[LINK] "To Fix China, Look to Korea"

[rfmcdonald]

Bloomberg View's Michael Schuman suggests that China should look towards South Korea, to find an example of how to deal with uncompetitive state-linked conglomerates.

Earlier this week, markets made clear how little they think of China's attempts to revamp the giant, state-owned companies that dominate its economy. After the government approved the merger of two massive shipping groups, two of their listed subsidiaries swiftly shed more than $850 million in value on Monday. Investors appear to appreciate something the regime doesn't: Simply tweaking the structure of state-owned enterprises -- professionalizing their management, inviting in private investors and merging lossmaking companies -- isn't going to transform them into world-beaters.

If Chinese leaders want proof, they need look no further than neighboring South Korea. Twenty years ago, Korea had similar problems with its biggest companies as China does today. While the family-managed conglomerates known as chaebols weren't owned by the state, the financial community in Seoul widely believed they were “too big to fail” and would always be supported by the government. As a result, a few large companies were able to suck up the economy’s financial resources no matter how poor their performance, how high their debt or how silly their business plans. Though conglomerates such as Samsung, Hyundai and LG dreamed of becoming innovative enough to compete head-to-head with rivals from the U.S. and Japan, their products were considered second-rate -- and earned the low prices to match that reputation.

Today, the chaebols have grown into the national champions China wants its SOEs to become. Samsung is the largest smartphone brand in the world. Hyundai cars are known for quality. LG has a buffed image in appliances and electronics.

The key was breaking the triangle between government, banking and corporations. During the high-growth period in Korea, the close networks among the nation’s top policymakers, chaebol chiefs and major bankers propelled stellar growth rates by funneling credit to favored industries, thus creating the conditions for high investment. But by the 1990s, that system had begun to work against the economy. Gorged with easy money, chaebols never had to become truly competitive. Managers, free from oversight by bankers or the demands of profitability, wasted funds on uneconomic projects while starving potentially more productive and innovative parts of the economy of resources.