Copyright by Chih-shian Liou 2010 The Dissertation Committee for Chih-shian Liou certifies that this is the approved version of the following dissertation: THE POLITICS OF CHINA’S “GOING OUT” STRATEGY: OVERSEAS EXPANSION OF CENTRAL STATE-OWNED ENTERPRISES Committee: ________________________________ Patricia Maclachlan, Supervisor ________________________________ Clement Henry _______________________________ Wendy Hunter ________________________________ William Hurst ________________________________ Patrick McDonald THE POLITICS OF CHINA’S “GOING OUT” STRATEGY: OVERSEAS EXPANSION OF CENTRAL STATE-OWNED ENTERPRISES by Chih-shian Liou, B.A.; LL.B.; M.A.; LL.M. Dissertation Presented to the Faculty of the Graduate School of The University of Texas at Austin in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy The University of Texas at Austin May 2010 THE POLITICS OF CHINA’S “GOING OUT” STRATEGY: OVERSEAS EXPANSION OF CENTRAL STATE-OWNED ENTERPRISES Chih-shian Liou, Ph.D. The University of Texas at Austin, 2010 Supervisor: Patricia Maclachlan The growing global presence of China‟s state-owned enterprise (SOEs) has captured much of the world‟s attention. Continuous waves of SOEs‟ overseas ventures, a result of government-led transnationalization officially dubbed the “Going Out” strategy, have generated great uneasiness in international relations. This dissertation, The Politics of China‟s “Going Out” Strategy: Overseas Expansion of Central State-owned Enterprises, seeks to answer the following question: how the Chinese central state and central SOEs interact with one another as the “Going Out” strategy has evolved. This dissertation finds that the transnationalization of SOEs is by no means a coherent policy but rather is fraught with power struggle, with various bureaucratic agencies setting different goals for SOEs on the one hand and with SOEs managers defending corporate interests without incurring political setbacks on the other. The state‟s advocacy of the overseas expansion of SOEs was aimed at achieving national economic and security goals, but SOEs, with their expanded autonomy gained from the new state- iv market relationship, have been able to ignore state directives that were detrimental to firms‟ financial performance. This dissertation also finds that negotiation and bargaining between China‟s fragmented bureaucracy and SOE managers over the terms of firms‟ “going out” grow more intense as corporate autonomy become increasingly institutionalized with the progress of reform. Over time, SOEs‟ overseas expansion reflected more the firms‟ corporate strategy than the state‟s policy objectives. v Table of Contents List of Tables and Figures……………………………………………………….viii Abbreviations……………………………………………………………….. …... ix 1. Introduction………………………………………………………………………..1 1. The Global Ambition of China‟s State-owned Enterprises……………3 2. A Fragmented Bureaucracy, the Changing State-Market Relationship, and the “Going Out” Strategy…………………………………………7 3. A Note on Methodology……………………………………………...17 4. Outline of the Dissertation…………………………………………...22 2. An Analytical Framework: The Neoinstitutional Approach……………………...25 1. A Principal-agent Analysis of Corporatized Central State-owned Enterprises…………………………………………………………...26 (i) Neoinstitutional Economics and the Study of Public Bureaucracy (ii) Fragmented Bureaucratic Principals (iii) Managerial Dual Identities and Bureaucratic Control in China‟s State Sector 2. Explaining Government-initiated Overseas Expansion: the “Going Out” Strategy………………………………………………………...50 3. Conclusion…………………………………………………………...56 3. State-owned Enterprise Reform and State-owned Enterprises‟ “Going Out”……58 1. China‟s Partially Reformed Economy and Managerial Opportunism………………………………………………………....60 (i) Enterprise Autonomy, 1978-1984 (ii) The Separation of Ownership from Management, 1984-1993 (iii) The Socialist Market Economy and the Ownership Restructuring Program, 1993-2003 (iv) Deepening Corporate Governance and Building up a New State- owned Asset Management System, 2003- present 2. State-owned Enterprises‟ “Going Out”………………………………81 (i) The Initial Stage of Transnational Operation of China‟s State- owned Enterprises and Particularistic Policies, 1979-1997 (ii) Government-initiated Overseas Expansion and the “Going Out” Strategy, 1997- present 3. Conclusion…………………………………………………………...99 4. China National Petroleum Corporation…………………………………………103 1. Background…………………………………………………………104 (i) The History of China‟s Oil and Petrochemical Industry vi (ii) China National Petroleum Corporatization after the 1998 Restructuring 2. Market Reform and Managerial Behavior………………………….120 (i) The Creation of Commercial Interests and Non-Market Behavior (ii) CNPC‟s Post-corporatization Performance and the Dual