bet, and can take larger amounts of money. Small to medium enterprises (SME) didn’t stand a chance. In the case of my wife’s company, she couldn’t even find a bank that would open a corporate account. If one thinks for a moment about how many millions of SMEs there must be in China, it is no wonder that banks nothing but paperwork, administration costs, tiny transaction amounts and greater risk of failure in SMEs.
There is no doubt that these young tigers are now starting to flex their corporate muscles. In the aluminium sector, I suspect that we will see some consolidation of corporate ownership of smelting capacity in the years to come. SOEs with access to the cash that is still sloshing around in China’s banks may start to look at improving the age and technology levels of their portfolios by acquiring plants belonging to private companies.
Indeed, it is worth taking a look at two things. The relative age and technology levels of Chalco’s plants, and the number of private companies that are seeking to get publicly listed. This was the route taken by coal miners and steel firms in China recently. Spreading the ownership of the asset is a defensive move to make it more difficult for a predator to take over, though the tactic did not always work in those other industries.
Another outcome from the surging strength of SOEs is the longer-term outlook when making investment or development decisions. A lot of foreign media pick up on the theme that China is building bridges and highwys to nowhere, empty cities and so on. A counter view that I heard the other day was that in 20 years time, China’s economy will be 4 times bigger than it is now. Considering that China is already the second largest economy in the world today, that’s a frightening prediction. But it is entirely possible, since it would only take a growth rate of about 7.5% per year – slower than the last ten years.
The investment decisions made by the big SOEs seem not to be driven so much by demand economics but on growth economics. It’s sort of like the old “Build it and they will come” adage. To western eyes and minds, this creates bubbles of enormous size, but to many Chinese thinkers, they see not today’s bubble, but tomorrow’s growth.
However, the real strength of the Chinese SOEs is likely to be most tested as they start to take their position in the international market. They will bring large amounts of capital, but also Chinese ways of doing business. Unfortunately, some of them may also bring with them into overseas markets the arrogance and haughtiness that they exhibit here in China. That could lead to some tough collisions.