Privatization, Chinese Style

We document the market response to an unexpected announcement of proposed sales of government-owned shares in China. In contrast to the "privatization premium" found in earlier work, we find a negative effect of government ownership on returns at the announcement date and a symmetric positive effect in response to the announced cancellation of the government sell-off.

We argue that this results from the absence of a Chinese political transition to accompany economic reforms, so that the positive effects on profits of political ties through government ownership outweigh the potential efficiency costs of government shareholdings.

Read the paper here.

China Sovereign Fund Acquires Morgan Stanley Stake

The stake taken by CIC will be passive and give the investment firm no special rights to name directors, Morgan Stanley said in its press release. CIC will purchase equity units that will be converted into common shares on Aug. 17, 2010, at prices between a still-undetermined reference price and a premium of 20 percent to that price. The units will pay a fixed annual rate of 9 percent on a quarterly basis.

That's the latest from NYT, more here.

Wonder what WSJ would have to say on this given its recent unfriendly stance towards foreign acquisition of US assets.

How to Make Sense of China's FDI

In spite of the causes for concern, standard economic rationales for FDI take on unexpected new forms in China, and may justify some, perhaps even much, of China’s outward FDI. Three rationales are of note.

First, the internalization theory of FDI, appropriately reinterpreted, suggests that Chinese companies, with vast experience in navigating complex bureaucracies, might do well in countries with similar institutional environments.

Second, in certain maturing industries, outward FDI from China, even into advanced economies, might make economic sense. This ownership reversal, which we develop from the perspective of Grossman and Hart (1986), argues that the party possessing manufacturing capabilities becomes the “boss” as the locus of competition shifts from innovation to production cost and quality control.

Third, China’s outward FDI may be justified economically to SOE insiders who overvalue control due to their distrust of markets and sense of national pride. This third rationale can continue as long as those who control China’s business enterprises continue to accept below-market share valuations in exchange for these perceived benefits of control.

That is the conclusion from a very interesting paper by NYU's Bernard Yeung and two coauthors entitled: Perspectives on China's Outward FDI. Read the whole thing here.

Facts and Fallacies Regarding MNE in China

Many otherwise well-informed experts on international economics believe that US FDI in China is large, that US multinational enterprises (MNEs) have significantly enlarged the US-China trade deficit by shifting production aimed at the US market to Chinese affiliates, and that this production shift has undermined investment at home and in other countries.

Current conventional wisdom also suggests that US MNEs are moving cutting edge R&D to China, in order to take advantage of vast legions of low cost technologically skilled workers. Our recent research, based on comprehensive surveys of US multinational activity in China, suggests that each one of these suppositions is largely false.

More here.

Listing Decisions, Chinese Style

From today's Hong Kong Standard:

The Chinese government will support state- owned enterprises to list shares in Hong Kong, contrary to reports that there are directives to limit public floats overseas, the head of the State- owned Assets Supervision and Administration Commission (SASAC) said yesterday.

SASAC chairman Li Rongrong said it was not up to the agency to determine on which market SOEs should list - rather, it is the boards of companies that make those decisions.

More here.

Question:

Now the companies are state-owned enterprises (SOEs), though they have already gone through a corporatization process. I probably can safely assume that the government holds controlling stake in these companies.

If true, presumably I can safely assume that government representatives dominate the boards of these companies. If so, then we have a situation where government officials, as resprenstatives of the state's interests, will determine where government-owned enterprises will list. Do you really believe that they will make that decision based on economic criteria and not on political ones.

If not, what's the difference between delegating the authority to make a listing decision to the board of the SOEs and having it made by your colleagues, Mr Li?

China's Productivity Surge Helps Raise Income

This is what I think is the more important message in this NYT story, though the author puts more on weight on labor shortage as a contributing factor to wage rise in China.

China Balance Sheet Project

One can certainly get a sense of the importance of China in US foreign policy by the amount of attention and resources think-tanks in DC devoted on China-related issues.

Here is the website of the China Balance-Sheet project.