Posts Tagged ‘antonio’

Fredrick Schroeder CIA Fighter Pilot?

In Uncategorized on February 17, 2016 at 2:07 pm

Fred Coward 2

Fredrick Schroeder, formerly a pilot for Shenzhen Airlines, now claims to be flying combat missions in Libya. To obtain this position, Schroeder claims he had to be approved by both the FBI and CIA. If the story is a lie, then he is grossly delusional. If it is true, I suspect he shouldn’t be telling people about it.

If you’ve been following the sad tale of Fred Schroeder over the last three years, you would know he agreed to fight me, but backed out 27 times. At least three of those fights were pro fights, two of which, tickets were already on sale for, another one was a TV fight. Apparently somewhere between talking on the internet and actually showing up and fighting, Fred’s balls took a detour. In between each of these fights he sends me messages and calls me telling me that satan is raping my mother who died when I was a baby. He also said he dug up her corpse and raped it. He insults the Christian religion and tells me that he is God. As payment for agreeing to show up for one of our fights, he asked for a photo of my dead mother which he then defiled and emailed back to me. On another occasion he asked for the location of her grave so he could “drop a deuce on it”. Through this entire process, he has maintained the fiction that he can beat me easily and that he is not afraid of me. He has said repeatedly that he will kill me and rape me, although he never shows up for these fights.

At one point, Fred told me that he had moved to Khartoum to work as a pilot. A few months ago, there was an internet rumor that he had gone to somewhere in the Middle East to be a combat pilot, having lied about his qualifications. The story said that it didn’t take his employers long to find out he was unqualified, and he was fired. More recently, he told me directly that he was flying combat missions in Libya and that he had to be approved by both the CIA and FBI. Fred also said that his social media was being monitored and that I would be in trouble for asking why he has never showed up at any of our scheduled fights. On the same, allegedly, monitored social media, he threatened my life, agreed to fight and backed out, and said something violently sexual about my mother and some of my friends. if his social media is being monitored it is obviously not monitored for morality.

A military psychiatrist reviewed a collection of the messages which Fred sent me and his determination was that Fred is seriously disturbed and shouldn’t be flying a plane. Fred’s ex-friend from high school reported Fred to the FAA and said that he was unfit to fly. The friend then told me that Fred is bi-polar. When I asked Fred if his new employers were aware of his being bi-polar and if they were fine with that, he said that they were aware and that they “don’t care.”

The transcript of the latest social media exchanges are available upon request. Previous exchanges, insults, threats, and fight dates are available online simply by Googling Fred Pilot Schroeder, the coward.

Will Fred ever fight me? Is he a CIA operative? Is his cover blown? Will the FAA finally realize that he is incredibly disturbed and pull his license? Stay tuned to find out.
Hey Fred Schroeder, please fight Antonio “Brooklyn Monk” Graceffo

Iran: Overcoming a Rentier Economy

In Uncategorized on December 31, 2015 at 2:59 pm

By Antonio Graceffo
Shanghai Jiaotong University, China MBA
PhD Candidate, Shanghai University of Sport
Prepared for the course: Constitutional Struggles in the Muslim World,
University of Copenhagen

About one third of Iran’s GDP is dependent on a single asset, oil, which has turned Iran into a classic example of a rentier economy (Graeber 2015). Rentier economies can be based on control of natural resources, property, financial assets, or intellectual property. (Standing 2014). Rentier states are capable of generating income without developing businesses. As a result, “When a country becomes a rentier state, it loses the incentive to diversify and expand other sectors of its economy, remaining stagnant in the raw materials sector.” (Sha’er 2015).

This paper will provide a detailed description of the problem the rentier economy poses Iran. Next, it will propose solutions, including sub-steps that make the solutions politically realistic. Then, it will identify potential opponents to the solutions, as well as potential allies. Finally, in the conclusion, this paper will stress that these solutions are both necessary and politically feasible.
Read the full paper on Aacdemia

Martial Arts Odyssey: Muay Boran 1

In Uncategorized on November 21, 2015 at 7:46 am

Before there was sport Muay Thai there was ancient Muay Thai, Muay Boran. Modern sport Muay Thai contains about 20 movements. Muay Boran contains hundreds. In the 1920’s when Muay Thai was codified as a modern sport His Majesty the King called the great masters together to write a book of modern Muay Thai. All of the techniques in that book have been recorded for history. All of the techniques excluded from the book are considered Muay Boran. Unfortunately, Muay Boran has never been codified. So, different masters know different techniques. Fighting Muay Thai is a way of earning a living in Thailand, but there are no Muay Boran fights. Consequently, young people abandoned the study of the art. Most masters haven’t passed on their skills to a younger generation. And now, most of the masters are old, dead, or dying. As a result, Muay boran is an endangered art. The master featured in this video is Adjan Sok Chai from Surin, Thailand, the first teacher of film star Tony Jaa. He can be seen in many of Tony Jaa’s movies, wearing almost the same clothes he wears in the video, the clothes he wears every day.
Martial Arts Odyssey: Muay Boran 1

Martial Arts Odyssey Re-Release (Part 1)

In Uncategorized on November 15, 2015 at 4:22 pm

Back to the beginning, rereleasing all of the videos
By Antonio Graceffo

Martial Arts Odyssey, the video series which follows the Brooklyn Monk, Antonio Graceffo on his journey through martial arts across Asia has been running since 2007. The video series grew out of a series of magazine articles and books which began in 2001, when Antonio left New York to go to Taiwan, learn Kung Fu and Mandarin and then train at the Shaolin Temple in Mainland China.

Since the beginning there have been about 400 martial arts videos, featuring the Monk studying diverse martial arts, such as Kuntaw in the Philippines, Muay Chaiya in Thailand, Selambam in Penang, Vo Co Truen in Vietnam, Bokator in Cambodia, shuai jiao in China and many, many more.

In order to share all of these wonderful martial arts with a new generation of fans, Antonio is rereleasing the episodes, in the order in which they were originally released, at a rate of one per day.

