Posts tagged: China’s state owned enterprises

Pencils, Staplers & Pens, Oh My! China Submits Government Procurement Bid to WTO Body

By , August 2, 2010

As promised, on July 9, 2010, China submitted its proposal to join the World Trade Organization’s (WTO) Agreement on Government Procurement (GPA).  China’s government procurement market – in which the government purchases supplies and services to keep it running –is larger than the GDP of many small nations, accounting for $500 billion by some estimates, a size that makes many western companies salivate.  But China has no legal obligation to open its government procurement market to global competition.

Needless to say, the inability for foreign companies to access such a huge market has been a sticking point for many foreign governments in its dealings with China.  During May’s Strategic & Economic Dialogue (S&ED), Secretary of State Hillary Clinton raised the government procurement issue often.  By the end of the S&ED, China promised to submit an application to the GPA in July, its first submission since 2007 when China’s application was resoundingly rejected by other GPA member nations for being over-protectionist.  But the U.S. is not the only country with issues concerning government procurement.  German Chancellor Angela Merkel visited China in the beginning of July and market access was number one on her list of discussion topics with the Chinese leadership.  Even the U.S. Congress is threatening action, proposing the adoption of the “China Fair Trade Act of 2010” if China does not open its government procurement market.

So with all that pressure, will China’s 2010 revised offer to join the GPA open its markets to foreign corporations?

Don’t hold your breath.  While China responded to some of the criticism lodged against its 2007 application – it shortened the implementation period from 15 years to 5 and significantly lowered the monetary values of the projects and purchases covered to be more in line with other member states – its 2010 application does little to actually open its government procurement market.

In Annex I of China’s 2010 application, a larger number of central government agencies are covered compared to China’s previous application – 61 to be exact.  But the largest market – namely government procurement on the local level – is completely absent.  Annex II, which is to list those sub-central government agencies covered by the agreement, is left blank.  Additionally, China’s state-owned enterprises (SOEs) are also not covered by the GPA

More high rise aparment buildings in Shanghai

application.  Although a hybrid between a government-run organization and a private corporation, SOEs maintain good ties with the government, especially on the local level.  As Monday’s New York Times pointed out, many SOEs whose businesses are completely unrelated to housing development, such as the Anhui Salt Industry Corporation, have been the biggest players in China’s real estate construction boom.  This is largely due to the SOEs huge amounts of cash and their ability to endless borrow from government-run banks.   But under China’s 2010 GPA application, these SOEs would be allowed to ignore competitive bids from foreign companies.

Although this is a disappointment for foreign corporations looking to crack into China’s government procurement market, China’s current 2010 GPA application is at least honest in admitting to the fact that the central government might have a lot less control over the provinces than many thought.

This is especially true if central policies seek to disrupt the symbiotic relationship that exists between local governments and local SOEs.  As Reuters notes in its report on China’s GPA application, China’s provinces have had a long history of preferential treatment of local provincial industries, even at the expense of Chinese corporations from other provinces.  These local SOEs – like the Anhui Salt Company – employ hundreds if not thousands of local workers, and local SOEs are often more willing to partake in a “I-scratch-your-back-you-scratch-mine” economy.  Take for example the real estate auction mentioned in the New York Times article.  At a government-run public auction, Anhui Salt put in an offer that far surpassed other offers, unnecessarily bidding up the price that it would eventually pay for the land.  But that inflated price goes directly to the coffers of the local government.  And in some provinces, where the government’s balance sheets are more of charade than actual accounting, this extra income is important.  Needless to say, provincial governments are inherently protectionist of its local industries and the system the two have created.

While many believe that the Chinese central government, with it authoritarian rule, can force provincial level governments to act a certain way, China’s 2010 GPA application reflects that there are actually limits.  It also hints that China might be more of a federalist system than originally thought.  Although the U.S. is a member nation of the GPA, because the federal government cannot mandate state government behavior when it comes to government procurement, states have to affirmatively agree to the join the GPA.  In the U.S., only 37 states are signatories to the GPA; the federal government can’t force states to comply with the GPA.  Similarly, China’s 2010 application and the fact that the central government apparently cannot force provinces to sign on to the GPA, raises the question if China is in fact a de facto federalist system.

At any rate, given the absence of SOEs and local governments from China’s GPA application, expect the 2010 offer to be rejected again.  What will be interesting is how loudly the U.S. will object when 13 states have yet to sign on to the GPA.

Citizens United: U.S. Politics with Chinese Characteristics

By , January 29, 2010

Originally Posted on the Huffington Post

In 1966, because of the fear of foreign influence in U.S. elections, Congress passed the Foreign Agents Registration Act.  Eventually incorporated in the 1974 Federal Election Campaign Act, the law prohibits foreign governments, foreign political parties, foreign corporations and individuals with foreign citizenship from contributing, donating or spending funds, either directly or indirectly, in any U.S. election.

What started it all - Hillary the Movie

What started it all - Hillary the Movie

While this law has been important to the functioning of our democracy, the Supreme Court, in the case of Citizens United v. Federal Election Committee, has moved perilously close to abolishing it and opening the U.S. political process to foreign money, influence and—given the structure of some multinational corporations—direct pressure from foreign governments.

This change stems from the majority opinion’s unprecedented elevation of corporations to equal status with individual citizens in the sphere of political speech.  For convenience’s sake, the law does periodically describe corporations as “legal persons” and “citizens” of the state in which they are incorporated.  But in Citizens United, the majority has taken this legal short-hand literally.  In the majority’s opinion, courts are no longer permitted to take into consideration elements such as limited liability, perpetual life and preferential tax treatment that distinguish a corporation from an individual citizen when analyzing a corporation’s rights, nor are courts allowed to treat corporations differently from actual persons (as they have been  doing since the country’s founding.)  After Citizens United, the law can no longer look behind the curtain of the corporate form: Citizens United commands that the law pertaining to political speech treat corporations exactly as individual citizens.  Simply put, distinctions between corporations and human beings are no longer permissible and limitations on corporations’ political speech are unconstitutional.

