Negative Impacts of Privatization

Methods
on International Business
Method
Restitution to
original owners

Impact
Emergence of a
business class
eager to do
international
business but too small
to matter

Negative Impacts of
Privatization Methods
on International Business
Method
Sale of state property

Impact
- May transfer welfare
state activities
new foreign owners
- Existing managers may
resist new control

Negative Impacts of
Privatization Methods
on International Business
Method
Mass privatization

Impact
Managers & employees may
retain control
State interference may continue
New domestic owners not
interested in foreign investors

Soviet Command System

Impact on Current
Economy
Command System
Taxing surplus

Current Economy
Confiscatory taxes

Consumption limits Shortage of retail services

Price controls

Prices liberalized, controls

on key products remain

Soviet Command System

Impact on Current
Economy
Command System

Current Economy

Vertical integration of Vertical integration of

large firms
large firms firms
(lack of flexibility)
Weak accounting

Weak accounting for

risk and value

Soviet Command System

Impact on Current
Economy
Command System

Current Economy

Import substitution Some import

policies
substitution
policies remain
Corruption

= Corruption

Problems Encountered by U.S.

Investors in Russia
Asset stripping
seeking
capital look
paper but

Joint venture partners

or companies
foreign
good on
are in poor shape
(Gazpom)

Problems Encountered by U.S.

Investors in Russia
Extortion

Payments for security

services can be high.

Marketing and
distribution

Transportation difficulties,
communication difficult,
few stores exist

Problems Encountered by U.S.

Investors in Russia
Control

Commercial law regarding

property rights is weak.

Problems Encountered by U.S.

Investors in Russia
So why bother?

U.S. Investors in China

Industries
chemicals

non-electric
machinery

food products

transportation
equipment

service firms

consumer goods

U.S. Investors in China

Goals
avoid Chinese trade
barriers
match E.U. and
Japanese competitors
strategic moves

export of lowtech, low cost

products
develop local
markets

obtain infrastructure contracting work

U.S. Investors in China

Government Requirements (occasional)
technology transfer
hiring and training
local managers
export orientation
location in
designated areas
many industries off
local content
limits
use of designated trading and distribution
organizations

China
More Worry Over Loans

NYT 5/10/02

China
More Worry Over Loans
Banking

system dominated by four giant

commercial banks, all state owned
Under Mao banks were used to funnel state
subsidies to local enterprises
How much companies received had nothing to
do with how much was repaid
1999 Government directed $179billion write off
(12%) of outstanding loans

China
More Worry Over Loans
Foreign

banks have less than 2% of all

deposits and loans
WTO

rules call for opening banking system to

foreign competition over the next 5 years

China
More Worry Over Loans

Dai Xianglung, Head of Central Bank recently

said 25-30% loans are not being repaid
Standard & Poor estimates it is 2X as bad as
stated, i.e., 50% loans are bad
US banks with assets > $1billion just 1.5% of
loans are more than 90 days overdue
In Japan bank bad loans are not not more
than 15%

China
More Worry Over Loans

Banks are propping themselves up by issuing

more loans at furious rate often for vaguely
described projects with little discernable effect
on improving the economy
More stringent rules on loans will push bad
loan % even higher
Goal = reduce bad loans to 15% in 5 years

China
More Worry Over Loans
Bank of China

China Construction Bank

Industrial & Commercial Bank of China
Agriculture Bank of China
Preparing to sell minority stakes to offset bad
loans
Bank of China furthest along expects to sell
stock in HK and NY this year

Bank of China

NY Times 2/1/02

Bank of China
Lax banking practices in China:
$320 mio bank funds diverted through
unlawful loans, off-the-books granting of
LCs and issuing bank bills

Bank of China
Lax banking practices in Hong Kong:
Scheme to launder $73 mio from
Kaiping, China branch

Bank of China
Lax banking practices in US:
Preferential

treatment of certain
customers: fraudulent LCs, pledged
assets sold
$20

mio fine for similar practices in US

Bank of China
Lax banking practices in Canada:
RCMP

investigating money illegally

taken from Bank of China ended up in
Canada

Bank of China
These

incidents are only the tip of the

iceberg
Every

bank in China has problems like this.

Reports

from Chinas audit office indicate

illegal use of 160 bio renminbi ($20 bio)

Foreign Fund Firms Face

Hurdles in China
As

China joins WTO - European and US

fund firms competing to find Chinese
partners for access to:
$600 million invested in Chinese stock
market
Hundreds of billions stashed away in
bank deposits, state pension funds and
social security

Foreign Fund Firms Face

Hurdles in China
Proposed rules:
Joint Venture (very costly) buy 33%
stake, paid for in cash
Buy 33% stake in existing domestic
fund manager; possible increase to 49%
in 3 years
Almost all of the 15 Chinese companies
have agreements with foreign fund

Foreign Fund Firms Face

Hurdles in China
Buying

in a 33% stake in Chinese fund

managing $1 billion is a steep price
Convince shareholders to pay cash for
company they cant control?
Buying in also buys into past liabilities

Foreign Fund Firms Face

Hurdles in China
Setting

up joint venture with Chinese

funds time consuming and at a
disadvantage against the top
established Chinese funds

Foreign Fund Firms Face

Hurdles in China
Why

only these two options?

Chinese Securities Regulatory
Commission (CSRC) has limited
resources
Foreign joint venture creates a new
category requiring another level of
regulation
CSRC may also be favoring domestic
funds to ensure they are in good shape
before partnering with foreign funds

Chinese Multinationals?
Name

a famous global Chinese brand?

Tsingtao
Ever

Beer

heard of: Haier Group?

Chinese Multinationals?
Haier Group Chinas largest appliance
manufacturing company

Haier Group
In

1990s opened factories in 10

countries

In

2000 opened $30 mio factory in US

Haier Group
Camden,

SC plant makes compact

refrigerators sold by Wal-Mart, Home
Depot, and others
Captured 30% US market share

Haier Group
Shipping

from China costly and takes

40 days
Able to put made in USA on products
Cheap R&D & machinery shipped from
China provide cost advantages

Haier Group
Rolling out other products for US:
Freezers, air conditioners, flat panel TV,
DVD players, microwave ovens

US sales about $500mio 85%

imported US company is profitable