MAO: Kuntaw in the Philippines was the first episode shot and the first episode released, in 2007. At that time, Antonio didn’t even own a video camera, so the video was shot and edited by a TV crew in the Philippines. This video features Grand Master Frank Aycocho.

Digging for the Truth: Angkor Wat, from the Philippines, Antonio flew to Siem Reap Cambodia, where he and his Bokator instructor Grand Master San Kim Saen collaborated with a New York based film crew to shoot this documentary about the traditional Cambodian martial art, Bokator.

Between 2007 and 2008 numerous episodes were shot with borrowed equipment, but Antonio lacked expertise and money for editing, so the tapes collected in a backpack until late 2008 when they were finally edited and released, but not in the order in which they were shot. The third episode to air was MAO: Training with the Shan State Army 1, which was shot in 2007.

This video was shot in Burma during the saffron revolution when foreigners were banned from entering Burma. It is thought to be the first video ever to feature the kung fu of the Shan ethnic group, called Lai Tai. MAO Laitai 1

Pra Kru Bah, the muay Thai monk is the abbot of the Golden Horse Monastary, Wat Achatong on the Thai Burma border. In 2003 he took Antonio in and became Antonio’s first Muay Thai teacher. He taught Antonio Muay Thai, Thai language, and Thai culture. It was in this monastery that Antonio first heard about the war in Burma and vowed to someday help the Shan people. Prah Kru Bah Story Part 1

Brooklyn Monk, Antonio Graceffo is a lecturer at Shanghai University. He is also a PhD candidate at Shanghai University of sport, writing his dissertation on comparative forms of Chinese wrestling, in Chinese, with expected graduation in June of 2016. He is expected to graduate his China MBA, from Shanghai Jiaotong University, in January, 2016. Antonio is the author of the books, “Warrior Odyssey”, “The Monk from Brooklyn,” and several others. He has published hundreds of articles in the fields of linguistics: second language acquisition, as well as martial arts. Antonio is the host of the web TV show, “Martial Arts Odyssey,” which traces his ongoing journey through Asia, learning martial arts in various countries.
The Monk from Brooklyn, the book which gave Antonio his name, and all of his other books, the book available at His book, Warrior Odyssey, chronicling Antonio Graceffo’s first six years in Asia, including stories about Khmer and Vietnamese martial arts as well as the war in Burma and the Shan State Army, is available at
See Antonio’s Destinations video series and find out about his column on
Brooklyn Monk fan page
Brooklyn Monk on YOUTUBE
Brooklyn Monk in Asia Podcast (anti-travel humor)

War Crimes, Genocide, and Terrorism, Defining Terror

In Uncategorized on November 15, 2015 at 3:54 pm

By Antonio Graceffo

In the aftermath of the November, 2015 terrorist attacks on Paris, the internet was ablaze with arguments and opinions, many of which were understandably emotionally charged. Many of the posts and arguments were using the words war crimes, genocide, and terrorism. Most people would agree that murder, whether defined as war Crimes, Genocide, and Terrorism, is a terrible thing. These words are not interchangeable, however, and to bring suit before the International Criminal Court or to bring a case to a world body, such as the United Nations, the specific crime would have to be named, defined, and proved. An atrocity can be committed which is seen as a pure act of evil and yet would not qualify as genocide, but a conviction might have been possible if the charge were war crimes or terrorism.

The purpose of this paper is to give an explanation for and some examples of the three terms; war crimes, genocide, and Terrorism.

War Crimes

Several definitions of war crimes can be found. According to The International Criminal Court: “War crimes” include grave breaches of the Geneva Conventions and other serious violations of the laws and customs applicable in international armed conflict and in conflicts “not of an international character” listed in the Rome Statute, when they are committed as part of a plan or policy or on a large scale” ( 2015).

“Genocide, crimes against humanity, mistreatment of civilians or combatants during war can all fall under the category of war crimes. Genocide is the most severe of these crimes” (Kafala 2009). War crimes include: Murder, Extermination, Enslavement, Deportation, Imprisonment, Torture, Rape, Persecutions on political, racial and religious grounds (Kafala 2009). “War crimes may be committed by a country’s regular armed forces, such as its army, navy, or air force, or by irregular armed forces, such as guerrillas and insurgents.” (

The Legal Information Institute of Cornell University cites 18 U.S. Code § 2441 – War crimes, “which constitutes a grave breach of common Article 3…committed in the context of and in association with an armed conflict not of an international character…contrary to the provisions of the Protocol on Prohibitions or Restrictions on the Use of Mines, Booby-Traps and Other Devices as amended at Geneva on 3 May 1996 (Protocol II as amended on 3 May 1996), when the United States is a party to such Protocol, willfully kills or causes serious injury to civilians” (LII / Legal Information Institute 2015).

“serious violations of the laws and customs applicable in international armed conflict” (ICC cited in 2015). “…subjecting a protected person to medical experiments” ( 2015).

“The conduct breaches important values.. example, abusing dead bodies;[8] subjecting persons to humiliating treatment;[9] making persons undertake work that directly helps the military operations of the enemy;[10] violation of the right to fair trial;[11] and recruiting children under 15 years of age into the armed forces.” ( 2015).

While the exact wording may differ, the commonalities between the various definitions of war crimes is that they must be committed during a war, generally by uniformed military personnel. War crimes are often assessed when civilians are specifically attacked or targeted by an army at war. Genocide is included in war crimes, and is considered the most extreme war crime. Genocide will be further defined in the next section.

Examples of war crimes would be the Nazis in World War II intentionally targeting Jewish civilians (Kafala 2009).


