It was as foolish as "pulling rice shoots up to make them look tall." ..................................................
insidechina.com
Bankruptcy Guru Dismisses Mergers and Acquisitions
Taiwan as China's Savior?
BEIJING -- Cao Siyuan has labored so long and hard to popularize bankruptcy in China that his nickname is "Bankruptcy Cao."
So his dismay at China's latest efforts to eliminate loss-making state enterprises is understandable.
Instead of forcing ailing firms to swallow the bitter pill of bankruptcy, the government is feeding them the sweet-sounding cure of mergers and acquisitions. All over China, companies that would otherwise go to the wall are being hastily merged or sold-off at government behest.
To Cao, Beijing is simply prolonging the agony.
"I am less than impressed," said the 51-year-old head of Beijing Ciyuan Merger and Bankruptcy Consultancy.
Soon after the Communist Party's decision in September to endorse mergers, acquisitions and bankruptcies, an enthusiastic Cao rushed into print with a paperback: "Mergers and Bankruptcies: How they Work."
Party chief Jiang Zemin used the words "survival of the fittest" to announce a new approach to state dinosaurs. But it now looks like survival of the fattest to the man who helped draft China's bankruptcy law.
Docile Takeovers
Cao dismisses the M&A mania as "administrative acts carried out by weak firms that wanted to cover up their bankrupt state, and by a government which also wanted to hide bankruptcy."
Last month, several profitable firms in the steel and petrochemical sectors announced they would take on weaker brethren -- and billions of yuan in debts.
Shanghai's Baoshan Iron and Steel (Group) Corp. announced a merger with struggling Shanghai Metallurgical Holding Co.
The 105 billion yuan tie-up, which welded Baoshan's lean workforce of 10,000 with a workforce more than ten times that size "was clearly mandated by mandarins, not the market," complained Cao.
"If you ran a successful enterprise, would you willingly strap to your back an ailing firm whose troubles were so heavy you couldn't move?" he asked.
Two weeks earlier, Qilu Petrochemical Corp. agreed to assume the 3.0 billion yuan ($361 million) debts of Zibo Petrochemical Fibre Co. and Zibo Petrochemical Co.
The resulting behemoth, with total assets of 17.6 billion, yuan "was an idea of the State Council (Cabinet)," Qilu said at the time.
Corporate Bondage
To be sure, mergers and acquisitions are not all forced marriages.
This week, North China Pharmaceutical Group Corp. announced its acquisition of an ailing pharmaceutical factory in central China. The deal, it insisted, made sense.
Although Taiyuan Pharmaceutical Factory came with debts of 330 million yuan, it gave its new owner a foothold in a distant market, and added products that reduced North China's reliance on imports, a company official said.
China's state sector this year would record 2,000 mergers, acquisitions and bankruptcies involving 1.4 million layoffs in 59 specially designated experimental cities, the Economic Information Daily reported this month.
But Cao said his tally showed that 80 percent of mergers were still driven by state policy, not market mechanisms. That was an improvement over the 99 percent figure of a decade ago, but not enough change, he said.
"These mergers are forced truss-ups, not free tie-ups," he said.
Visible Hand
China is promoting M&As to help rid central government of the burden of loss-making enterprises.
It also hopes to build multinational companies able to withstand competition as Chinese markets open wider to foreign firms. And it is keen to promote industrial integration to cut through competing Chinese bureaucracies that own state enterprises.
The Company Law, passed in 1994, gives acquiring companies exemptions from paying interest on loans of acquired enterprises and a grace period of about five years to repay debts.
That formula applied to the Qilu Petrochemical deal. State banks gave Qili a waiver on the acquired firms' interest payments of 800 million yuan and a grace period of five to seven years on other debts, officials said.
The government has backed away from suggestions that acquiring firms would find it easier to list shares on China's stock exchanges. Fears of a flood of new scrip had rattled the Shanghai and Shenzhen markets.
Instead, securities regulators are reportedly putting pressure on profitable state firms to merge with money-losing ones before seeking a stock market listing.
Cao quoted an old Chinese proverb to describe the government's efforts to build industrial behemoths. It was as foolish as "pulling rice shoots up to make them look tall."
Bankruptcy Better
The World Bank last year warned that "institutional and procedural hurdles make bankruptcy difficult, time consuming and costly."
It also estimated that $10 billion worth of assets had been stripped by local officials over the past 10 years.
To combat illegal asset-stripping, China has expanded the use of auctions to put firms on the chopping block more quickly and tightened rules to ensure more accurate and transparent book-keeping.
The National Administration of State Property this week tightened bankruptcy assessment rules. Companies with an assessed value of more than 500 million yuan cannot be auctioned without government approval.
Declaring bankruptcy would go further than mergers towards clearing up the one trillion yuan of non-performing debt hanging over China's banking system, said Cao.
