Commentary: The Chinese Need Capital And Condemnationby
American labor and human-rights activists are celebrating a smashing success in knocking a giant Chinese state-owned company down to size. Their late March campaign against the New York Stock Exchange's listing of PetroChina Co. pared the deal to $2.9 billion--$2 billion less in new capital than the Chinese oil company had expected to raise. Using conference calls and the Internet to reach U.S. fund managers and investors, the AFL-CIO got out the message that the company is essentially a subsidiary of the Chinese government, which has one of the worst human-rights records among the world's major economic powers. Labor leaders even organized an "anti-road-show" at the same time and place as the investment bankers' pitch for the offering, forcing investment bankers from underwriter Goldman, Sachs & Co. and PetroChina management to switch hastily from New York's Waldorf-Astoria Hotel to the Four Seasons to avoid an embarrassing confrontation.
Emboldened by the victory, these labor groups say they're coming back for more. They're vowing to fight other listings of China's state-owned companies, reasoning that their campaign will force the country to improve human-rights and labor standards.
But other than providing high fives for the activists, the exercise is pointless, even damaging. Choking off funds for state-owned enterprises such as PetroChina may feel good. But it doesn't help workers, Chinese or American. It doesn't help human rights in China. And it doesn't improve corporate governance.
DISTORTIONS. Instead, turning off the capital spigot would just frustrate Beijing's laudable, if halting, steps at reform and lend support to the anti-Western hard-liners in the Chinese government. Consider what would come next: No more new money for Chinese companies means no investment for modernization. And no more New York listings means no disclosure and even fewer opportunities for anyone, be they shareholders or activists, to know what Chinese companies are up to.
Indeed, these backward-looking campaigns stymie Chinese progressives' efforts and are based on innuendos, distortions, and half-truths. Activists accused PetroChina of everything from supporting slavery in Sudan to human-rights abuses in Tibet, but stiff Securities & Exchange Commission rules kept the company from defending itself during its pre-listing quiet period. PetroChina's parent has a minority share in a Sudanese project and operates gas stations in Tibet. But there is no evidence PetroChina is involved in anything more than business operations in either place, despite the AFL-CIO'S tarring of PetroChina with Chinese government abuses, from environmental degradation to employing forced prison labor.
Step back and consider what's at issue. The listing of PetroChina and other behemoths will go a long way toward determining how quickly China continues moving along the path of reform. Since former paramount leader Deng Xiaoping launched his sweeping plan to open the economy in 1978, China has deftly used foreign capital and technological knowhow to power stunning 10% annual economic growth. It has gone from a virtually 100% state-owned, old-style communist economy to one where the state accounts for less than half of output--and that percentage is shrinking fast.
Now, reforming the lumbering state-owned enterprises is one of the Chinese leadership's biggest hurdles. The giant companies together employ tens of millions of workers--more than the populations of most countries. Like mini-states, they provide everything from education to housing to health care. Yet they are crumbling. They squander capital, and most of the goods they make are of mediocre quality at best. With profits paltry and China's political climate changing, they're increasingly unable to provide social services.
Perhaps the activists hoped to save PetroChina workers' jobs and benefits by attacking the offering. But with or without the IPO, PetroChina is being forced to become a viable operation. Jobs are threatened anyway by a system that cannot endure the huge losses of the state-owned industrial enterprises forever. This is a painful process. But the alternative is even worse: a slow-motion collapse of the state sector that drains the country of its financial strength, imperils the economy, and throws millions more out of work.
Foreign capital almost always nudges ahead the cause of change and reform. By listing on the New York Stock Exchange, Chinese companies must play by U.S. accounting and disclosure rules. Those rules will encourage transparency at PetroChina and give more leverage to shareholders. Such disclosure will hold the company up to scrutiny on issues ranging from the environment to management compensation to labor rights. With BP Amoco PLC buying 20% of the deal as a long-term shareholder in the new company, another point of leverage is created to influence PetroChina's management.
Getting PetroChina onto Wall Street sure beats the alternative, which is to leave the company an opaque, unaccountable enterprise. That simply means no corporate governance and no possibility of influencing or scrutinizing the company. Another point: more than $100 million of PetroChina's listing proceeds are earmarked for retraining and severance payments for PetroChina's parent company's employees. Yet the AFL-CIO's campaign, if brought to its logical conclusion of ending such stock offerings, would mean much less money for laid-off Chinese workers.
To discourage putting U.S. dollars into Chinese companies, the AFL-CIO makes a big deal out of the risks of investing in China. Sure, it's risky to buy shares in Chinese companies. It always has been, just as in other developing countries--though no more so than a Silicon Valley startup these days. Just check out how the markets are pummeling high-tech stocks worldwide.
COSSETED COTERIE. It's understandable why labor doesn't like China. It is one of the most repressive places in the world. The government continues to ban independent labor unions and has thrown union activists in jail. Eleven years after the Tiananmen Square killings, its politics remain frozen. Beijing's coterie of cosseted and often corrupt officials does anything it can to cling to power. President Clinton's rebuke--that the Chinese leadership is "on the wrong side of history"--stung precisely because it's true.
The task is to get China on the right side of history. China is not the Soviet Union or Hitler's Germany. It is a country more akin to authoritarian South Korea or Taiwan in the 1970s and early '80s than it is to a totalitarian police state. The freedom to move, to choose a job or a place to live, to travel, and to make money has never been greater in China. Life has gotten better for most of its 1.3 billion people--much better for many. Some 200 million people have been lifted out of absolute poverty since 1978.
A quarter-century of stellar economic growth makes it hard to argue, as the AFL-CIO does, that economic reform is bad for workers. China's progress has occurred precisely because it has opened up to the world economy. Implicitly, what the AFL-CIO wants are sanctions. And sanctions would be a bad thing for a China that is moving, however haltingly, in the right direction.
By trying to cut off China from global capital markets, activists unwittingly support hard-liners such as Li Peng, the former Premier and the man reviled for his role in the Tiananmen killings. Li wants reform to go slow because he's worried that faster opening will mean more calls for change. American progressives, with their feel-good politics, no doubt believe their cause will help people. But China is at a crossroads, and those who claim to help instead risk pushing it in the wrong direction.