Financial Daily from THE HINDU group of publications
Monday, Nov 21, 2005
The divestment debate: China's example
India's Left parties, however, seem to remain loyal to their ideological roots. They do not accept even a partial divestment of shares in a public enterprise such as BHEL, although such a sale will bring in much-needed resources to help India's social sector outlays without conceding a majority stake to private investors, leave alone a share in management.
The latest in a related series of developments is the controversy in China about allowing a strategic stake to foreigners in the Bank of China (BoC).
The candidates for investment include the Royal Bank of Scotland (RBS) and Temasek, the aggressive investment arm of the Government of Singapore. Mr Li Hui, President of the Bank of China, one of China's four leading state-owned banks, has defended extensively the proposed presence of both RBS and Temasek as strategic partners.
In an interview with the Financial Times of London dated November 3, 2005 Mr Li has said that "Temasek (the proposed Singapore partner) has been quite successful in making investments in quite a number of countries and has been instrumental in reforming and renewing banks that have been problem-ridden".
Quite an unexpected compliment by a communist executive to Singapore's investment vehicle! (Incidentally, Temasek is a public sector entity, owned 100 per cent by Government of Singapore but with private sector rules of behaviour.)
Mr Li goes on to say that RBS, the other partner, is "a very famous and very well-run European Bank with a lot of experience in different areas, such as product control and risk management". These statements are to be examined and understood in the context of the background of strident criticism in the Chinese media and financial press about the proposed stake sale.
Particularly strong were the objections centred on the proposed stipulation that RBS is entitled to compensation if the BoC fails to meet certain financial targets. This is an unusual stipulation, but the BoC President seems to have been impressed by the advantages of foreign stake-holding so much that the condition was acceptable. Can we imagine the Chairman of State Bank of India recommending such a strategic sale to the likes of RBS and Temasek? But China is China, and India is India. It is worth stressing that the (immediate) motivation for China's enthusiastic welcome to foreign strategic ownership in its leading state-owned bank seems to have been its eagerness to make a success of its proposed initial public offering in the international financial markets.
BoC is expecting to raise about $8 billion in its IPO opening on the Hong Kong Stock Exchange early next year, about the same order of capital as was raised a few weeks back by the IPO of the China Construction Bank, the first of China's four public banks to go public overseas and which was also preceded by a strategic partnership with foreign banks.
It is obvious that such IPOs of shares overseas means allowing private investors in the overseas markets to hold shares in the participating entity. The Chinese have gone about the whole enterprise of bank IPOs with a great deal of finesse and skill.
They have purposefully inducted strategic investors with a good international reputation into the entities before throwing them open for an IPO. A typically capitalist approach, more suited to New York's rampant capitalists than to Beijing's radical but eclectic communists!
In the interview with the Financial Times, the President of the BoC has given a more revealing explanation of his Bank's approach to divestment. He says the BoC had largely achieved the financial targets it had set for itself to prepare for the listings boosting capital adequacy above 10 per cent, cutting the bad loans ratio to 5.12 per cent, and achieving a return on equity of 10.4 per cent. Spoken like a true capitalist, not a communist red in tooth and claw, but faithful to the market-determined criteria of returns and profitability!
Mr Li goes on to say: "We regard the IPO not as our destination, but as a bus stop by means of which we can move towards our destination" the destination being an efficient bank! The entire Chinese attitude to divestment, as displayed by the President of BoC, is the mirror image of the Chinese communists' approach to foreign direct investment itself.
If divestment is the route to more FDI so be it all the better seems to be their attitude. The same issue of Financial Times discloses another instance of a refreshing approach to FDI by the Chief Economist of the Chinese Ministry of Railways.
As is well-known, the Chinese Railways have an aggressive plan of modernisation and expansion. They need cash for it. The Financial Times of November 3, 2005, quotes the Chief Economist of the Chinese Railways Ministry as offering significant railway assets for sale to foreign investors. The problem posed by China's version of capitalism intermingling with state control is a bit similar to that faced by investors in India's public sector enterprises. With increasing foreign institutional investors' presence in India's stock market, it is inevitable that there is a sizeable foreign private investors' presence in the shareholding structure of many of our public enterprises such of them as are listed.
It is likely that such stakeholders assert their hold by raising questions, both convenient and inconvenient, about various aspects of the firm's performance at the annual general meeting.
The Chinese have gone further, openly seeking assistance from their strategic foreign investors with special emphasis on improving management practices. Can one imagine our politicians of the Left parties being comfortable with such a practice in India? There is undoubtedly a great ideological distance between communists in power in China and communists exercising indirect but coalition-based power in India.
While the Indian communists have balked at the Government's plan for a limited stake sale in a public enterprise, we see China's communists literally plumping for such a sale, citing the advantages that such a partnership can bring. When China's communists are so forward-looking in regard to attracting foreign capital and management to sensitive sectors in that country's economy, what explains the difference in the approach of Indian Left?
It is perhaps pertinent to refer to the historical fact that China's communists have always been more pragmatic than those of India. The Chinese, for instance, recognised the need to offer a hand of friendship and cooperation to their recently bloodied enemy, the US, through the Kissinger visit of the 1970s, even while Stalin was pressing on with the Cold War.
Again, China was the first to recognise the need to marry market capitalism with the framework of a socialist society. "It is glorious to be rich" proclaimed Chinese leader Deng even as India was still struggling with pseudo-radical control measures, which constrained entrepreneurship with a permit licence raj. It is time our politicians learn from the pragmatic successes of China's communists.
It seems desirable that the UPA leadership engages in a dialogue with its communist partners on how to learn from the Chinese experience and change their mindset. West Bengal's Chief Minister, Mr Buddhadeb Bhattacharya, has shown the lead and indicated that at least some of India's communists can be as pragmatic, if not more, than China's.
Granted, the partners of India's coalition regime are currently confounded by the prospect of forthcoming Assembly elections in Kerala and West Bengal.
Perhaps that is dictating their political strategy. But it is obvious that the economy will be the casualty of such political compulsions. It is time India's policy-makers take a true measure of the ultimate costs of the politicisation of economic reforms.
India's communists admittedly wish to play a positive and legitimate role in the economic progress of India to its well-deserved goal as a global power at the same level as China. It should not be beyond the limit of political feasibility for the coalition parties to take advantage of China's experience in resolving the problems caused by the economic reforms.
The question remains whether the existing contradictions are a pointer to the need to redraft the Common Minimum Programme, learning from the lessons of the past few years and the experience of China. Contradictions can and will lead the way to a new synthesis of the old and the new. That is the way political dialectics should work in India. China's model should tell us how to solve India's problems in managing its fractious coalition, including its communists of diverse persuasions.
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