Small Business "Famine", Grain Industry Behemoths

A Chinese news site paired these two news items side by side:

• "Small and Medium Businesses Face "Five-Famine, Double-High, One-Low" Difficulty
• "COFCO Takes Over China Grain to Create Grain Business 'Super Aircraft Carrier'"

"Small and Medium Businesses Face "Five-Famine, Double-High, One-Low" Difficulty describes how small and medium businesses are often frozen out of access to essential resources for doing business. Chen Zemin, the chairman of a frozen food company, identifies five "famines" facing small and medium businesses in China. First, they have a hard time finding enough workers. Second, a money famine--they have a hard time getting financial capital and have to borrow at high rates. Third, land is hard to get and small companies are often left out of big projects. The fourth and fifth famines are electricity and water which are controlled or given out at favorable rates to some businesses.

"Two highs" faced by small and medium businesses are high costs and high taxes, which lead to the "one low", low profits. Transportation, raw materials, energy, and labor costs are continually rising. High taxes includes many irregular fees and penalties assessed at the whim of officials. Mr. Chen said the biggest problem facing small businesses is getting started in the first place. 

"COFCO Takes Over China Grain to Create Grain Business 'Super Aircraft Carrier'" describes how COFCO, China's state-owned flagship agribusiness is taking over China Grain Logistics Group, another state-owned grain behemoth. China Grain has a string of grain warehouses, port and bulk-handling facilities around the country, grain distribution infrastructure that is key to the government's food security strategy of transporting grain around the country. COFCO is being engineered to become a company with a "complete industry chain" and has rice, flour, and feed mills, farming assets. It has 3 million metric tons of grain storage but wants more and has had its eye on China Grain since 2009. 

Neither China Grain nor COFCO suffer from the "five famines." China Grain has built-in business delivered by the government's policy of encouraging north-south grain trade, loading and unloading import and export shipments orchestrated by state reserve corporations and other "policy-type" business. It benefits from tax exemptions and has rail cars set aside for its use. It was handed a $1.6-billion loan from the World Bank at its founding. China Grain owns land and real estate assets and exemptions from urban land use taxes and business taxes. It had a new set of highly-paid executives installed last year just to prepare it to be taken over. No "famine" here, yet it still managed to lose billions of dollars and within a few years after its founding it was taken over by the State Council's State Asset Supervision Commission, a warehouse for decomposing government companies. 

COFCO is not starved of resources either. Last month the company was given a $4.7-billion line of credit by the China Development Bank. COFCO has real estate, a chain of hotels and financial services (including a pig trust).

COFCO has been competing with Sinograin--yet another state-owned grain giant-in-the-making--for China Grain Logistics. The resource allocation decision of who gets the company was made by the State Council. 

Behind this is a notion that a big company is a competitive company. Chinese economic planners look around and see multinational companies encircling their market and they want to create their own big multinational grain company. By assembling the pieces--even if some of the pieces come from the morgue, like the brain of Frankenstein's monster--and building a big enough company they think they can engineer another ABCD company.  

By the same logic, small companies--no matter how well-managed--are inherently uncompetitive, backward, "chaotic", hard to control and need to be flattened like old hutongs or absorbed into bigger companies. 

The article concludes by explaining that combining COFCO and China Grain Logistics will raise the competitiveness of Chinese grain business, give China more say over prices and influence, factors favorable to maintaining food security. Professor Li Guoxiang of the Chinese Academy Social Sciences remarks that China doesn't lack grain enterprises, but it does lack "big strong" companies (implying big=strong). If this merger succeeds, he anticipates that there will be more mergers and acquisitions in the future (all orchestrated by government officials, no doubt).

The two stories illustrate China's military-style resource allocation and perhaps signal the resurgence of Jiang Zemin's Shanghai-style big business + government-sponsor economic model that Yasheng Huang criticized for its lack of innovation and sustainable growth in his book Capitalism with Chinese Characteristics: Entrepreneurship and the State. Behind the veil of the Chinese economy are extractive institutions that Acemoglu and Robinson's Why Nations Fail cited for stifling growth. 

While China looks like a free market economy, officials retain control over the key factors of production: financial capital, land, water, electricity, fuel and other factors of production. They are rationed by officials to engineer growth and build an empire. Officials extract resources by imposing fees and penalties. Government officials order banks to lend and decide who gets access to equity markets in an ongoing effort to engineer the creation of big, competitive companies. Only companies with access to funds can meet the government's standards for water or electricity-efficiency, pollution control or food safety controls. The private entrepreneur with a good idea but lacking a government sponsor is starved of capital and left to wither on the vine, while the anointed state-owned enterprises are like pigs at a trough, continually needing to be engorged with more capital (and with much of it going out the back end).