Genocide is considered one of the most severe crimes against humanity. It means “the deliberate attempt to destroy a national, ethnic, racial or religious group.” ( 2015).
According to the International Criminal Court (2015) Genocide means any of the following acts committed with intent to destroy, in whole or in part, a national, ethnic, racial or religious group, as such: “killing members of the group, causing serious bodily or mental harm to members of the group, deliberately inflicting on the group conditions of life calculated to bring about its physical destruction in whole or in part, imposing measures intended to prevent births within the group, forcibly transferring children of the group to another group…Individuals are chosen as victims purely, simply and exclusively because they are members of the target group, and not because of anything an individual has done.”
Twentieth Century examples of genocide: Ottoman Turks slaughter of 1.5 million Armenians 1915-1923, Hitler’s holocaust against the Jews, Roma, and others 1930s and 40s, 800,000 Tutsis and moderate Hutus killed in Rwanda 1994, and Former Yugoslavia 1992-1995. ( 2015b)


Experts will agree that there is no unified definition of terrorism (Schaack 2009). Schaack (2009) describes terrorism as ‘The perpetration of violence by enumerated or unenumerated means; The targeting of innocent civilians or elements of the civilian infrastructure; Conduct is undertaken: With the intent to cause violence or with wanton disregard for the act’s consequences; For the purpose of causing fear or terror, coercing a government, or intimidating an enemy; or To achieve some political, military, ideological, or religious goal” (Schaack 2009).

Cohen (2012) defines terrorism as: “acts offenses involving use of firearms, weapons, explosives, and dangerous substances when used as a means to perpetrate indiscriminate violence involving death or serious bodily injury to persons or groups of persons or populations or serious damage to property” (Cohen 2012).

According to International Crimes Database (n.d.) “In its Resolution 1566 (2004), the Security Council drew on the international conventions and protocols relating to terrorism, and on this basis, referred to terrorism as: criminal acts, including against civilians, committed with the intent to cause death or serious bodily injury, or taking of hostages, with the purpose to provoke a state of terror in the general public or in a group of persons or particular persons, intimidate a population or compel a government or an international organization to do or to abstain from doing any act.” ( n.d.)

“In order to intimidate a population or compel a government or an international organization to do or to abstain from doing any act.” ( n.d.)

“Perhaps the most debated definition of terrorism, as an international crime, has been brought forward in the landmark decision of the Appeals Chamber of the Special Tribunal for Lebanon (STL). In paragraph 85 of that decision, the Appeals Chamber considers that: the international crime of terrorism … requires the following three key elements: (i) the perpetration of a criminal act (such as murder, kidnapping, hostage-taking, arson, and so on), or threatening such an act; (ii) the intent to spread fear among the population (which would generally entail the creation of public danger) or directly or indirectly coerce a national or international authority to take some action, or to refrain from taking it; (iii) when the act involves a transnational element.” ( n.d.)

Examples of terrorism

The September, 2001 attacks on the World Trade Center in New York City which killed 2993, the 2001 “shoe bomber” who attempted to blow up an American Airlines flight ( n.d.) the 2009 Boko Haram attack in Maiduguri, Borno, Nigeria which killed 780, the 2004 attaack in Beslan, North Ossetia, Russia resulting in 372 killed ( 2015) The 2015 Paris attack on the offices of Charlie Hebdo magazine, which killed twelve (WSJ 2015), The November 2015 terrorist attacks in Paris which left more than 128 people dead (Almasy, Meilhan and Bittermann 2015).

Taking the Paris bombings or the 9/11 terrorist attacks in New York City, one can apply the definition of terrorism. Both attack were violent in nature, directly targeted at civilians or civilian infrastructure, and were undertaken for the intent of spreading fear among the population and to indirectly coerce a national or international authority to take some action, or to refrain from taking it.


Horrible things can and do happen in this world, but that doesn’t make them a war crime, neither does it make them genocide, or terrorism. A million people could be killed in a single day, and yet it may not qualify as a war crime if the persons killed were combatants in a declared war, killed in a way that does not violate the rules of war. A million civilians could be killed in a single day, and yet it couldn’t be called genocide unless the intent was to exterminate an entire race from the planet. A million civilians could be killed in a single day, but the crime wouldn’t necessarily qualify as terrorism if the perpetrators were uniformed soldiers, acting on direct orders from the country’s government, within its own borders. This is not to detract from the tragedy of a million people being killed in a single day, it just means that in order to bring suit, or to bring the case before a world body, the crime needs to be identified correctly.

Almasy, Steve, Pierre Meilhan, and Jim Bittermann. ‘Paris Massacre: At Least 128 Die In Attacks – CNN.Com’. CNN. N.p., 2015. Web. 15 Nov. 2015.,. ‘BBC – Ethics – War: War Crimes’. N.p., 2015. Web. 15 Nov. 2015.
Cohen, Aviv. ‘PROSECUTING TERRORISTS AT THE INTERNATIONAL CRIMINAL COURT: REEVALUATING AN UNUSED LEGAL TOOL TO COMBAT TERRORISM’. Michigan State International Law Review Vol. 20:2 (2012): 223. Print.,. ‘ICC – What Are War Crimes?’. N.p., 2015. Web. 15 Nov. 2015.,. ‘ICC – What Is Genocide?’. N.p., 2015. Web. 15 Nov. 2015.,. ‘Customary IHL – Rule 156. Definition Of War Crimes’. N.p., 2015. Web. 15 Nov. 2015.,. ‘ICD – Terrorism – Asser Institute’. N.p., 2015. Web. 15 Nov. 2015.,. ‘Worst Terrorist Strikes–Worldwide’. N.p., 2015. Web. 15 Nov. 2015.
Kafala, Tarik. ‘BBC NEWS | Europe | What Is A War Crime?’. N.p., 2009. Web. 15 Nov. 2015.
LII / Legal Information Institute,. ’18 U.S. Code § 2441 – War Crimes’. N.p., 1949. Web. 15 Nov. 2015.
Schaack, Beth. ‘Intlawgrrls: Toward A Definition Of Terrorism’. N.p., 2009. Web. 15 Nov. 2015.,. ‘War Crimes’. N.p., 2015. Web. 15 Nov. 2015.
Copy and paste bibliography citation Copy and paste in-text citation
WSJ,. ‘Timeline Of Terror Attacks In Past 20 Years’. N.p., 2015. Web. 15 Nov. 2015.

