Why governments in emerging economies are buying back big businesses
May 23, 2011
Renationalisation is about bureaucratic ambitions and greed; often political ambitions are also involved I was doing research for my new book and I came across the following quotation. The article was written for The Economist in 2007, but the sentiment is quite common. According to The Economist, “The world is experiencing one of the biggest revolutions in history, as economic power shifts from the developed world to China and other emerging giants. Thanks to market reforms, emerging economies are growing much faster than developed ones.” Precisely! The quote is accurate in that it attributes the rise of emerging economies to market reforms. Where the premise fails is the assumption that these reforms are permanent. They aren’t. These reforms are only laws and like any laws they can be rewritten.
A pretext to get rid of market reforms was the recession, or as it is becoming known, the ‘Lesser Depression’. The consensus for governments in both emerging and developed markets is that capitalism has somehow failed and that with more government intervention in the markets economies can be revived. But the Lesser Depression was not the beginning. It only helped accelerate a process that had started much earlier. The process involved a major assault on markets through an insidious process of renationalisation.
In the good old days a government who wished to nationalise a company simply did so by decree. The most recent example was when Bolivia’s President Evo Morales chose 1 May 2006 to lead troops into his country’s biggest natural gas field and read out a decree that gave Bolivia control. The glitch was that the owner of the gas was not some evil multinational corporation, but the state of Brazil through its state-owned gas company Petrobras.
But Bolivia is the exception. These days, governments understand that an outright nationalisation is bad for business and especially foreign investment. So they have developed more subtle methods. For example, the takeover of Yukos and the jailing of its owner, Mikhail Khodorkovsky, by the state through a charge of tax evasion helped to increase the state’s share of the Russian stock market capitalisation from 24% in 2004 to 40% in 2007.
The Lesser Depression provided an excuse for governments in emerging markets to provide money and liquidity to favoured state firms while strangling private and foreign firms. In Russia, the state-owned banks, Sberbank and VTB, received enough new capital to be able to capture more than 50% of Russia’s retail and corporate banking market. Foreign firms cannot compete because the Russian state banks can lend on terms which would not get past credit committees in western institutions. If the money is not lent, it is used for acquisitions like the recent acquisitions of Bank of Moscow and TransCreditBank by VTB.
Buying the competition with state money is also popular in China. In 2009, when private companies were reeling from the economic downturn, the provincial government of Shandong used its control of Shandong Iron and Steel Group, the world’s ninth-largest steelmaker by capacity, to attempt a take over the largest non-state steel groups Rizhao Iron and Steel. Rizhao’s owner, Du Shuanghua, was not happy about the prospect.
To try to prevent the merger, he tried a very Chinese poison pill. He handed up to 30% of Rizhao’s shares at a low valuation to Kai Yuan Holdings, a Hong Kong-listed company which is controlled by close relatives of Hu Jintao, Chinese president. It didn’t work. Protecting Du would have been too politically risky for Hu, so the merger went through.
Renationalisation is not necessarily a product of bureaucratic ambitions or greed. Often, political considerations are involved. Huang Guangyu, founder of Gome electronics retailer, was once China’s richest man. Like Khodorkovsky, he was seen by China’s leaders as a potential threat to their power, so he was arrested in 2008.
The Chinese sovereign wealth fund also played a part in the renationalisation process known in Chinese as “guojinmintui” or “the state advances as the private sector recedes”. State-owned banks have to raise capital to cover an ever-increasing amount of bad loans caused by the real estate bubble. In stepped China Investment Corporation, one of the country’s many sovereign-wealth funds, and purchased shares of Chinese banks.
It is not just emerging markets. Developed countries have set up sovereign wealth funds to help out local industries. The French created the Fund for Strategic Investment and the British set up Strategic Investment Fund; both were created to steer state money to particular industries and companies.
Any reform, especially a market reform, is very difficult for the reason that it threatens powerful economic and political interests. The difficult market reforms in the 1990s in China, India and Russia were achieved at great cost and suffering. They were undertaken basically because there were few alternatives. But the assumption that these reforms and the growth they engendered are permanent is simply false.
(This is the second article of a two-part commentary on the reversal of reforms in emerging economies. The first article, ‘
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