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Chinese officials spent the last five years trying not to become Japanese, as President Xi Jinping’s men watched the bad-loan factor, asset bubbles and deflationary perils.
If the risk has been mastered, the next risk for China is to avoid going the way of South Korea.
Take the two biggest worries about Asia’s biggest economy over the last 12 months. And no, we are not talking debt, runaway credit or demographic time bombs – those have preoccupied investors for years and will continue to do so, going forward.
One of the cracks in question involves a handful of globally-acquisitive Chinese conglomerates with names like Anbang Insurance Group, Dalian Wanda Group, Fosun Group, HNA Group and Zhejiang Luosen Neili. In recent years, they grew to be “too big to fail,” earning the nickname “gray rhinos.” The reference is to obvious, high-impact threats that can abruptly run away from regulators and leave the entire financial system vulnerable.
The other crack involves China’s biggest tech names, including Alibaba Group and Tencent Holdings. A torrent of recent press reports points out that many of the sexiest initial public offerings owe much to Jack Ma and his peers at Tencent. All too many startups rely on Chinese giants for financial support and credibility.
That gives Alibaba and Tencent vast voting power via board seats, veto rights and a big say in strategic decisions from mergers and acquisitions to hiring. All this leaves startups reliant for their survival on the conglomerates.
A corrupting influence
This will all sound eerily familiar to students of Korea Inc and its continued reliance on family–founded conglomerates, known locally as chaebol.
Korea’s 51 million people have a love-hate relationship with the giants towering over Asia’s fourth-biggest economy. They love how names we know today as Samsung, Hyundai, LG and SK propelled Korea from the ashes of war into the ranks of the top-12 economies.
The massive neon signs looming over some of the world’s most famous intersections – from New York’s Times Square and London’s Piccadilly Circus to Tokyo’s Ginza – fuel Korean national pride.
But Koreans are less enamored with how chaebol excesses from debt to overcapacity to opacity nearly toppled the economy amid the 1997 Asian crisis. Since then, the chaebol have harnessed political ties to limit regulatory efforts to curb their influence; their corrupting influence in society is so great it can even destroy presidencies.
Moreover, their stranglehold on all socioeconomic stands of life are impeding the startup boom Korea needs to move upmarket and create jobs.
All nations, especially developing ones, have a certain supply of innovative oxygen. In Korea’s case, it’s super concentrated at the top end of the economic food chain. It makes Korea’s government more about protecting jobs at the top than creating new ones from the ground up.
That impedes innovation, productivity and competitiveness. When chaebol perceive a threat on the horizon – a would-be Apple or Google – they can just gobble it up, starving Korea of a game-changing startup.
China’s last 12 months are littered with chaebol-like zigs and zags. First, regulators pounced to get a handle on the “gray rhinos” problem. Their dizzying overseas acquisition binge – more than $350 billion in recent years – had a noticeable pre-1997 quality.
These national champions once were the vanguard of China Inc’s overseas ambitions. Then, Beijing realized they were spreading their tentacles too far, too impenetrably and too indiscriminately for comfort.
Now come questions about China’s homegrown tech titans. As Bloomberg reports, nearly two dozen companies highlighted Alibaba and Tencent as risk factors in IPO documents over the last two years.
Among them is Pinduoduo, a shopping site that last month raised more than US$1.6 billion in a New York IPO. In its filing, Pinduoduo admitted “failure to maintain our relationship with Tencent could materially and adversely affect our business.”
Another one is food-delivery company Meituan Dianping, which is working toward a US$6 billion Hong Kong IPO.
The point here is that for all Xi’s platitudes about building a vibrant, innovative and productive private sector, China is seeing a concentration of risk and power that ended badly for more advanced economies.
South Korea is a development role model for China as Xi endeavors to beat the “middle-income trap.” And certainly the successes of the chaebol in global markets cannot be denied. But still, Seoul’s corporate system also abounds with cautionary tales. These are what Xi’s team should be studying – and avoiding.