Brooklyn Monk, Antonio Graceffo is a lecturer at Shanghai University. He is also a PhD candidate at Shanghai University of sport, writing his dissertation on comparative forms of Chinese wrestling, in Chinese, with expected graduation in June of 2016. He is expected to graduate his China MBA, from Shanghai Jiaotong University, in January, 2016. Antonio is the author of the books, “Warrior Odyssey”, “The Monk from Brooklyn,” and several others. He has published hundreds of articles in the fields of linguistics: second language acquisition, as well as martial arts. Antonio is the host of the web TV show, “Martial Arts Odyssey,” which traces his ongoing journey through Asia, learning martial arts in various countries.
The Monk from Brooklyn, the book which gave Antonio his name, and all of his other books, the book available at His book, Warrior Odyssey, chronicling Antonio Graceffo’s first six years in Asia, including stories about Khmer and Vietnamese martial arts as well as the war in Burma and the Shan State Army, is available at
See Antonio’s Destinations video series and find out about his column on
Brooklyn Monk fan page
Brooklyn Monk on YOUTUBE
Brooklyn Monk in Asia Podcast (anti-travel humor)

Make up Your Own Linguistic Rules

In Uncategorized on October 18, 2015 at 11:26 am

By Antonio Graceffo

I love when people make up their own little linguistic rules, not based on any sort of research or significant experience, such as: a detractor on the internet claimed that native speakers of Spanish learned Vietnamese faster than English natives “because of the similarities in the languages.” The ONLY similarity that he was referring to was putting adjectives after nouns. Apart from that, a Spanish speaker would have no advantages at all. And at this point in the world’s history, the bulk of loan words in almost any language are from English. So, English would be better than Spanish as a basis for any non-Latinate language. Another point is that when you start talking about Asian languages there isn’t a lot of data on non-native English speakers as learners. For Vietnamese, there is undoubtedly data on French speakers, but beyond the US and France, which western countries has Vietnam had a lot of involvement with? Apart from US soldiers of Latin extraction how many Spanish speakers have ever studied Vietnamese?
Another one I have heard repeatedly is that Koreans learn Chinese faster because of similarities in vocabulary and because of the Korean government’s Chinese character exam, which a significant percentage of young people have passed. In practice, I have found that Koreans and Vietnamese are the absolute least fluent students at the Sports University. Even students preparing for their graduation speak Chinese at an incredibly basic level. Much of the reason why Koreans fail to learn Chinese, but many Africans succeed, is probably cultural, rather than linguistic. But that is a central theme in my linguistics writing. I believe that with very few language combinations, the bulk of the difficulties or advantages people have in learning a foreign language are cultural, rather than linguistic. Another anecdotal proof would be that 60% of the vocabulary of the Vietnamese language could be traced to China. And yet, Vietnamese are among the worst Chinese learners at the university.
Today sitting in my hotel room, in Phnom Penh, hearing the Indians across the hall talking way too loudly, with their door open, I could catch about every tenth word, because of the shared origin of some of the Khmer, Thai, Bahasa, and Filipino vocabulary. And yet, these guys couldn’t speak Khmer. And when they tried to communicate with the hotel staff, they did so in absolutely atrocious English, rather than broken Khmer. My point, once again, is that people put too much emphasis on words, when it comes to language learning. Since Indians would already have 10-20% of the Khmer vocabulary, you would think they would find it easier to learn the language. And yet, that doesn’t seem to be the case. Language learning is much more about culture than linguistics.

Brooklyn Monk, Antonio Graceffo is a lecturer at Shanghai University. He is also a PhD candidate at Shanghai University of sport, writing his dissertation on comparative forms of Chinese wrestling. He is expected to graduate his China MBA, from Shanghai Jiaotong University, and his PhD in Spring, 2016. Antonio is also a martial arts and adventure author living in Asia, the author of the books, “Warrior Odyssey’ and “The Monk from Brooklyn.” He is also the host of the web TV show, “Martial Arts Odyssey,” which traces his ongoing journey through Asia, learning martial arts in various countries.
The Monk from Brooklyn, the book which gave Antonio his name, and all of his other books, the book available at His book, Warrior Odyssey, chronicling Antonio Graceffo’s first six years in Asia, including stories about Khmer and Vietnamese martial arts as well as the war in Burma and the Shan State Army, is available at
See Antonio’s Destinations video series and find out about his column on
Brooklyn Monk fan page
Brooklyn Monk on YOUTUBE
Brooklyn Monk in Asia Podcast (anti-travel humor)

State-owned Enterprises, Still a Major Force in the Chinese Economy and Abroad

In Uncategorized on October 13, 2015 at 12:38 pm

By Antonio Graceffo
Shanghai Jiaotong University, China MBA
PhD Candidate, Shanghai University of Sport

Table of Contents
1. State-owned Enterprises (SOEs)
2. Privately Owned Enterprises
3. Mixed Ownership Firms
4. SOE Performance
5. From Planned to Chinese style market economy
6. State-owned Assets Supervision and Administration Commission of the State Council (SASAC)
7. Singaporean Temasek model
8. Employment in Modern SOEs
9. Employment in POEs
10. Employee Turnover in China
11. China and the WTO
12. Foreign Direct Investment (FDI)
13. Mergers and Acquisitions (M&A)
14. Changes in Corporate governance
15. The Banking Sector
16. Corruption in SOEs
17. Stock Market Listing
18. Domestic Listing
19. Hong Kong Listing
20. Overseas listing
21. Government Control of Stock Markets
22. Outbound Investment by SOEs
23. Conclusion
24. Bibliography
25. Abut the Author


One of the world’s biggest hotel groups, with both five-star and budget hotels, JIN JIANG is a state-owned enterprise (SOE) of the People’s Republic of China (PRC) controlled by the Shanghai government. When one hears SOE one pictures large, gray, concrete buildings with thick black smoke pouring out of them. But, most of China’s SOEs are not oil or steel companies. They are companies, such as Jin Jiang, operating in many different sectors of the economy. They include restaurants, construction firms, and shopping malls. (The Economist)

Prior to 1978 “capitalists were considered class enemies, and the economy was virtually closed to foreign trade and investment” (U.S.-China Economic and Security Review Commission) At that time, SOEs accounted for nearly 100% of non-agricultural employment. (Wu) Through the 1980’s and 1990’s until today, the private sector has grown in leaps and bounds. Consequently, as private sector employment has grown, SOE employment has decreased. In 1998 SOEs accounted for 60% of industrial employment. But by 2010 that percentage had dropped to 20%. (Zhang and Freestone) While that number is smaller than it was in 1978, 20% is still a significant percentage of China’s total workforce.