Roles of CNPC Managers 3. The Overseas Expansion of China National Petroleum Corporation…………………………………………………………134 (i) The “Going Out” Strategy and the Evolution of Overseas Projects by China National Petroleum Corporation (ii) The State-SOE Interactions in CNPC‟s “Going Out” 4. Conclusion………………………………………………………….150 5. China State Construction Engineering Corporation…………………………….152 1. Background…………………………………………………………153 (i) The Outlook of China‟s Construction Industry (ii) China State Construction Engineering Corporation 2. Market Reform and Managerial Behavior………………………….167 (i) Pro-competitive Reform and Non-market Behavior (ii) The Dual Roles of CSCEC Managers and the Powerful Bureaucratic Lobby 3. The Overseas Expansion of China State Construction Engineering Corporation…………………………………………………………177 (i) The “Going Out” Strategy and the Evolution of Overseas Projects by China State Construction Engineering Corporation (ii) The State-SOE Interactions in CSCEC‟s “Going Out” 4. Conclusion………………………………………………………….190 6. Conclusion………………………………………………………………………192 1. Summary of Findings……………………………………………….193 2. How Strong is the State‟s Control over State-owned Enterprises…..195 3. A Possible Solution for Partial Reform Equilibrium?........................198 Bibliography………………………………………………………………………….203 Vita…………………………………………………………………………………...211 vii List of Tables and Figures Tables 3.1: China‟s Industrial Structure by Ownership, 1985 and 1995……………………….63 3.2: The Ratio of State Shares, Legal Person Shares, and Tradable Shares in the SOE Sector, 1999-2002………………………………………………………………….75 3.3: The Share of Central SOEs to the Whole SOE Sector, 2004………………………78 3.4: China‟s approved outward FDI, by type of enterprise, 2003 and 2004……………93 3.5: China‟s approved outward FDI, by sector of investment, 2003 and 2004…………94 3.6: China‟s approved FDI outflows, top 30 destinations, 1979-2002………………..101 3.7: China‟s approved outward FDI, top 20 destinations, 2003- 2007………………..102 4.1: The Evolution of China‟s Energy Governance, 1949-present……………………109 4.2: CNPC‟s Financial and Operational Indicators, 2001-2008……………………….127 4.3: CNPC‟s Overseas Projects, 1993-2009…………………………………………...140 Figures 1.1: China‟s Government-approved OFDI, non-financial sectors, 1990-2007…………10 1.2: China‟s Government-approved Overseas Contractual Projects, 1990-2007……….10 2.1: The Decision-making Process of the “Going Out” Strategy……………………….56 4.1: CNPC‟s Organizational Structure………………………………………………...119 5.1: CSCEC‟s Organizational Structure……………………………………………….166 viii Abbreviations ASEAN The Association of Southeast Asian Nations CCP Chinese Communist Party COD Central Organization Department CNOOC China National Offshore Oil Corporation CNODC China National Oil and Gas Exploration and Development Corporation CNPC China National Petroleum Corporation CSCEC China State Construction Engineering Corporation China Exim Bank The Export-Import Bank of China FDI Foreign Direct Investment MOC Ministry of Commerce MOF Ministry of Finance MOFTEC Ministry of Foreign Trade and Economic Cooperation NBS National Bureau of Statistics NDRC National Development and Reform Commission NIE Neoinstitutional Economics NOC National Oil Company OECD Organization for Economic Co-operation and Development OFDI Outward Foreign Direct Investment PetroChina PetroChina Company Limited PLA People‟s Liberation Army SAFE State Administration of Foreign Exchange SASAC State-owned Assets Supervision and Administration Commission of the State Council SETC State Economic and Trade Commission SDPC State Development Planning Commission Sinopec China Petroleum and Chemical Corporation SOE State-owned Enterprise SPC State Planning Commission UNCTAD United Nations Conference on Trade and Development WTO World Trade Organization ix Chapter 1. Introduction MG, the legendary British brand that expired after a lengthy illness, will be revived this month as a Chinese sports car when the Nanjing Automobile Corporation begins to produce convertible sports cars under that name in China. The rebirth of MG is the latest and most splashy example of how China's growing economic might is reaching carefully into foreign markets, buying up troubled companies with established brands and using them to build bridgeheads for some of the hundreds of billions of dollars that the country has to invest overseas. The New York Times, March 13, 2007 China is also mining uranium in Niger, iron and steel in South Africa and nonferrous metals in Angola, among others. Its state-owned nonferrous metals company -- owner of the mine where Mule works -- has invested more than $300 million in Zambia and promised over $200 million more last year for a copper smelting facility. The Washington Post, September 9, 2007 When the Aluminum