Twofish's Blog

February 21, 2009

General Motors and the lessons of SOE’s

Filed under: china, finance — twofish @ 11:10 am

rziemba: However, they have also frequently received payments from the government to compensate for the gap between the cost of oil on the global market and the fixed price of products on the domestic market (eg for much of 2007 and 2008). these payments were often ad hoc. In general though this gap contributed to the incentives to find and sell resources abroad on the global market.

Precisely which illustrates how the oil companies are profit oriented. In the middle of 2007, there were fuel shortages all over China while Chinese oil companies were selling oil oversees. If the purpose of Chinese oil companies was to acquire resources, then the Chinese government could have just ordered the oil companies to sell their oil in China at a loss. They didn’t.

*Why* they didn’t is interesting. They didn’t force companies to sell oil in China at a loss because that would have killed profits and would have hurt the state’s role as shareholder.

This points out another thing that the US is getting wrong with GM and the banks. People are willing to buy stock in PetroChina and Sinopec because the rules are set up so that what helps the Chinese government helps shareholders and what hurts shareholders also hurts the Chinese government.

In the case of GM and the big banks, the fact that the US government has pumped money in as preferred stock rather than common stock makes private shareholders wary of putting money into those companies, because they are afraid that the government will come in and just take it.

The other thing that the US could do with GM is come up with a consortium of state governments to serve as shareholders. The way that this would work is to have the Fed lend money on a non-recourse basis to state pension funds which would then buy common stock in GM and the banks and then exercise supervision over management.

What’s interesting about CDB is that they have an ownership stake in Barclay’s and a seat on the Board of Directors which means that CDB indirectly owns Lehman’s American operations.

It’s not that the Chinese leadership is brilliant about SOE management. It’s just that the government has made all sorts of mistake until it came up with something that seems to work. What I worry about the banks and GM is that the US government is going to go through the same learning process and make very similar mistakes.

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