March
26, 2002
REALITY
CHECK: Daqing Meets Wall Street
by Dan Ewing
The irony hidden in the massive labor protests that hit China’s Daqing oil fields last week is that for decades it was the model of Communist China’s industrial prowess. In the 1960s, Daqing was held up as the model of efficiency. Today, redundant workers and high operating costs are hampering its competitiveness. The recent protests illustrate some of the dramatic effects that global competition is placing on China’s economy and the resolution of this dispute will indicate the future of economic reform and social stability in China.
Globalization is steadily transforming the Chinese economy, and changes brought by China’s entry into the World Trade Organization will accelerate the process. Soaring foreign trade and investment are the most visible signs of globalization, but often the evidence pops up in unexpected ways. For instance, one of China’s top bankers was recently toppled by corruption charges brought not by Beijing, but by the U.S. Treasury Department. The Daqing protests offer another example unexpected power of global markets.
Competition from multinational firms has squeezed domestic industries and labor protests have hit China hard over the past few years - especially over the two last weeks. Despite China’s healthy GDP growth, many workers are angry. Unemployment is rising, inefficient industries are closing, corruption is rampant, and some occupations (mining in particular) are simply lethal. These problems have sparked unrest and were behind other large protests in Liaoyang. But, what happened in Daqing is wholly different and critically important.
Managers in Daqing wanted to reduce its oversized workforce and offered severance packages to some employees. The deal was $500 per year of employment, and about 50,000 workers signed up. But, when the company also shut off heating and insurance benefits, the workers felt duped, wanted to renegotiate, and took to the streets. Perhaps 20,000 protestors staged one of the largest demonstrations of labor unrest since 1949. This standoff is important for three reasons.
To start, it highlights the need for independent labor unions, currently prohibited in China. China’s one official labor union simply relays party decisions, it does not lobby for workers’ interests. Collective bargaining by workers would probably have produced an agreeable severance package and settled this issue at the negotiating table. Moreover, it would give them an avenue back into the boardroom to renegotiate. Instead, they can only take disruptive action and go to the streets.
Second, workers in Daqing see wealthy corporate managers and are angered by their own economic misfortunes. In a sense, they were protesting the income gap in China that has grown since reforms began in 1978 and may widen in coming years. Premier Zhu Rongji has taken several measures to address this problem. The Chinese government is running record budget deficits this year to fund its $18 billion fiscal stimulus package and it has increased spending on social welfare.
The most telling part of this drama is the pivotal position of the owner of the Daqing oilfields, PetroChina. PetroChina was formed when China National Petroleum Corporation (CNPC), the nation’s state-owned petroleum titan, consolidated its best assets and launched PetroChina as a private subsidiary to compete against the world’s top petroleum multinationals. Two years ago, PetroChina launched a $3 billion IPO on Hong Kong and New York stock exchanges, giving foreign shareholders minority ownership of one of China’s most powerful corporations. Yet, CNPC retained ninety percent of the shares – overwhelming control.
PetroChina became a model for the "corporatization strategy" of state-owned enterprise reform. By issuing shares on international exchanges, the corporatization of state-firms is designed to tap new sources of capital, shift financing from struggling domestic banks to capital markets, and impose external market discipline. This strategy is one key component of economic reform and Beijing has applied this formula to many large state-owned firms, like SINOPEC, CNOOC and China Mobile. Over the past two years, China has raised over $20 billion through IPOs of several major firms. Moreover, Chinese firms are planning a new wave of large overseas IPOs, including the Bank of China’s Hong Kong branch.
As a state-owned/privatized hybrid, PetroChina is now facing precisely the "agency problems" that analysts warned about years ago – will PetroChina respond to market demands or political pressures? One the one hand, PetroChina needs to meet shareholders demands for increased efficiency and greater profits. On the other hand, the Chinese government, through its ownership of CNPC, can dictate actions based on their political considerations and desire muffle social unrest. Should PetroChina renegotiate the severance packages? Should it slow future plans to reduce workers? PetroChina is caught in the middle. How it answers these questions will have a huge impact on Daqing, on China’s future reforms, and on how the government will treat similar companies caught in similar situations.
Thus, globalization has brought Daqing to Wall Street. If foreign investors believe that Beijing bullies firms like PetroChina and that shareholder interests are ignored, international equity investment for future overseas IPOs, like the Bank of China, will drop. This could close one spigot of foreign investment and threaten an important component of China’s economic reforms. A combination of payoffs, willingness to discuss severance terms, and arrests have defused the protests in Daqing for now. But similar outbreaks of unrest are likely to reoccur. How Beijing and companies like PetroChina resolve these protests will serve as an important guidepost for the current struggle between reform and stability.
(Dan Ewing is
Assistant Director of Chinese Studies at The Nixon Center.)
