Friday, 3 October 2008


Private Equity Executives Walk Away Empty Handed
Greedy Privatisation Bid Smashed in China
August 7 - Zero. Absolute zilch. That’s what big time private equity group Carlyle ended up getting when they attempted to take over a state-owned Chinese manufacturer. The final defeat for the U.S.-based Carlyle Group was announced on July 23. Carlyle and Chinese state-owned Xugong Construction Machinery announced that the original takeover deal signed in October 2005 had now expired. China’s Communist Party regulators had rejected the sell-off.

The three-year Carlyle-Xugong saga was a hot issue in the Peoples Republic of China (PRC.) Xugong is China’s biggest manufacturer of construction machinery although by the standards of the PRC’s state-owned enterprises it is not big: it is not one of the 160 or so giants controlled directly by the Beijing national government but is owned by the local government of Xuzhou city in Jiangsu province. But had Carlyle succeeded in its grab for Xugong it would have been the biggest foreign takeover of an existing Chinese state-owned enterprise (most of the foreign investment into China has gone into new factories or into joint ventures with state firms.) So when it was announced that Carlyle were to takeover 85% of Xugong it unleashed a storm of opposition. The opposition to the sell-off was led by left-wing academics, staunch elements within the Communist Party of China (CPC) and Chinese state media. They protested that too many state-owned firms were being sold off.

Before long what had seemed like a formality became tied up with regulatory authorities. The fate of Xugong became an issue far, far larger than the enterprise itself. Opposition to its sell-off became a symbol of resistance to erosion of the socialistic state-owned core of the PRC’s economy. But the capitalist side mobilized too. The finance pages of Western mainstream media sneered at the delay in approving Carlyle’s bid. The U.S. government blatantly interfered and demanded that the privatization go ahead. Then in July 2006, Carlyle, working with the American Chamber of Commerce in Shanghai (which later became notorious for trying to scuttle China’s new pro-worker Labour Law), hosted a visit and advocacy speech by Colin Powell. However, as we noted last year in Trotskyist Platform Issue #8, “Powell would ultimately find that getting PRC authorities to approve the imperialist takeover of state-owned Xugong was not as easy as getting the United Nations to endorse the ‘weapons of mass destruction’ pretext for the imperialist takeover of Iraq!”

There was animated debate within the PRC authorities themselves over Xugong. Reports circulated of deadlock within the Ministry of Commerce over what to do about the issue. In 2006, senior PRC officials held an unprecedented meeting just to deal with the question. The Xugong dispute reflected a broader political struggle occurring within the PRC. On the one side stand those who want to strengthen the PRC’s foundations of socialist-type state ownership of key economic sectors. On the opposite side are rightist elements who want to facilitate greater - and some secretly even wanting total – capitalist economic penetration. In the middle of these opposites are various political shadings that represent the stance of the current PRC leadership. This official path has as its final declared destination socialism and seeks to maintain state control of key economic sectors but at the same time continues with the post-1978 “reform and opening up” policies that have led to a degree of capitalist encroachment and inequality. The problem with this current course is that in the long term it is not sustainable. To be realistic there are in the end only two ways that China can go. In one variant, the still tenuously riding layer of capitalists spawned by post-1978 reforms will, with the backing of Western and Taiwanese capitalists and in alliance with right-wing sections of the officialdom, manipulate mass grievances to smash pro-communist rule and grab political power for themselves. In the other variant, the Chinese toilers, emboldened by the successes of their socialistic development but enraged by the inequalities caused by pro-market reforms, move to complete their class struggle victory gained in the 1949 Revolution. They defeat capitalist restorationist forces within China and proudly advocate socialist triumphs internationally. The workers of the world need this second variant to emerge. But if this is to occur then it will require the international working classes to do all in their power to stop the Western and other capitalists from fomenting capitalist counterrevolution in China.