In treating corporations the same as individuals, Citizens United leaves the door wide open for foreign influence in our politics.  In the case of Chinese corporations, this also means foreign government involvement.  Most multinational Chinese corporations, like Haier, China Telcom, and China State Construction Engineering Corporation (CSCE), have U.S. subsidiaries.  These are companies incorporated in the United States: Haier’s U.S. subsidiary, Haier American Holding Corporation, China Telecom’s subsidiary, China Telecom Americas, and CSCE’s subsidiary, China Construction America, are all incorporated in Delaware.

Under Citizens United, all three of these subsidiaries are citizens of Delaware and enjoy the same political speech rights Haieras any other citizen of the United States.  Citizens United does not permit us to look behind their corporate veil to see their relationship to foreign corporations.  But make no mistake: these subsidiaries are heavily influenced—if not outright controlled—by their Chinese parent corporations.  This is not unique to Chinese corporations.  In a parent-subsidiary relationship, especially for foreign corporations, there is a lot of overlap between the parent and its U.S. subsidiary; the parent usually owns a majority, if not all of the shares of the subsidiary; capital is often infused to the subsidiary from the parent; and directors from the parent’s board usually sit on the subsidiary’s board of directors.  This is the relationship that Haier, China Telcom, and CSCE all have with their U.S. subsidiaries.

What is unique to Chinese corporations is the scope of their government ties—indeed, some are controlled outright by the Beijing government.  Unlike in, say, Western Europe, places like China, Russia and Vietnam still have a fair share of government-run corporations.  Haier, China Telecom and CSCE are all officially government-run.  While the Chinese government does not meddle in the corporation’s daily affairs, it will exert its influence if it suits the government’s self-interest. For example, in 1994, Haier, a manufacturer of washing machines and refrigerators, was pressured by the Chinese government into acquiring a pharmaceutical company, a venture that ended badly.

Citizens United allows for the very real possibility of the Chinese government’s direct influence in our elections through a Chinese corporation’s U.S. subsidiary.  While no official number exists about the number of Chinese companies with a U.S. subsidiary corporation, Dan Harris, a partner at the international law firm Harris & Moure and editor of the China Law Blog, believes that the number is substantial.  “My small firm represents a number of U.S. companies that are wholly-owned by Chinese companies or by Chinese citizens and that convinces me there must be thousands of such companies in the U.S.”  While certainly not all of these Chinese companies with a U.S. presence are directly owned by the Chinese government, there are likely many more than just Haier, China Telecom and CSCE.  And given China’s vast currency reserves ($2.4 trillion, the world’s largest), the Chinese government certainly has the money to spend on U.S. elections should it choose to do so.  Corporations in other countries, particularly oil-rich ones like Saudi Arabia and Russia, also own U.S. subsidiaries.  The threat of foreign involvement in our elections has been noted by the White House, as seen in the Obama’s critique of the decision during his State of the Union, and by Congress as it explores ways to nullify Citizens Untied.

This issue wasn’t completely lost on the majority in Citizens United—they simply chose not to deal with it.  While the majority hinted that there could be a compelling interest in preventing foreign nationals, foreign corporations or foreign governments from influencing the political process, the logic underlying Citizens United’s literal definition of the corporation as citizen prevents this.  After Citizens United, courts are no longer allowed to look behind the curtain of the corporate form to the realities of the situation or to distinguish between corporate citizens and individual ones; the majority opinion allows no leeway to examine the foreign origins of the shareholders.  For the purposes of political speech, one person’s U.S. citizenship, be it from a passport or from the documents of incorporation, is just as good as another’s; to draw distinctions would be discriminatory.

Given that the majority in Citizens United so easily overturned it previous rulings with regard to limitations on

Justice Samuel Alito

Justice Samuel Alito

corporate participation in elections, one ought not expect the Court to maintain any consistency when a case involving political donations from a U.S. subsidiary of a foreign corporation comes before it.  The Justices will want to reach the result that American subsidiaries controlled by foreign entities cannot provide support to political activities; Justice Alito, with his mouthing of the word “not true” during Obama’s State of the Union address, certainly signaled this.  Such a result, however, will require the Court to overturn the logic of the corporate citizen as equal to an individual citizen. A majority will likely call this an “exception.” In reality, it is more of an excuse.  In either case, such a ruling will likely prove difficult to enforce.

Many Chinese corporations have American subsidiaries that are private, i.e., are not subject to the same reporting requirements as publicly-traded ones.  In some states, such private corporations have no reporting requirements at all.  With a private corporation, it is difficult to determine share ownership, identity of officers or even names of the directors.  This difficult detective work will become the responsibility of the Federal Election Commission (FEC).  Ironically, the majority in Citizens United found that the campaign finance law’s requirement that corporations work through their Political Action Committees (PACs) during the law’s 30-60 day quiet period was too burdensome since it required copious amounts of paperwork.  Imagine the time, effort and money the FEC will be required to put into determining the ownership of any number of private corporations.

In equating corporate citizenship with individual citizenship, the Court does more than just disregard its own rules of precedent and stare decisis.  It also provides an image of a corporation completely disconnected from reality, does a grave disservice to our political process and jeopardizes our democracy.  And that, Justice Alito, is the truth.

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