Venal Chinese Corporates
|Jul 10, 2009|
This is not a full-blown book review. But there is a very interesting anecdote in the book that reminds me of how treacherous it can be to invest in shares of a mainland-operated and Hong Kong-listed company. For well-written full book reviews, please refer to here and here.
In 2001, I was working as a senior staff analyst at Stockhouse Media Group’s Hong Kong arm and one of my colleagues, who was mainland-born and US-educated, did some research work on a company called "Greencool Technology Holdings" which was listed on GEM (the second board of Hong Kong’s stock market). He came to the conclusion that it was a rising corporate star as it was equipped with innovative technology that could produce some kind of environmental-friendly freezing agent for refrigerators. All the fundamentals were excellent and the stock was trading at a big discount to its asset value. He was thrilled with his findings and put his bet on the company.
After reading Yasheng Huang’s "Capitalism with Chinese Characteristics", I’ve come to know the intriguing background story about Greencool.
Greencool was delisted in May 2007 after a two-year suspension. Its chairman Gu Chujun had been arrested by mainland authorities in September 2005 on fraud and embezzlement charges and was later jailed in Foshan, Guangdong.
The most mysterious part was Greencool’s transformation when Gu bought a majority stake in 2001 in the then refrigerator giant Kelon Group. The stake purchase portended the future downfall of Greencool as well as Gu himself. The tricky thing is: was Gu fully aware that Kelon’s assets were being or had been expropriated by its state-owned parent at the time of the takeover (as described in the book)? Another question would be: was Gu an accomplice in the asset expropriation by the state or was he just a scapegoat? Mysteries of such kind will probably remain mysteries forever.
As for the rise and eventual gutting out of Kelon, the following two excerpts from Huang’s book give a lucid account:-
"Between 1984 and 1998 Pan Ning had built up a formidable Kelon brand and by the late 1990s, Kelon controlled 25 percent of the world’s second largest refrigerator market….. But neither Pan nor Kelon itself owned the Kelon brand. The Kelon brand was registered with Kelon’s state-owned holding company. That all the business value was located in Kelon but all the corporate control was located in the state-owned holding company created an opportunity to expropriate Kelon’s assets. As soon as Pan Ning exited the scene, Kelon suddenly began to record massive payables to its holding company."
"The Kelon example illustrates the treacherous side of directional liberalism. For many years, Kelon was effectively run as a private-sector firm. The Rongqi township respected the control rights of its true founders in part because of its goodwill and its self-restraints. But, it is also because Kelon was small and there was little to expropriate. When Kelon was worth billions, the incentives began to change. The helping hand turned into a grabbing hand. This is the price of directional liberalism: property rights security was not institutionalized."
The Kelon/Greencool example is one of several cases cited in the book that are used to support the author’s argument that the entrepreneurial, market-driven and rural-accentuated economic initiatives of the 1980s were thwarted by state-led, interventionist and urban-biased policies of the 1990s that encouraged FDI but restrained domestic enterprises. The noxious outcome is crony capitalism built on systemic corruption and raw political power.
No amount of fundamental analysis is ever capable of revealing the murky backgrounds of mainland-operated and Hong Kong-listed companies such as Greencool, let alone the furtive and venal roles played by all levels of government in those companies. Caveat emptor is the only protection for investors.