China’s amazing economic growth over the last 30 years could lead one to believe that the country has embraced capitalism and abandoned Communism. But actually, the Chinese government refers to their system as “socialism with Chinese characteristics” (U.S.-China Economic and Security Review Commission) Consequently, although China is moving toward a more market driven economy, the state-owned enterprises (SOE) still accounted for 40% of the GDP, as recently as 2011. (U.S.-China Economic and Security Review Commission) A significant component of China’s SOE reforms of the last several decades has been “grasping the big, and letting go of the small.”(Cao) This policy has lead to smaller SOEs being privatized, or sold off, as larger SOEs are encouraged, through acquisitions, to increase their size and importance, becoming global players. In fact, Chinese SOEs appear on both the Forbes Global 2000 (Dobson) and Fortune Global 500 (Cendrowski)

While China appears to be moving toward a market economy and repeatedly releases edicts and guidelines calling for SOE reform (Peng, Shi and Xu) and the reduction of government intervention in business, this hybrid, semi-liberalized, economic system still calls for the state to be heavily involved in business control and ownership. (U.S.-China Economic and Security Review Commission) The natural expectation would be that as China moves to a more market driven economy that SOEs would become dinosaurs, slowly falling into extinction. On the contrary, SOEs are still here and the Communist Party of China (CPP) still considers them to be very important. (U.S.-China Economic and Security Review Commission) “SOEs still dominate China’s economy. According to Credit Suisse, the total assets of non-financial SOEs represented 60% of Chinese GDP as the end of 2013.” (

As important as the SOEs are to the Chinese economy, they have been identified by
both foreign observes and Chinese economists as being a drag on the economy and an
impediment to its development.

The SOEs have been criticized for their inefficiencies, over employment, and
mismanagement. They are accused of misusing resources, creating unfair competition, having easy access to government capital loans and loans from state banks that they fail to repay. “Indeed, 85 percent of loans in 2009 were issued to SOEs, because banks themselves are state-owned, and are directed to let credit flow to other state-owned businesses.” (Cary) This free flow of lending to SOEs makes it difficult for the privately owned companies (POE) to obtain financing, which many economists feel is impeding the development of the private sector of the Chinese economy. Michael Pettis, a professor of finance at Peking University in Beijing, said “the key to resolving the imbalances in the Chinese economy was ensuring a better allocation of capital.” This can be achieved by lending more to POEs rather than SOEs. (Bland)

SOE managers have been accused of corruption and asset stripping as party officials treated the SOEs as their personal piggy banks and fiefdoms. They also enjoy a monopoly in certain industries such as energy, power, steel, telecommunications and shipbuilding, giving them unfair advantage over private firms who may want to enter these sectors. SOEs are not limited to large, critical industries. They also include some restaurants, retailers, construction, metals, and real estate companies. The managers have been cited for holding lavish banquets and using state money to purchase other luxuries. The Central Commission for Discipline Inspection criticized SOEs for exploiting state-owned assets and using them as “a huge coffer for bribery,”’ (Gan and Huang) A 2013 Xinhua news agency reported that in the results of a National Audit Office audit of ten SOEs, the following violations were found: inaccurate accounting, incomplete financial statements, illegal practices and “poor management of investment decisions.” (

As a result of incidences of corruption and inefficiencies resulting in low return on assets (Wang), the PRC government has made SOE reform a main priority. (Peng, Shi and Xu)

This paper will give a brief overview of the SOEs and government owned banks, and their history. Problems in SOEs will be examined, such as mismanagement, government controls, unpaid loans, and corruption. A brief overview of China’s privately owned companies (POE) will also be given. The paper will go on to explain the various reform programs taken by the Chinese government to make the SOEs more competitive in the global markets. Stock exchange listing of SOEs, both inside and outside of China will be addressed. And finally, outbound investment by Chinese firms will be covered. In the conclusion, it will be noted that China’s SOEs are still a significant force, driving China’s internal economy, and a powerful tool which China can use to enter into foreign markets around the world.

1. State-owned Enterprises (SOEs)

In 2014, there were 150,000 SOEs which accounted for 17 percent of urban employment. (Curran) Prior to the economic reforms of 1978, the SOEs directly employed a higher percentage of the population and directly impacted the lives of more Chinese citizens. “Each SOE acted as a mini-society in providing life-time employment — the so-called ‘iron rice bowl’ — and some basic social services (clinics, schools, age pension equivalent) for its employees and their families. As a result, pre-reform SOEs were highly inefficient.” (Zhang and Freestone)

During the days of the planned economy, 1950 to 1984, there was no legal form of ownership, apart from state ownership. And the state could hire and fire SOE executives at any time. (Aivazian, Ge and Qiu) In the Communist model, the assets of the SOE belong to the people. Local governments are the stewards of those assets, seeing after the interest of the people. And managers are entrusted with the day-to-day operation of those assets, tasked with the ongoing duty to generate a return on assets. In this model, the mangers have no discretion regarding asset transfer. As a result, local governments tend to be highly involved in the operation of SOEs and give very little authority to managers. (Cooke)

The 1993 Corporation Law: divided SOEs into two categories: that of closely held corporations, including wholly state-owned corporations and foreign-invested corporations, and publicly held corporations, including listed and non-listed corporations. There are four organizational forms in the second category: limited liability companies, limited liability stock companies, employee shareholding cooperatives, and private enterprises. (Aivazian, Ge and Qiu)

Estimating the actual size of SOEs and their impact on the Chinese economy is difficult. When the government releases data on what percent of the GDP is attributed to SOEs, they often only count companies which are 100% owned by the state or where a majority of shares are owned by the state. But tracing the ownership of shares to ultimate ownership would give a very different picture. For example shares of private sector firms may be owned by SOEs, or may be investments by mixed ownership entities. (U.S.-China Economic and Security Review Commission)