On 13 November 2006 there was an act of solidarity in Sydney with the pro-communist opposition to the Xugong privatization. A small group of protesters rallied outside Carlyle’s Australian headquarters under the slogans “Stop the Carlyle Group Profiteers from Grabbing Control of Chinese State-Owned Firm Xugong Machinery! Defend State Ownership of Major Industry and Banks in Red China.” The call for the demonstration which was distributed by Trotskyist Platform supporters insisted that: “It took the Heroic 1949 Revolution to Achieve Nationalisation of Chinese Industry – Let’s Protect this Anti-Capitalist Triumph! Keep Carlyle and Other Capitalist Exploiters Out! …. The capitalist parasites should get nothing.”

One Country in The World Where The Carlyle Group Can’t Run Roughshod
In October 2006 it became public that Chinese regulators had quashed Carlyle’s full-scale takeover bid. A new scheme had emerged for 50-50 ownership. On the eve of a trip to China by U.S. Commerce Secretary Carlos Gutierrez in November 2006 Chinese media announced that the new arrangement had been approved by China’s state assets watchdog. But two days later the same media reported that the state assets body was still scrutinizing even the revised Carlyle 50% bid. Then in January 2007, with the Carlyle-Xugong issue in mind, the Chinese government released a circular prescribing that the state should maintain its absolute control over enterprises in key industries. A couple of months later PRC authorities knocked back Carlyle’s revised bid and the private equity capitalists settled for a minority 45% stake. The U.S. capitalist rulers were furious that the full-scale privatisation had failed. In a March 29 speech in Beijing U.S. Commerce Undersecretary Frank Lavin arrogantly ranted that “China needs a hundred Carlyles to come in and buy a hundred Xugongs.” His heavy-handed behaviour was to no avail. By July of this year Carlyle went from losing on points to being totally knocked out. The 85% that had turned to 50% and then 45% went to … a big fat 0 %.

It turns out that Xugong was not the only Chinese state company that Carlyle could not get its hands on. The PRC’s Communist Party authorities have knocked back Carlyle from claiming even minority holdings in other state firms. In early July Carlyle failed to grab a stake in state-owned chemical producer Shandong Haihua. The private equity high-riders have also been locked out of investments in two state-owned banks, Guangdong Development Bank and Chonqing City Commercial Bank. By contrast, Carlyle and other similar companies have been allowed to grab many stakes in Chinese privately owned firms. That is not so bad. If an enterprise is to be run by capitalists it is a secondary consideration which lot of profiteers run them; and in any case foreign-owned ones like Carlyle may be easier to squeeze out in the future than domestic Chinese ones.

Xugong Victory: A Good Step Forward But A Long March Ahead
The defeat of the Xugong privatization attempt was certainly a victory for China’s masses. It is the continued public ownership of key economic sectors in China (including major banks, all agricultural land, communications, steel, oil, aluminium, automotive, aircraft manufacturing, shipbuilding and transportation) that has enabled the PRC to pull hundreds of millions of its people out of poverty in the last 59 years. In the PRC the socialistic state-owned industries not only grant their employees higher wages and better conditions than do China’s privately-owned firms but they are able to be steered to meet broader social goals - goals that in a private company would clash with the capitalist imperative of higher profit at all cost. So PRC public firms are often directed towards meeting targets in hiring of disabled people, development of poorer regions, relieving of unemployment and opening up of opportunities for women to reach high positions. In response to the devastating May 12 earthquake in Sichuan, PRC state-owned enterprises were at the forefront of relief and reconstruction efforts. Major state-owned steelmakers like Boasteel and Angang Steel stepped up production to ensure that there would be adequate steel supply to build 1 million movable houses for those left homeless by the quake. Of course, to constrain PRC public firms to act as truly socialistic enterprises is a political struggle in itself. Chinese state enterprise managers are often tempted to want to act like their counterparts in capitalist firms. Mass participation by elected worker representatives both from within and from outside a particular enterprise must be asserted to ensure the success of anti-corruption drives, to increase equality within the firm and to ensure that employees genuinely understand that the workers state’s enterprise really does belong to them.
Beijing to Tianjin Intercity service. This, the world’s fastest passenger service, uses trains built by a Chinese state-owned enterprise, CNR Tangshan Railway Vehicle Co.

