The Wall Street Journal reported last week that Chinese regulators won’t let ships from a Brazilian miner (Vale) deliver iron ore, citing alleged “safety concerns.” The problem is not safety, but the undue influence of state-owned enterprises (SOEs).
In December 2011, the Valemax Berge Everest—a huge ship 50% larger than the next largest global carrier—unloaded a record 350,000 tons of iron ore in the Chinese port of Dailan in only 55 hours. The head of China’s steel industry association praised the feat, noting that the large ships will cut production costs. But the Chinese Shipowners’ Association blasted the Valemax ships as “a matter of monopoly and unfair competition.” The association’s chairman, Wei Jaifu, is also chairman of SOE China Ocean Shipping Company (COSCO), China’s largest shipping line. Shortly thereafter, China’s Transport Ministry effectively banned the ships, citing a 2-foot crack in the ship’s hull. Experts had examined the crack and found no reason for concern, but this didn’t stop the Ministry from intervening.
The problem here is not safety, but protectionism. Most of the shipyard business Vale created went to a private company that lacked government pull. Vale’s huge ships represent a direct threat to COSCO and other firms in shipping and related industries. Those that are state-owned have the necessary connections to raise safety or other concerns to keep the global competitors out. While privately held companies must compete on factors like price and quality, SOEs have another level at their disposal, government intervention.
This type of government-big business collusion is known as crony capitalism in the U.S. But direct government ownership and control is much less common here, with notable exceptions like Amtrak, the US Postal Service, and GM. China has opened its economy to some extent over the past two decades, but SOEs still control banking, telecom and many other sectors of the economy, making it difficult for non-Chinese firms to get a fair shot at the Chinese market.
Politicians often focus on problems with China over exchange rates and intellectual property rights. These are certainly important issues, but they emanate from a deeper notion that Beijing can and should intervene in global business affairs to protect Chinese firms. Until China is willing to privatize its SOEs it will continue to arbitrarily and unfairly deter global competitors seeking to enter the country.
Could we view the problem as a childhood illness that China will get over in a few years? After all it is still the People’s Republic, governed by the party.
a childhood problem? State-owned enterprises have dominated China since Mao. this has been a problem for 20 years and isn’t changing
How do we explain to our grandchildren that we have the greatest economic system the world has ever known, but that we have to borrow money from the Chinese to pay our bills?
You can explain to them that this money goes to good causes such as: supporting educational TV programs like Sesame Street that prepares kids who stay home for school; providing food for kids who get their only one hot meal a day at school, protecting America from terror, supporting a defense system that save the lives of other little kids in the world, who are forced to live in shelters because other vicious people fire missiles and rockets at their houses.
I bet they will be proud.