“In 2004 China amended the constitution to grant the non-public economy a legal status in the socialist market economy.” (Chen) As the private sector developed, the SOE sector also became more market oriented and began to function as for-profit businesses. SOE productivity improved with the introduction of the incentive contract system of the mid 1980s. The new system gave the SOE more autonomy in decision making and allowed them to keep some of the profits. Bonuses were also paid to worker whose income increased under this system. (Aivazian, Ge and Qiu)

One of the ways of dealing with SOE reform was for the PRC government to corporatize some of the SOEs. Corporatization was a way for the Chinese government to retain ownership and control of the SOE, but with the benefit of having a CEO, CFO and other executives running the SOE more efficiently. Having these managers in place resulted in a more efficient flow of information, which combined with an incentive system, resulted in higher profitability. (Aivazian, Ge and Qiu) From the 1980s until today, the system of managing the SOEs has become more and more streamlined, to increase efficiency. Changes have been made to reduce the bureaucracy in state-owned enterprises, to make them more nimble and competitive. (Zhang and Freestone)

In 1983, the Chinese government implemented the Contract Management Responsibility System (CMRS) followed by the 1993 implementation of the Modern Enterprise System (MES) both of which granted more autonomy to SOE managers, without the state giving up ownership. (Forrester and Porter, 1999; Scot, 2002 cited in Bai and Bennington). These two programs have decreased state intervention at the micro level. (Child, 1994; Harvie, 1999; Warner, 2001; Warner and Zhu, 2000 cited in Bai and Bennington)

Today, SOE managers enjoy a great deal of autonomy compared to their predecessors of only two decades before. “Enterprise managers have been given autonomy over pricing, investments, accounting, human resources, material supply and acquisition, and other decisions related to the enterprise operations, which were absent under the former planned economy (e.g. Child, 1987, 1999; Lin et al., 1996, 2001; Naughton, 1995 cited in Ralston et al.)

In the past SOEs reported directly to the central government. Today, they are controlled by the provincial and local government. (Zhang and Freestone) But, in spite of the party appearing to take a step back from managing the day-to-day operations of the SOEs, many SOEs have adopted the “‘one-man responsibility system’, under which the Party secretaries have become part of the management.” (Bai and Bennington)

These reformed, corporate SOEs remain a significant force in the economy. In 2013 there were 155,000 SOEs valued at approximately $17.4 trillion. (Zhu) The SOEs employ tens of millions of people. (Bland)

The SOEs dominate many sectors of the economy, including: automobiles, information technology, petrochemicals, aviation, insurance, energy, banking, railways, media, shipping, construction, metals, telecommunications, industrial chemicals, alternative and new energy technologies, new generation IT, biotechnology, new generation automobile technology, high-end equipment manufacturing, new energy sectors, and new and advanced material sectors. (LEE)

The new-style corporate SOEs have grown, through mergers and foreign direct investment (FDI) into some of the largest companies in China and around the world. The Industrial and Commercial Bank of China (ICBC) a banking SOE, for example, is the world’s largest bank, in terms of assets. (Bland)

One-hundred and Twenty-eight of the companies on this year’s Fortune Global 500 are US based companies, making the US the world leader among global companies. Coming in second, however, was China, with 98. The top 12 Chinese companies on the list are SOEs, including banks and oil companies. In fact, SOEs comprise 22 of the 98 companies. (Cendrowski)

According to CCTV commentator Feng Yu, SOEs were prominent among the Top 500 Chinese Enterprises for 2015. (Jingya) The largest SOEs are in the petroleum and energy sectors with SinoPec at the top, followed by China National Petroleum Corporation. State Grid, China’s largest electric utilities company, ranks third. (Jingya) China Mobile, another SOE, is the world’s biggest phone company. (Wang)

For all of their impressive growth and immense size, the SOEs are still fraught with profitability issues. Testament to the problems inherent in SOE performance, “Of the 54 companies with the biggest losses last year, 16 were Chinese, the most of any country.” (Cendrowski)

2. Privately Owned Enterprises (POE)

In 1996, just below half of China’s 689 million workers were employed in agriculture. At that time, the state sector was the next largest employer. SOEs tend to be important employers in inland and Northern provinces but less so in richer, coastal regions such as Jiangsu, Zhejiang, Fujian, Shandong, Guangdong and Guanxi. (Wu) At that time, there were almost no POEs for people to work in.

Private property only came under the law in 1999, when personal belongings were protected from nationalization. Private business people were denied Communist Party membership until 2002. Private assets and capital finally became legal in 2004. (IFC 2000: 10-19; Wang, 2004 cited in Ralston et al.) At one time, SOE was the only form of business, and virtually all businesses were owned by the government. Since the advent of private property, other forms of business ownership have also grown in importance. Company “ownership forms in China, include domestic privately-owned enterprises (POEs), foreign-controlled businesses (FCBs), and state-owned enterprises (SOEs).” (Ralston et al.) The management culture of the Chinese privately owned enterprises (POE) vs. foreign controlled businesses (FCB) are vastly different.

POEs have been increasing in both number and percentage of total GDP since economic reforms which enabled private citizens to engage in for profit activities. (Ralston et al.) Today, China’s private sector demonstrates high growth and productivity. (Ralston et al.) As private enterprises entered the market they faced a number of disadvantages as SOEs were given tax breaks, better access to information and natural resources, easier access to bank loans and were supported by local governments. (Ralston et al.) SOEs have dominated the fields of automotive, pharmaceutical, electronics and petrochemical. (Ralston et al.) Entry into SOE dominated fields is difficult for POEs. Private sector firms are faced with “glass doors” or “glass ceilings.” In theory, they are allowed to invest in most sectors but SOEs dominate many sectors, “including mining, financing, banking, rail, aviation, telecommunication, media and education.” A state monopoly in these areas creates barriers of entry for private firms. (Song, Yang and Zhang)

Some of China’s POEs are small, family run businesses which developed out of a traditional Chinese clan culture, where the majority of the employees are related. Other POEs actually started as collectives, whether township or village enterprises (TVE), whereby the people operating the business were eventually allowed to take it over and run it as a POE, sometimes on a lease basis. (Ralston et al.)

