Chinese Firms Wasting Political Capital?

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By Co-Director of CEIBS Centre for Family Heritage and Professor of Finance and Accounting Oliver Rui

China’s national evening news almost always features scenes of government officials visiting enterprises around the country. This custom of official visits dates back to ancient times; the government believes they demonstrate its concern for business activities and ordinary citizens.  Today, news of these visits is interpreted by lower-level officials, investors, banks, suppliers and other related parties as a signal of official endorsement and support.

Just last month, when Chinese President Xi Jinping visited Changchun Railway Vehicles the stock price of its state-owned parent company, CRRC (HKG: 1766), jumped by nearly 4%. This type of corporate political activity is especially effective for family firms in China since private companies face far more difficulties than state-owned enterprises in obtaining government approval for equity offerings and they are largely denied access to bank loans from the state-controlled banking system. Studies have shown that 80% of the formal bank credit issued between 2000 and 2010 was allocated to the state sector, while private firms received less than 20% even though their contribution to China’s total GDP surpassed 60%. Read more on Forbes.com

 

Official visit to Changchun Railway Vehicles on July 17. Photo credit: Xinhua.

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