Resource Security and Governance

Globalisation and China's Natural Resources Companies

Xinting Jia, Roman Tomasic

• Publisher: Taylor & Francis
• Year: 2017
• Print ISBN: 9781138680555
• eBook ISBN: 9781317190554
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

China's phenomenal economic growth in the past 30 years has witnessed the rise of its global natural resources companies. At the same time, the emerging of a middle class in China and their desire to improve living standards including better dwelling conditions, better health and nutrition, has driven strong demand in mineral resources, energy and quality food. The so called 'socialist market economy' in China has seen this growing demand being met partially by companies with 'national significance'. In the resources sector, these companies are represented by companies listed in stock exchanges in China as well as globally such as in New York and London; at the same time, most of these companies are also controlled by the Chinese government.

China's resources companies have expanded overseas in search of new acquisition targets whilst seeking to extend their global reach with a focus on resource rich countries. The expansion of these companies internationally, and the unique ownership structure of these companies, has posed challenges for regulators, trading partners of these companies, investors and other interested parties seeking to understand how these companies are governed and the implications of government ownership for resource security globally.

Resource Security and Governance: The Globalisation of China's Natural Resources Companies contains case studies of the global expansion efforts of Chinese global natural resources companies; it reviews the governance structures of these companies and analyses how these have affected the inter-relationship between these companies and their trading partners, governments, regulators in targeted countries and investors globally. In addition, this book examines how the unique structure of these companies may affect resource security globally and touches on other related matters such as climate change, and air and water security in China.

1 Economic Development, Resource Governance and Globalisation

The Growth of China’s Resources Companies

Xinting Jia and Roman Tomasic

1. Introduction

China has experienced massive economic growth since the introduction of the ‘open door’ policy in 1978. Over the past 50 years, China’s gross domestic product (GDP) has grown on average at around 10% per annum (World Bank, 2016) and by the end of 2014, China for the first time overtook the USA as the world largest economy (International Monetary Fund, 2014, Foxnews.com, 2014).

These impressive economic growth figures demonstrate that China’s economic development has followed a distinctive growth path that calls for closer examination. In the past decade, not only has China grown in terms of its own economic power, it has also expanded its reach overseas through the acquisition of resource generating assets via companies of ‘national significance’ or its so-called national champions that are controlled by the government through the State-Owned Assets Supervision and Administration Commission of the State Council (SASAC). The global expansion strategy of Chinese companies has been based on the belief that it would help China to secure valuable resources to not only support its further growth but also to provide ‘security’ to the ever growing needs of its large population for natural mineral resources, energy and food.

China’s participation in the global mergers and acquisitions market has brought fresh capital and competition which has contributed to the rise in value of desirable assets; at the same time, the nature of those acquisitions (in most cases with the Chinese government as their controlling shareholder) has added more complexity beyond pure market practices. Friction may sometimes arise from cultural misunderstandings in host countries that have received Chinese investment (Tomasic and Xiong, 2016); also, the distinctive governance structure of Chinese companies poses challenges to all market participants including target companies and regulators in host countries.

To help gain a better understanding of these unique government-controlled listed companies, this chapter will review the economic and enterprise growth of state-owned enterprises (SOEs) and ‘national champions’ in China, followed by a discussion of the emergence of China’s global resources companies and their implications for corporate governance and resource security globally. This chapter thus provides an overview of the historical development of China’s large companies and sets the scene for detailed discussions of the implications for corporate governance and natural resource security, food safety and security, water safety and related issues covered in later chapters.

2. Economic Development in China and the Emergence of China’s Global Natural Resources Companies

For political reasons, China has taken its own distinctive economic development pathway. Since the adoption of the ‘open door’ policy in 1978, China has gradually transformed from being a ‘socialist’ economy into a ‘socialist market’ economy or into a system of ‘state capitalism’ (Lin and Milhaupt, 2013); others have described it as a system of ‘authoritarian capitalism’ (Witt and Redding, 2014).

As the backbone of the economy, SOEs have also been transformed gradually since the establishment of the Shanghai and Shenzhen Stock Exchanges in 1990 and 1991 respectively. Despite being listed on the two domestic stock exchanges and with some companies also listed in Hong Kong and on other overseas stock exchanges, a majority of China’s large SOEs have not gone through complete privatisation. In fact, when these companies were first listed, they were only partially listed on stock exchanges, as the government only wanted to ‘sell’ part of these companies to the market in order to raise capital and bring more competition to revitalise large SOEs.

The partial privatisation of SOEs aligns with China’s ‘gradualist’ approach to its social and enterprise reforms, as China has adopted a ‘trial and error’ method rather than the ‘big bang’ approach that was adopted by most former socialist countries in Eastern Europe in the 1990s (Liu and Garino, 2001). This also aligns with China’s domestic strategy of ‘grasping the big, letting go of the small’ (zhua da fang xiao) and of nurturing companies in strategic industries without abandoning ownership control. This strategy seems to have facilitated the growth of large SOEs. As is evident from the sheer size of China’s three largest SOEs—Sinopec, China National Petroleum and State Grid—between 2011 and 2013, these three largest SOEs had earned more revenue than the combined revenues of the largest 500 private domestic firms in China (Lee, 2013).

Overall, China’s economic and enterprise reform has gone through what can be seen as four phases: Phase One (from 1978 to 1984), Phase Two (from 1984 to 1993), Phase Three (from 1993 to 2005) and Phase Four (from 2005 to the present) (Hemphill and White III, 2013: 195). The transformation of large SOEs has always been an important part of the Chinese government’s reform agenda, ranging from ‘small-scale privatisation’ (i.e. partial listings on the Shanghai and Shenzhen Stock Exchanges) during Phase Two in the 1990s, to the promotion of ‘national champions’ in strategic industries during Phases Three and Four (Hemphill and White III, 2013: 195). In November 2000, for the first time, the ‘go global’ strategy was explicitly put forward at the Fifth Plenary Session of the Fifteenth National Congress of the Communist Party of China (CPC) (Wang and Lu, 2016: 27).