POEs generally perform better than SOEs which is a considerable achievement considering all of the advantages that SOEs enjoy, such as easy credit and low cost raw materials. One reason why the POEs outperform SOEs is because of superior managerial oversigh. Not only are the POE managers real entrepreneurs, but because POEs obtain financing from banks, the banks fulfill an oversight function in the POEs, monitoring their management decisions. (Gong, Görg and Maioli)

3. Mixed Ownership Firms

In the early days of Foreign-controlled business (FCB) the government offered a number of incentives to convince foreign companies to invest in China. FCBs are generally large multinational corporations (MNC) which tend to operate according to the norms of western corporate culture. (Ralston et al.) Many of the FCBs function as joint-ventures whereby the foreign partner provides technology, experience and access to foreign markets, and the local partner contributes land and government and local connections. The FCBs tend to use more international accounting and western management styles. (Ralston et al.)

Tian and Estrin found that in mixed ownership companies, with a small percentage of state ownership, the state ownership has very little impact on the firm’s performance. In firms where the state owns a large percentage of the shares, however, the influence of the state ownership on performance is slightly positive. A firm with large state and private ownership has to provide incentives to motivate agents from both sides, which, seem to produce positive results. (Tian and Estrin)

4. SOE Performance

Evaluating the financial performance of SOEs is problematic because “the prices of inputs and outputs of SOEs are often set by the state and distorted, on the other hand, in addition to financial goals, SOEs also bear nonfinancial goals such as serving as social security providers for their employees.” (Kong, Marks and Wan) The general theory on SOEs says that they will underperform because their decision making is not solely based on profit maximization, but also to meet certain political goals. (Tian and Estrin) From 1980 to 1995, the percentage of loss making SOEs roe from 19.2% to 33.5% . (Dong and Putterman) Even loss making SOEs don’t necessarily have to close their doors.

The SOEs, even if mismanaged, generally do not face the threat of bankruptcy, because of easy access to state credit. Government subsidies can help them remain in business. (Bajona and Chu) The experience of China’s SOEs largely confirms this theory. (Tian and Estrin) However, SOEs are not without their advantages. World class investor Warren Buffet, for example, likes certain Chinese SOEs. His investment company, Berkshire Hathaway made an investment of $500 million in PetroChina Co., in 2003, and sold it for more than $3 billion four years later. (Das) So, there are benefits to the SOEs and they can be very profitable. These advantages come from preferential treatment these companies receive in the home country. (Tian and Estrin)

Not all SOEs are profitable. In fact, SOEs often contain fundamentals flaws which will prevent them from being profitable. By maintaining surplus employees, or making decisions which are contrary to market demands, the SOEs rack up losses. (Bajona and Chu) SOE return on assets (ROA) have consistently fallen short of POE returns. “The average return on assets for state entities stands at a paltry 4.6%, compared with 9.1% for private companies”. (Wang) Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics estimates that the return on assets of SOEs is between a third and half that of POEs. (Curran)

Part of the reason why the SOEs have such low returns might be because of a conflict between their business role and their political role. SOE managers are faced with two sets of obligations, turning a profit and following government mandates. It seems, however, that when these two goals conflict, the SOE managers are meant to chose in favor of the government mandate. (U.S.-China Economic and Security Review Commission) The government has repeatedly said that it would not meddle in the affairs of the SOEs, and that the managers should run them as a business. “According to the Chinese government, they are not there to influence the decisions because all SOEs are supposed to be profit-driven now, like all other businesses.” ( The reality, however, seems to differ from the stated. “But there have been examples that whenever the state interest is not in complete overlap with the business interest, the state interest trumps the business decisions.” (

One of the many political roles that SOEs play in the economy is as a vehicle for the transmittal of government stimuli, in the form of loans from state banks, to the greater economy. (Investment Adventures in Emerging Markets) This role may cause a conflict between earning a profit and following the party line.

5. From Planned to Chinese style market economy

“ In 1978, capitalists in China were official “class enemies” but in 2001 they were welcomed into the Chinese Communist Party (CCP)” (Szamosszegi and Kyle)

In 1949, following the establishment of the People’s Republic of China, the Chinese government followed a Soviet style Communist economic system. By 1954, nearly all companies had been nationalized. (Fu) From 1954 through 1979, the beginning of the SOE reforms, nearly 100% of the industrial sector was dominated by large SOEs and collectives, with almost no POEs in operation. The administration of these firms was carried out by successive levels of government, rather than some sort of managerial hierarchy. The economy was a true command economy with the government providing financing, and controlling the prices of both inputs and outputs. Salaries were generally low, with managers earning only slightly more than workers. Employees had jobs for life with numerous health and welfare benefits such as free housing and education for their children. (Tian and Estrin) SOE output was sold to the government at prices set by the government. Nearly all SOE profits were turned over to the government. (Aivazian, Ge and Qiu)

The 1979 SOE reform began with the fang quan rang li policy, whereby SOEs were given greater autonomy and a share of the profits. In 1981, the “Economic Responsibility Policy” was introduced, whereby the firm could, after paying a share to the government, decide how to allocate the residual profits. These incentives had to be put in place to make SOE managers think in terms of earning profits. The incentive contracts applied to both managers and workers. (Bai and Xu)

From 1983 to 1987, a taxation system replaced the earlier profit sharing program. (Lok and 駱佩傑.) Through 1992 the reforms gave increasing autonomy and incentives to managers. It was at this time that the government began selling off smaller SOEs. (Fu) After the implementation of the 1993, Company Law, SOE reform was realized through corporatization of SOEs along western corporate lines. (Aivazian, Ge and Qiu) The Company Law was designed to force companies to let markets determine such aspects as pricing, and that “finances must be raised through banks and other creditors; firms must pay dividends to their shareholders; pay back interest and principal to their creditors, and tax to the government.” (Tian and Estrin) This replaced the earlier system whereby the government financed the firms directly.
Under this new law, the Board of Directors, composed of the delegates of the largest shareholders, would elect and monitor the directors. However, in practice, a retired government official would usually serve as chairman of the board. (Tian and Estrin) This was not a privatization. Once again, the government maintained both its ownership of and ultimate control of the SOEs.

