VZCZCXRO3776
PP RUEHCN
DE RUEHCN #0281/01 3350920
ZNR UUUUU ZZH
P R 010920Z DEC 09
FM AMCONSUL CHENGDU
TO RUEHC/SECSTATE WASHDC PRIORITY 3585
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHCN/AMCONSUL CHENGDU 4296

UNCLAS SECTION 01 OF 02 CHENGDU 000281 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM 
 
E.O. 12958: N/A 
TAGS: ECON EIND EFIN PGOV CH
SUBJECT: WORLD BANK/IFC ON RESURGENCE OF STATE-OWNED ENTERPRISES 
 
REF: A) CHENGDU 271; B) CHENGDU 263 
 
¶1. (U) This cable contains sensitive but unclassified 
information - not for distribution on the Internet. 
 
¶2. (SBU) SUMMARY: Chengdu IFC officials recently shared their 
assessment that state-owned enterprises (SOEs) have been on the 
resurgence since well before the financial crisis.  They 
particularly emphasized the proliferation of "chengtou gongsi" 
or city investment corporations in Chengdu and Chongqing, 
contrasting with the almost complete absence of local-government 
SOEs in Sichuan as of the early 2000s.  A range of factors have 
driven this process, they noted, including: cash strapped 
municipal governments seeking a platform to implement large 
development projects; some officials retaining a philosophical 
commitment to a state-supported conglomerate model for economic 
development(a la South Korea); corruption and nepotism; and the 
immaturity of the private sector.  SOEs retain some notable 
advantages over private-sector companies, able to quickly deploy 
large resources without regard to commercial considerations, but 
the overall trend is ultimately "not in the country's interest." 
 Their greatest concern is that SOE expansion constricts the 
space for private-sector development.  In their view, the 
pendulum will swing back against the SOEs again, although this 
could take several years.  END SUMMARY. 
 
¶3. (SBU) During a November meeting with Consul General (ref A), 
the head of the Chengdu office of the World Bank's International 
Finance Corporation (IFC), Lai Jinchang, and Charlie Cheng, 
IFC's Program Manager for Corporate Advice-Sustainability, 
discussed the resurgence of SOEs in recent years, both in 
Southwest China and nationwide.  The SOE comeback predates the 
financial crisis and the stimulus package from which they have 
further benefited, they observed.  Citing the example of 
Sichuan, they noted that more than a decade of privatization 
trends had left the province with an extremely small SOE 
presence by the early 2000s, comprising primarily a few 
national-level "key" industries and a handful of provincial 
SOEs.  (Dongfeng Electric Corporation is an example of the 
former; liquor producer Wuliangye and television manufacturer 
Changhong (ref B) are examples of the latter.)  However, the 
last few years has seen this trend reversed, they said, with a 
tendency toward the establishment of local (provincial and 
municipal) SOEs in a variety of fields, such as energy and 
infrastructure, and increasingly expansion into other sectors as 
well. 
 
"Chengtou Gongsi": 
Platform for Development, or a Vehicle for Corruption? 
--------------------------------------------- --------- 
 
¶4. (SBU) The trend toward SOE resurgence has been particularly 
marked at the municipal level, where they observe the increasing 
dominance of the "chengtou gongsi" or city investment 
corporations.  Lai and Cheng cited a range of factors driving 
the establishment of these local SOEs, including: 
 
-- Cash strapped municipal governments, under pressure to 
accelerate economic growth, have turned to local SOEs as a 
platform to raise funds and implement major development 
projects.  The chengtou gongsi model has given local governments 
"greater flexibility" to build infrastructure, and provide a 
means for borrowing large sums from banks -- a "very risky 
situation" about which the China Banking and Regulatory 
Commission (CBRC) has warned. 
-- Many officials still believe in a statist conglomerate 
approach to economic development.  While noting that less 
idealistic motives are often at work, some view the promotion of 
"national champions" as necessary to increase competitiveness, 
with South Korea often held up as a successful model. 
-- Various forms of corruption and nepotism remain central.  As 
a government official, if given the opportunity to set up a 
company, and then place yourself in a high-status, high-pay 
position within it, "why wouldn't you?" asked Lai. 
-- The private sector remains immature.  Governance and 
sustainability structures within private companies remains 
significantly underdeveloped, they noted, with most still 
running as "one-man shops," even if they have all the right 
structures on paper.  They expressed optimism that this is 
changing as an increasing number of private-sector managers gain 
overseas experience and education.  Nonetheless, they said, 
there is still a long way to go before private companies will be 
able to compete with SOEs on reputation, both for access to 
finance, and as an attractive option for the most talented 
employees. 
 
"Probably Not a Good Trend": SOEs Encroach on Private Sector 
Space 
--------------------------------------------- -------------- 
------- 
 
CHENGDU 00000281  002 OF 002 
 
 
 
¶5. (SBU) SOEs retain some notable advantages over private sector 
companies and will continue to have an important role in the 
Chinese economy, they said.  Citing the example of post-quake 
reconstruction in Sichuan, they noted that SOEs were in a better 
position to respond than private sector companies, given their 
ability to deploy large resources quickly.  Unlike private 
companies, they noted, SOEs could launch projects with little 
concern regarding the impact on their bottom lines.  However, 
they assessed the overall trend as "not in the country's 
interest, but in the interest of many people." 
 
¶6. (SBU) Of greatest concern to them is the extent to which SOE 
expansion constricts the space for private-sector development. 
If the new local SOEs "were just doing infrastructure, it might 
be ok, but they have now gone way beyond that," said Lai.  With 
no obligation to return earnings to shareholders, SOEs are often 
investing unproductively.  He cited the example of a 
newly-established insurance company being run by state- and 
privately owned Sinopec that recently moved into office space 
within the same Chengdu office building as the IFC.  "This 
should clearly be a (purely) private-sector investment, and it 
is a completely non-core business for them, but they have the 
political connections," said Lai. 
 
An Anti-SOE Pendulum Swing on the Way? 
------------------------------------- 
 
¶7. (SBU) Given these criticisms, the IFC officials hope to see 
the pro-SOE trend reversed.  Certainly, their role should not 
see further expansion, they said.  The SOEs continued expansion 
within the domestic sphere, often by leveraging political 
connections, they fear, will only crowd out the private sector. 
(However, they saw Chinese SOE expansion into overseas markets 
as basically a positive long-term development for the national 
economy.)  Despite their concerns regarding the current 
trajectory, the IFC officials nonetheless see the pro-SOE trends 
as ultimately a temporary swing of the pendulum.  They expect 
that over the coming decade many will fail and the model will 
face increasing political backlash. 
BROWN