RECENTRALISING CONTROL OF CHINA’S MINERAL EXTRACTION

 

HOW CHINA’S NEW RICH MAKE MONEY FROM ARBITRAGE

#8 in a series on THE FUTURE OF TIBET

China’s recent recentralisation of mining and metals manufacturing could be presented positively as a step towards efficiency, reduced energy intensity, burning fewer tonnes of coal per tonne of finished steel.  The argument for recentralisation is that the number of steel mills will be reduced, mill size will expand, resulting in greater efficiency and less use of energy per tonne of steel produced. It is all about rationality, not the power play of factions, provincial and national, all out for a slice of the action. Recentralisation could mean lesser resource intensity if the wasteful production of poor quality products could cease, to be replaced by cleaner technologies and more focus on what customers actually want.

Recentralisation could go together with marketisation of state owned enterprises, which usually means hiving off their many activities that don’t make metals, divesting themselves of the total institution that provides housing, health care, education as well as employment for life for those on the payroll. For Tibet, increasingly a major source of steel making ingredients such as chromite, and for copper and gold, this could mean the recentralised, reinvigorated, recapitalised and highly profitable state owned enterprises have greater capacity to extend their reach into remote areas of the Tibetan Plateau.

Marketisation of state owned enterprises was known in Chinese as “shaking off burdens”, including not only employee health and education but also pensions, to be scaled back or divested altogether as a state responsibility. The newly marketised corporation made its non-core businesses semi-independent subsidiaries, often corruptly transferring much wealth to new inhouse owners. But the capitalised, corporatized, marketised SOEs nonetheless remained, in their core business, highly vertically integrated. In the minerals business this means owning and/or controlling the mines, the bulk freight transport of commodities to smelter, the manufacture of metals and the marketing. The mines remained captive, with no choice as to how to operate, what scale, or who to sell to. The mines are still largely subservient to their smelters, which may be thousands of kilometres from Tibet.

The ongoing vertical integration of China’s largest mineral and energy enterprises continues to mimic the largest vertically integrated institutions on earth: the Chinese Communist Party and the Chinese state. Their reach from top to bottom extends down to village level and up to a monopoly on all top positions. This enables cadres, whether in Party or official posts, to extract maximum rent from enterprises, and maximises opportunity for State owned enterprises to effectively privatise their profits by establishing subsidiaries that do the profitable aspects of the SOE’s functions, and retain the proceeds.

Hong Kong social scientist Lin Yi-min has plenty of stories of how cadres make money by controlling official permissions. Lin calls these numerous offshoots the “backyard profit centres” of state agencies. They make nothing. They are traders in permissions, favours, contracts, insider deals, access. They are expert at arbitrage, at buying and selling where there is sufficient spread between prices for a profitable transaction. Lin describes the way they are “set up, run, or facilitated by state agencies outside the scope of their regular administrative functions. Such economic entities are managed by former or incumbent officials or persons they trust. They receive funding and favourable regulatory treatment from, or with the help of, their government sponsors, and contribute a significant part of their revenue to the slush funds of the latter.”

Lin gives several vivid examples. A small company bought trucks to deliver its products, but “they were frequently harassed by public security officers and forced to pay heavy road tolls.” The solution was simple. The public security department, for a fee, could arrange for one of its subsidiaries to rent out military licence plates to affix to the trucks, plates belonging to a nearby missile base. End of problem.

Another company routinely hired new workers from the pool of migrant labourers coming from rural villages to the factories. As is usual all over China, the migrants came to factories where there were people they knew, who might help get them a job. Sometimes this meant staying a night or two in the workers’ dorm until they were hired. Technically, this was illegal, unless they first obtained a permit. Although the entire factory system, with its high workforce turnover, relied on constant recruiting, this was an opportunity for the police to raid the premises, and heavily fine the factory owners for failing to exclude from its premises unauthorised people. Again the solution was simple. The police happened to have a subsidiary that provided security services. The company got rid of its own security staff, hired the security subsidiary of the police at three times the cost, and all their problems ceased. There were no more raid of workers’ dorms, even though friends of workers continued to base themselves in the dorm while looking for work. So it goes.

