China's Great Missed Opportunity

While a U.S. Representative to the Asian Development Bank Board of Directors during the first Bush administration, I consistently called for China to "bite the bullet" and privatize its state-owned enterprises as soon as possible. Representatives of European and other Asian countries would just shake their heads and mutter about impatient Americans while advising that China take. A slow, incremental approach to privatization

Here we are more than twelve years later and the ball was turned into a time bomb that China's impressive economic growth and a better life for the people could derail. The fact that a majority of China's large companies still owned and controlled by the Chinese government has three negative economic consequences.

Firstly, it has stunted the growth of China's financial markets and prevent many companies from tapping capital markets. Almost 70% of the shares of Chinese 1,377 listed companies are substantially owned by the state and are not negotiable. This is the dreaded "overhang", the Communist Party leadership and bureaucrats anxious have stock prices reflect bewitched economic growth. For Chinese private shareholders The Shanghai Composite Index recently went into hiding in 1000 for the first time since 1997. The problem is that when the government sells these shares, private shareholders are diluted and stock prices fall. The use of public funds to private shareholders compensate for this dilution was considered and rejected as too expensive.

The Chinese government announced to invest in state-owned enterprises, a 15000000000 $ buy-out fund but the markets are very skeptical. My opinion is that the only solution is auctioning shares to private investors and the list underperforming and let them fight to survive.

Meanwhile, private companies hungry denied the opportunity to comment on these exchanges. Return to capital The result is that private Chinese companies rely on banks for 99% of their funding! This lopsided dependence on bank financing is unhealthy and also many Chinese banks are bogged down by mismanagement, bloated bureaucracy, corruption and politically motivated saddled with non-performing loans

Moreover, the Chinese stock market slump continues its listed companies in intensive care. China's 114 listed companies which are largely dependent on the trading commissions suffered a decline of 45% in sales in the first half of this year. Trading in the Chinese A-shares (for Chinese citizens) market has virtually disappeared. The Shanghai Composite Index is down 15% this year. The Chinese government also has an unofficial moratorium on new offers.

Second, maintaining state ownership and control of so many Chinese companies leads to a lack of transparency and openness that is necessary for China to participate fully as a member of the global community investment. Foreign institutional investors tend to invest indirectly to get better disclosure and listing requirements in China through the Hong Kong Stock Exchange. Preferred As an investment advisor, I advise clients to participate in China's growth by investing primarily in Hong Kong (EWH) Malaysia (EWM), Canada (EWC) Australia (EWA), and other Asian countries. The issue of China's dysfunctional financial markets has also led to our recommendation to clients that India, not China, the best performing Asian market may be in the next ten or twenty years.

The recent announcements of the Bank of America and HSBC to invest in two leading Chinese banks is a welcome step, but far short of the mark. Both are relatively small investments and both foreign investors will have little authority, nor have. Meaningful management responsibilities The Chinese want the publicity, the brand and the opportunity to learn, but are clearly not willing to assist. Sole control off

Look at what Indonesia is doing to open up to international investment. Its financial sector International investors are now the majority and management control and just last week a large Singapore and Malaysian bank announced plans to do in the Indonesian banks. Sizeable investments The Indonesian government is also drawing up a list of its 145 state-owned enterprises will be sold to investors. International investors have taken - the Indonesian stock market is doing well and our recommended Indonesia Fund (IF) is up 29% this year.

Third, if the recent high profile cases of Lenovo, Haier and CNOOC demonstrate, as state-owned Chinese companies seek to acquire or invest in foreign companies, the reaction is wariness, skepticism and outright political hostility. The Chinese leaders are trying groom about 100 of the largest companies going global in a big way and "brand hunting" of leading multinational companies with its excess cash ($ 700 billion of foreign exchange reserves) is the fastest way to achieve this goal. If you thought the Japanese spending spree in the 1980s was controversial in America - your seat belt.

The U.S. Congress and other foreign governments will resist these bids because they particularly enjoy a $ 200 billion bilateral trade surplus, little interest in having a foreign government, an economic competitor purchase of its most valued companies. The issue of Chinese bidders use of public funding is also a red flag. Then there is the issue of reciprocity - foreign companies can only minority stakes in Chinese state-owned enterprises and to obtain approval for even these minority interests is not transparent and very political.

Finally, there is the broad policy question to the intention of the Chinese Communist leadership. The slow pace of privatization and begrudge can reasonably be read as an indication that the Chinese government is not going to give up control of state-owned enterprises. Away This, in turn, has serious consequences as countries evaluate how a rapidly growing authoritarian country that seeks to participate in and benefit from the global economy with state-owned and state treat. Sponsored enterprises

The Chinese adage of "crossing the river by feeling the stones" can be a wise policy at times, but in this case a dip in the river would have been for the Chinese economy and the people. Much better ten years ago It is by no means too late to take the plunge and the U.S. should be ready to help in any way it can take.