"I've seen more failed mergers than I care to count and the one thing they have in common is too much debt to ever make the marriage work." Reuters
Taiwan as China's Savior?
TAIPEI -- For two decades, China has leaned heavily on far-flung ethnic Chinese tycoons, moguls and barons across Asia for cash to prime its huge, fast-changing economy.
But with these neighbors falling victim to Asia's financial contagion, China may have to turn to the one Chinese wellspring where money is plenty, but politics are tricky -- Taiwan.
If, as many predict, money from Southeast Asia's Chinese business diaspora dries up, jeopardizing growth in China, the healthy Taiwan economy and its savvy financiers could come to be seen by Beijing as potential saviors.
After all, despite their bitter political estrangement, Taiwan is China's largest overseas investor.
Crisis Is Chance for Rapprochement
While Asia's financial turmoil has battered many countries, analysts say it could provide a crucial lift for closer economic and even political links between Taiwan and China, ideological rivals since a 1949 civil war split.
Ma Kai, a research fellow at Taiwan's Chunghua Institution for Economic Research, said the Chinese yuan's sharp relative rise against Southeast Asia's currencies could trigger capital flight from the mainland -- and a call to Taiwan for help.
"Because Southeast Asian currencies have depreciated greatly, China has lost many of its export markets and much foreign capital has begun to flow out of China," Ma said.
"Consequently, Beijing may extend an olive branch to Taipei because China is in need of Taiwan capital to fill the vacancy left by the withdrawal of foreign capital," he said.
Taiwan, still ruled by the Nationalist Republic of China government that fled China in defeat 48 years ago, has emerged as the mainland's largest overseas investor since a thaw in frosty ties allowed economic links to boom in the 1980s.
Strong Economic Ties Continue Despite Politics
Although "direct links" remain banned and capital must be routed through Hong Kong, some 30,000 Taiwan firms have poured an estimated $30 billion into the mainland since the 1980s.
Investment fervor has surged in recent years despite Taipei's call for caution lest the island become over-dependent on the economy of its main adversary -- and thereby vulnerable to Beijing's intense pressure to accept mainland sovereignty.
And it is some of Taiwan's biggest fish who want in.
In contrast to the small businesses that pioneered Taiwan's investment drive into the mainland, the island's China-bound money now comes from some of its top enterprises.
President Enterprises, Taiwan's top food company, has poured some $900 million into a variety of China joint ventures with interests ranging from hypermarkets and instant noodles to investment holding firms.
Global petrochemical giant Formosa Plastics has pushed Taipei hard for permits to build a $3 billion power station in southeastern China, but Taiwan has said no.
Taipei still bars investment in mainland infrastructure -- specifically waterworks, railways, harbors, airports and power plants, areas where China could be hit hard by a slowdown of capital inflows from overseas Chinese.
Analysts say Taiwan money is certain to play a bigger role in China's economy as once-reliable fund flows from ethnic kin in Southeast Asia slow.
Christianto Wibisono, a social and economic commentator in Jakarta, said China's relatively stable economy should help Indonesian Chinese firms' existing China operations, but added they were likely to postpone any new projects.
"The turmoil has certainly affected their businesses here (in Indonesia)," said Wibisono, head of Indonesia Business Data Center.
"But it's not clear yet how the turmoil is affecting their projects in China as they are focusing now on how to survive here," Wibisono said.
Taiwan, China Standing Tall Amid Crisis
So far, both Taiwan and China appear to have withstood the financial crisis with aplomb.
China, expecting strong economic growth of 9.0 percent in 1997, has pegged its yuan firmly to the U.S. dollar despite a contagious depreciation that has infected Indonesia, Malaysia, Thailand, the Philippines and even export "dragon" South Korea.
Taiwan has seen its local dollar fall roughly 14 percent against the U.S. dollar since July, but the island's 1997 gross domestic product growth is forecast at a healthy 6.72 percent.
Most analysts describe the 14 percent currency slide as a welcome boost for the island's exports rather than an economic concession. The slide is relatively small compared to the 30-plus percent drops in South Korea, Indonesia and Thailand.
Yuan Depreciation?
Despite China's expected strong GDP growth, concerns linger over the mainland's ailing state-run enterprises and bad debt.
Analysts say China may suffer a tightening of money supply if Asia's financial crisis triggers further capital outflows.
Exports already are showing signs of slowing as China is underpriced by Southeast Asian rivals.
Ma of Taiwan's Chunghua Institution said China may be forced to devalue its currency if the outflows become too serious and exports begin to lose significant ground to regional rivals.
For the time being, Beijing has said no. Vice Prime Minister Zhu Rongji said in November that China did not need to devalue the yuan as it had other means to stay competitive.
Zhu did not specify what China would do to boost competitiveness but Beijing has said it would cut tariffs in general and was reviewing reintroduction of a waiver on duties on capital equipment imports. Reuters |