A more contemporary example is internet censorship, at the behest of the party-state, but in practice implemented by the major corporate players within the Chinese firewalled internet. China’s internet regulations are not enforced by the government; rather the companies that manage China’s various and extremely active blogs and microblogs are responsible for enforcing China’s online censorship laws and regulations. Yes such censorship leaves these companies’ customers angry, but its worth it for what they get in exchange: an exclusive monopoly that keeps out more sophisticated players like Facebook and Twitter.

This is the genius of China’s state capitalism. The deals made between corporations and the party-state are personalistic, boss-to-boss, based on a shrewd calculus of power and the price corporate players are willing to pay, as the necessary cost of being in business. Everyone knows the implicit rules of the game, no formal deals need ever be done, no contracts signed. Everything is deniable, on the rare occasions such deals are questioned, or retrospectively judged as wrong. The powers of the party-state to make or break a business are so many, and the opportunities to accumulate wealth so tempting, that relationship management is the key to all business success and profit. There is now hope that China’s new leaders will change this system of favours for insiders, but it is deeply entrenched. Tibetans, by definition, are the outermost of outsiders.

Paying extra for security guards or number plates is a small impost, but it is not only police who can add to the costs of doing business, or extract rents for easing those pressures.  Dozens of state agencies can take similar bites out of corporate cash flow, or, alternatively, can swing contracts to a compliant company, or speed up permissions, while stalling a competitor. The missile base licence plates  and security guard stories suggest a shakedown by opportunistic police and public security officials  marketising their monopoly coercive powers, on a local basis. But the problem goes deeper, is more systemic.

Some see this as corrupt corporations perverting, even capturing, the state. Political scientist Shawn Shie says “Collective corruption has evolved into increasingly complex and sophisticated forms that involve large-scale collusion between entrepreneurs, organized crime elements, and multiple enterprises, units and officials in the public sector. The main goal of collective corruption in these cases is not simply the enrichment of individual officials or public units, but the support and protection of large-scale, organized criminal enterprises. In comparative perspective, these recent cases of collective corruption evoke images of an alliance between organized crime, the managerial class, and the nomenklatura mafia that we tend to associate with post-communist countries such as Russia.”Shawn Shie, The Rise of Collective Corruption in China: the Xiamen smuggling case, Journal of Contemporary China (2005), 14(42), February, 67–91

But the party-state is not passive, its agents are acutely aware of the opportunities for monetising their power to act in the name of the state, and  frequently it is their initiative that obliges corporations to become clients, accepting offers that cannot be refused.

The implicit deal between the party-state and the internet companies is at the highest level, centred on protecting central leaders from unwelcome ideas and debate, and protecting corporations from competition. Such deals are hardly unique to China, but in China are more prevalent, entrenched and normalised. The normalisation effected by the proposition that this is simply business with “Chinese characteristics” resists the more widespread trope of “corruption” as an alien, imported concept not relevant to China. Whether or not the party-state-business nexus can all be considered as the ancient art of guanxi remains debatable, but the result is an uncommonly fused hybrid, a China that is not at all traditional in that the commercial class has eclipsed the rectitude of the administrators. No longer do Confucian virtues of restraint, self-cultivation, propriety and civic duty outrank accumulation: this is a new China.

With so many stated owned but semi-privatised subsidiaries extorting rent and competing against each other, one of the basic services they provide is to protect their paying clients from competing rent-seekers. The range of services they provide to those who adopt them is impressive: “acquirement of resources, protection against predatory actions by other agencies, facilitation of entry and expansion, creation of monopoly positions, ad hoc relaxation of restrictions, exemption from taxes or other levies, and defusing of punitive actions by law enforcement authorities.”

This is a closed system, from which Tibetans are excluded. It is a system that rewards those with money (their own or others) to stake out a turf as players in the big game of wealth accumulation, not by making anything, but by trading in permissions, turning power into rent.

What has this got to do with Tibet? Until now, not much. Tibet has remained a state project, directly financed by subsidies from Beijing, often diverted by various levels of government to other ends. But now the biggest Chinese state owned corporations, especially in hydropower construction and minerals extraction, are moving into Tibet, and they have distinct ways of operating. The close partnership of party-state and big business leaves little room for Tibetan voices to be heard, especially when there is money to be made.

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