Saturday, February 7, 2009

Bringing the State Back In (and Driving Private Capital Out)

Once upon a time (ca. 2000) a term was popularized in China: 国退民进, which can be roughly translated as "the government withdraws, the people enter". Foreigners with Chinese-English dictionaries rejoiced at the apparent meaning of this important phrase: the government was preparing to step aside and let the private sector take over.

Over the years, we have certainly seen evidence of 国退民进 at work, but occasionally we see quite the opposite.

A securities brokerage located in Shanghai's Pudong District, Aijian Securities, was originally majority controlled by Huiyin Investment, itself a privately-held firm. Aijian had been planning to undertake an equity restructuring and an injection of additional capital that would have left Huiyin as the controlling shareholder, or so they thought.

Once all was said and done, Aijian Securities found that its controlling shareholder was no longer Huiyin. Its new ultimate controlling shareholder was none other than the Pudong District SASAC -- in other words, the State.

How could this have happened?

Apparently the Shanghai City Government had this intention in mind all along.

One of Aijian Securities' original shareholders was Shanghai Aijian Corporation (hereafter, Shanghai AJ), a listed firm (SH600643) whose ultimate controlling shareholder is the City of Shanghai. While Shanghai AJ originally either directly or indirectly controlled 20.4% of Aijian Securities, it was not the controlling shareholder. As mentioned above, Huiyin Investment, a private firm, originally controlled 54% of Aijian Securities.

According to the Economic Observer, the Party Secretary of one of Shanghai's districts, Chen Zhenhong, was transferred to the post of Vice-Chairman of Shanghai AJ in 2006. While there, Chen organized and arranged the restructuring of Aijian Securities
both to draw in private capital and to land himself in the position of Chairman of the Board of Aijian Securities.

Also around 2006, Aijian Securities' controlling shareholder, Huiyin began to experience financial difficulties, and as a result Aijian's balance sheet became increasingly more leveraged with debt that was convertible into equity. While it is not known for certain who the holder of such convertible debt was, we can surmise that it was Shanghai AJ since Shanghai AJ (which, don't forget, is controlled by the City of Shanghai) became the majority owner of Aijian Securities after the restructuring.

In a clear case of 国进民退 (the government enters, the people withdraw) Aijian Securities is now a part of the Pudong District Government's plan to ensure that Shanghai (not Tianjin, not Beijing, not Hong Kong) becomes the Financial Capital of Greater China. This plan also includes increased stakes in insurance companies, banks and fund management firms.

When I consulted a reference guide* to determine the origin of 国退民进, I discovered that its very invention was surrounded with weasel words that resulted in a concept so broad one could drive a maglev train through it. Like the phrase "with Chinese characteristics" it was intended to mean whatever the leaders want it to mean.

No one is suggesting that there was any kind of conspiracy or underhanded dealing that resulted in the nationalization of Aijian Securities, merely that, when governments in China set their minds to a task, there is little that stands in their way, least of all meaningless catchphrases.

* 章迪诚,著,中国国有企业改革编年史,(北京:中国工人出版社,2006) pp.556-7.