Since 2005, China began to promote its ‘national champions’ and leverage the ownership structure (as listed government controlled companies) of its ‘national champions’ to pursue its ‘go global’ strategy (Hemphill and White III, 2013). In essence, China has expanded overseas through the growth of its ‘national champions’, in the form of large listed SOEs, with the aim of raising the international competitiveness of its strategic industries (Lee, 2013) and to secure natural resources globally. This has subsequently seen a wave of overseas acquisitions by large Chinese companies, often raising national security concerns for the target country. At the same time, China has undertaken another measure to further reform its stock market listed SOEs; this has seen the conversion of shares from non-tradable into tradable shares.

When large SOEs were first listed in the early 1990s, use was made of the so-called split-share structure, whereby A-shares¹ listed in the domestic market were separated into tradable shares (held by the general public) and non-tradable shares (held by the government) with both types of shares having the same cash flow and voting rights (Firth et al., 2010: 685–686). The split-share structure has posed enormous corporate governance challenges to regulators, such as ensuring equal treatment of large and small shareholders (Jia and Tomasic, 2010) and aligning executive remuneration with company performance (Hou et al., 2012); as a result, the Chinese government has been determined to undertake further reforms so as to eliminate structural flaws in China’s stock market (Jia and Tomasic, 2010: 7).

On 31 January 2004, China’s State Council issued an official document entitled ‘State Council’s opinions on further reforming and maintaining the stability of the stock market’, expressing the concern that ‘the split ownership structure problem’ needed to be dealt with properly (Jia and Tomasic, 2010). After trialling this reform in four companies, the China Securities Regulatory Commission (CSRC) issued an official policy document entitled “Guidance on Split-Share Structure Reform in Listed Companies” and clearly stipulated that the reform plan (i.e. converting non-tradable shares into tradable shares) for each listed company had to be approved by at least two-thirds of voting shareholders (Jia and Tomasic, 2010: 7). Despite the controversy surrounding this reform regarding corporate governance issues, such as the dilution of share ownership for existing tradable shareholders and the protection of minority shareholders’ rights, the government nevertheless managed to push through its reforms and reduce its major shareholding in some listed companies in subsequent years.

This has been perceived as the government wanting to attract capital and to improve the efficiency of these large government controlled companies (Liao et al., 2014) rather than to let go of its controlling rights. After the introduction of the split-share structure reforms, the government still owned more than 50% of shares in large SOEs or ‘national champions’ through CSOEs (centrally controlled state-owned enterprises) which are under the direct control of the State-Owned Assets Supervision and Administration Commission (SASAC). Table 1.1 shows the controlling shares held by the government through CSOEs in some selected ‘national champions’ that have been active in the global corporate acquisition market. A list of all CSOEs and their ranking in the Fortune Global 500 companies in 2015 can be found in the appendix.

As shown in Table 1.1, apart from the fact that government ownership in Chalco was 41.33%, in most cases, the Chinese government, as the ‘dominant’ shareholder, owned more than 50% of shares in the listed entity through a controlling state-owned enterprise.

Among these transactions, the most notable was ChemChina’s US$43 billion takeover bid for Syngenta, one of the largest acquisitions by a Chinese company and by a Chinese government controlled company (Burger, 2016). The ChemChina/Syngenta takeover raised concerns regarding ‘Chinese Nationalism’ (Ellyatt and Chatterley, 2016), and the potential for conflict that could arise from the interaction of different governance, cultural and management styles and the effect of different policy preferences in the future. On the one hand, the acquisition would help China improve its long-term food security (Burger, 2016); on the other hand, some environmental activists have also expressed the concern that the acquisition may lead to the proliferation of ‘genetically modified’ seeds and pesticides for global agricultural development, which could have adverse environmental consequences (Greenpeace, 2016). Nevertheless, the deal was eventually approved by Syngenta’s shareholders in May 2017 (Spegele and Wu, 2017).

Overall, the expansion of government controlled companies overseas has often been seen as raising concerns in other countries on national security grounds and as having created challenges for global politics (Umar, 2016).

3. Governance of Large Listed Chinese SOEs/National Champions

The role of the CPC and the Chinese government in SOE management: To help us gauge the root causes of national security concerns, we need to better understand how Chinese companies are governed as this can differ from the governance of their global counterparts. It is worthwhile to first gain an understanding of the relationship between the CPC and the Chinese government,...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Figures, Charts, Tables, Boxes and Appendixes
• About the Contributors
• Introduction
• 1 Economic Development, Resource Governance and Globalisation: The Growth of China’s Resources Companies
• 2 Resource Security and Corporate Social Responsibility Norms in the Governance of Globally Active Chinese State-Owned Enterprises
• 3 Extractive Governance, Environmental Management and Community Engagement: China Versus Global
• 4 CSR-Related Risk Management in the Overseas Investments of Chinese Companies: Context, Dimensions and Effectiveness
• 5 Challenging Issues in China’s Mining Industry: Human Resources and Others
• 6 China’s Rising Online Food Trading: Its Implications for the Rest of the World
• 7 Enforcement of Food Standards in China—Impact of the State-Led Stakeholder Model of Corporate Governance
• 8 Water Security, Governance and Sustainable Development Goals in China—Radical Laws, Institutions and Courts
• Index