Despite the Xugong victory, the danger of erosion of state ownership over the Chinese economy has not been averted. It is unclear whether the relative weight of the public ownership in the Chinese economy has increased or decreased in the last few years. Certainly, the speed of privatization that was cranked up in the late 1990s has slowed down. Furthermore, in the last three or four years the biggest state-owned enterprises have grown rapidly. Indeed, in some sectors there has even been a defacto partial renationalization. For example, in the last three years many, terribly unsafe, privately-owned coal mines have been closed while government funding for the safer, big state-owned mines has increased. But at the same there has been some whittling away of state ownership in a range of big state-owned enterprises through sell-offs of minority stakes to private holders. And it is planned that a minority (some 20%) of the Agricultural Bank of China – one of China’s “Big Four” state banks – will be privatized. The presence of private part-owners, motivated as they are by personal profit, are a pressure on state companies to veer away from their social goals. For example, could you imagine what the minority capitalist stakeholders (which include some big foreign banks) in Chinese state banks were saying when they heard that the banks would be cancelling the requirement to repay loans of those affected by the Sichuan earthquake: they would have been screaming!

The mooted partial sell-off of the Agricultural Bank of China and other part-privatisations must be stopped. The defeat of Carlyle’s takeover of state-owned Xugong should be used to embolden the fight to extend the PRC public sector. One factor influencing this struggle will be the fact that while Red China’s economy continues to boom, similarly populous countries that are capitalist like Indonesia and India are having their masses hit with unbearable rice and grain price increases and the U.S. is verging on recession. That makes it even less palatable when U.S. capitalist officials lecture that “China needs a hundred Carlyles to come in and buy a hundred Xugongs.” Another factor is that owners of private companies in China (which are concentrated in the light manufacturing export sector) are being squeezed by the PRC’s new pro-worker, Labour Law. With the help of this law and more aggressive state support for trade unions, workers in the private sector have recently been able to achieve rapid wage rises. Many sweatshop private firms are as a result closing down. It has been estimated that by the end of this year, up to 7,000 factories owned by Hong Kong capitalists in mainland China will have been closed. The state should take over these closing plants, retool them and consolidate them into larger more efficient operations. Existing public firms should in the meantime increase hiring to make up for lost jobs.

We should never forget that the struggle over ownership systems of the economy cannot be separated from the question of power: from the question of which class rules. To maintain the pre-eminence of collectivised ownership of key sectors requires maintaining the PRC workers state. On the other hand those who want to bring back capitalism to all of China will have to smash the existing political regime along the way. Capitalist forces in China certainly understand this. They are preparing their future open bid for power by pushing now for greater representation for capitalists in political bodies. They do this by playing victim and having a big sob about how private bosses are “unfairly” despised in PRC society. These capitalist restorationists, some of whom are in right-wing factions of the CPC and some outside the party, often promote their goals with calls for greater political “pluralism” in China. They advocate more influence for the All China Federation of Industry and Commerce (an officially welcomed body of private bosses.) They also “advise” that there should be more leading posts granted to the smaller non-communist parties that are part of the CPC-led governing coalition in China. Within some of these non-communist parties, capitalist elements have a proportionately much greater representation than they do in the CPC.

All these counterrevolutionary methods are of a piece with the Western imperialists’ demands for “human rights” in China. These demands have reached a crescendo in the lead up to the Beijing Olympics. But the imperialist concerns for the “human rights” of anti-communist forces in China can be compared to a capitalist boss’s concern for the “rights” of scabs that are firmly stopped by striking workers. Workers in the West should reply with a concern for the PRC that is equivalent to the solidarity that proud unionists show for a strike by their fellow workers. The 1949 creation of a state in China that is based on a public economy is a great strike for all the workers of the world. State ownership of an enterprise in a workers state means the collective ownership of that enterprise by all the people in that country. It is the basis on which a more humane, egalitarian future can be won. It is a future worth fighting for. Let us be inspired by the political defeat of the private equity bid for state-owned Xugong.

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