On July 18, the State Asset Commission announced the State Council's approval of the plan for Chinatex to become a fully-owned subsidiary of COFCO. Both are state-owned enterprises owned by the central government with business in agricultural trading, processing, marketing and sundry other businesses.
According to Economic Observer, this deal is part of a grand scheme to whittle down the number of centrally-owned state-owned enterprises to less than 100, creating "stronger, better, bigger" companies, by "slimming down, shaping up" and experimenting with a separation of capital ownership from capital management that gives managers more autonomy.
In addition to being a model of supply-side structural reform, the COFCO merger has a particular aim of creating a world-beating food company that can compete with the so-called "ABCD" multinational grain-trading companies.
The merger has been in the works for a while. In May, Economic Observer reported that COFCO, Chinatex, and Sinograin (the government's grain reserve management company) signed a strategic cooperation agreement to engage in mutually beneficial business operations. COFCO's absorption of Chinatex appears to be engineered by the communist party as part of a calculated strategy to create a sprawling food industry giant. Economic Observer reports that another State-owned enterprise, Baoli (Poly Group), had discussions about acquiring Chinatex, but the talks were derailed by unidentified factors. It appears that those other factors may have been the plan to add Chinatex to the COFCO collection of subsidiaries.
Economic Observer notes that the strategic agreement between the three state-owned grain companies reflects the communist party's 2016 "Number One Document" on rural policy issued by the central communist party this year included instructions to:
"Nurture internationally competitive grain trading and agribusiness conglomerates by supporting development of various forms of multinational business by national enterprises, strengthening cooperation in processing, transportation, and trade."The intent of the COFCO-Chinatex tie-up was explained at a July 18, 2016 meeting held in Beijing by Communist party organization leaders from both COFCO and Chinatex, along with an official from the State Assets Commission. Leaders explained that COFCO's absorption of Chinatex reflects President Xi's directive to create "stronger, better, and bigger" state-owned enterprises, and it is another step in the process of creating an internationally competitive big grain trader. Earlier steps were COFCO's absorption of other state-owned grain trading and logistics companies, and purchases of Nidera and Noble Agri.
COFCO are said to be the number-one and number-three companies in grain and oils sales in the Chinese market. After adding Chinatex to its collection, COFCO will reportedly have 24 million tons of edible oils production capacity--18 percent of the Chinese market. COFCO will have a nearly ten-percent share of the global cotton industry chain. COFCO has rice, flour, tomato sauce, wine, sugar, real estate, and hotel holdings.
Communist Party officials say that the new COFCO will have responsibility for maintaining national food security, serve as a model in upgrading food safety, enhance "macro control"--the ability to regulate the flow of commodities to stabilize the market, and play a leading role in the agricultural "going global" initiative.
COFCO's communist party organization secretary and chairman Zhao Shuanglian described it as follows, using all the appropriate political buzz words:
“COFCO shall resolutely carry out Secretary General Xi Jinping’s important instructions and undertake to ensure China’s grain security and food security so as to gain control over grain resources on behalf of the country and develop international industry competitiveness.”The company will flatten its management structure and operate as a series of semi-autonomous companies, including one for its overseas business. COFCO will jettison some of its companies and allow subsidiaries to operate with a higher degree of autonomy under the headquarters management. Business proposals and investments by subsidiaries will be approved by their communist party organizations and forwarded to the board of directors for consideration. Board members and key personnel for the overseas operations will be chosen for their political reliability and "correct policy."
China appears to be on another backtracking phase in its decades-long circular "reform and opening" path of liberalization-retrenchment. China appears to be trying to recreate monopoly in the grain market it tried to dismantle in the State Council's 1998 "Decision on Further Deepening Reform of the Grain Marketing System," and the "opening" of the grain market in 2004. Like much of the rest of the world, Chinese officials no longer trust free markets. Instead, they believe big companies manipulate prices through their market power. China believes it needs a company big enough that it can manipulate prices too. And they assume the managers of such a company will act in the national interest.
No one has explained the advantage of stringing together rice, flour, cooking oil, cotton, wine, tomato paste, and hotels under a single company. While each product produced by COFCO's subsidiaries has a well-known brand, Fulinmen cooking oils, Joycome meats, Great Wall wine, and Wuhu rice brands and logos under the COFCO umbrella don't seem to have any connections to one another or synergy. The new restructuring seems to acknowledge that the separate companies need more autonomy to "slim down", but why wouldn't they be even more nimble and competitive if they were entirely autonomous and not tied to a headquarters?
The presumption seems to be that "big is competitive." The communist party loves big things and views small things as chaotic and hard to manage. Or maybe the companies need to be under a prominent flagship company to open the pipeline to political influence which leads to subsidies, bank loans, and IPOs. COFCO will be free to make money as long as executives answer the phone when the Party calls. Another advantage of the sprawling structure is the possibility of cross-subsidizing businesses through various pop-up subsidies and monopolies, such as earmarked loans and import quotas set aside for COFCO's exclusive use, and subsidies for holding grain reserves.
But beware foreign companies. Just because Chinese companies can sign collusive agreements, monpolize markets, and set prices through "macro controls" with the government's blessing and encouragement doesn't mean you can do it too. China's antimonopoly law is made specially for you.
Chinatex communist party members celebrate the party's
90th anniversary, July 8, 2016. Source: Chinatex website.