After the reforms of the 1990s, the economic climate changed dramatically. Property rights were established. Many state assets became privatized and some SOEs became joint stock companies. The new owners of these firms had more decision making authority. They also shared in the profits of the firms, which provided incentives not present during the true communist days. (Tian and Estrin)
Prior to 1993 employee associations and the enterprise branch of the Communist Party monitored the daily activities of managers. Since then, the law has expressly forbidden Communist Party officials from interfering in corporate governance. But since the government controls a large percentage of voting stock, it still exerts a great deal of control over companies by exercising voting rights. (Tian and Estrin)

The period 1993-2003 saw the end of lifetime employment and the “iron rice bowl” system. During this time, the government also enacted a policy of “grasping the big, and letting go of the small”, whereby smaller SOEs were sold off and larger SOEs were reformed.

From 2003 to the present western style capital management systems were put in place and the number of non-performing loans was decreased. (Cao)

Before 2003 it was hard for POEs to enter the market. Entry costs were high and POEs had less access to bank financing. SOEs, on the other hand, could obtain essentially non-performing loans from the state or from state controlled banks. (Cao) In 1997, ninety per cent of bank loans were granted to SOEs, although two thirds of these firms were losing money. (Wu) The SOEs were also heavily subsidized. (Cao) These factors combined to make the playing field extremely uneven, with a decided advantage going to the SOEs. After 2003, however, things changed dramatically. Entry costs dropped. Favorable loans to SOEs still existed, but the government subsidies had decreased dramatically. (Cao) Today, SOEs are still a large and important factor in the Chinese economy. The remaining SOEs are generally very large. (Cao)

In November 2013, the Chinese Communist Party’s Third Plenum announced the “mixed ownership economy,” concept, whereby SOEs would be partially privatized but the government could retain ownership control. The hope was that exposing SOE managers to market pressures would increase their efficiency. Other programs include the professionalization and marketization of SOE managers. (Lin, Li-Wen)

SOE reform is one of the most significant changes to occur in the Chinese economy.
(Peng, Shi and Xu) The recent economic slowdown has brought scrutiny to the unbalanced allocation of resources between SOEs and POEs. (Fidelity World Wide Investments) As a result, the government has been focusing on SOE reform. “Evidence has shown that China’s SOEs could cut staff by a third with no impact on output.” (Economist 1997) The obvious answer would be to fire these redundant workers and try to steer the SOE on a path of greater profitability. But fears of increasing unemployment may be one of the factors which is hampering the government’s ability to reform the SOEs. (Wu)

In SOE reform the Chinese government has been careful to avoid the mistakes made by Russia, namely, trying to change too much, too quickly. (Steinbock) In the 1990s almost overnight, the former Soviet Union (USSR) changed from a centrally planned economy to a market economy. (Aven) “Russia’s economy descended into a death spiral” causing the national currency, the ruble to crash. (Stoner and McFaul) This swift conversion was accompanied by crime and corruption on such a scale that journalists dubbed the country “a collapsed and criminal state.” (Aven) Instead, of instantaneous change, China has implemented a series of policies of incremental change. “Much of Chinese success in the reform of state-owned enterprises can be attributed to pragmatic gradualism.” (Steinbock)

Since the economic reform there has been a decentralization of power from the central government to the local government, regarding matters of the economy. Now, local governments are under more pressure to see after their local economies, but at the same time, they are now able to share in the benefits and rewards of their local economies, which serves as an incentive for them to improve economic performance.
(Jin, Qian and Weingast) This increased local control and responsibility for the economy is in keeping with the shift of SOE management and responsibility to the local or collective or village level enterprises. In the past, the central government appointed local government officials based on loyalty. Today, many of these appointments are based on the individual’s ability to successfully manage the local economy. Implementing these types of incentives, which were absent before the economic reforms have had positive results. “Across provinces and over time, stronger fiscal incentives imply better economic performance and faster structural change. Stronger fiscal incentives positively affect the development of the non-state enterprises” (Jin, Qian and Weingast)

The positive performance of POEs even influences the SOEs, leading to better performance. “Stronger fiscal incentives also induce more reforms in state-owned enterprises in terms of the increased shares of contract workers in the total state employment and bonuses in total employee wages.” (Jin, Qian and Weingast)

A recurring theme in both the reform of the SOEs and the economy as a whole is the conflicting concepts of POEs and SOEs existing in the same economy and of the SOEs pursuing profit but still fulfilling some political function. “In the transition from central planning to a market economy, however, SOE operations are complicated because liberalization forces and state influences coexist and jointly constrain.” (O’Connor, Deng and Luo) In spite of reforms, however, the SOEs still engage in counter-profit producing activities in order to fulfill other needs of the government. SOEs serve as the carriers of government sponsored economic stimuli in the case of financial crisis such as the global financial crisis of 2008. (Peng, Shi and Xu)

6. State-owned Assets Supervision and Administration Commission of the State Council (SASAC)

Another step taken by the PRC government to reduce the conflicting interests of politics and profit and to remove the government from the daily operation of companies was the creation of the State-owned Assets Supervision and Administration Commission of the State Council (SASAC). In 2003 SASAC was established to oversee state-owned assets of the enterprises, “enhance the management of the state-owned assets, increasing the value of state –owned assets, promote the government’s financial reform measures and the modern enterprise system, improves corporate governance, appoints and removes corporate officers, and evaluates the performance of the companies under its supervision.” ( The SASACs are holding companies which hold the shares of SOEs on behalf of the state and are responsible for SOE reform. In fulfilling its various roles of improved asset management, the SASAC is meant to transition loss-producing SOEs into productive POEs or corporate style SOEs.

Multiple SASACs exist across various levels of government, overseeing SOEs from central down to provincial and local level. “There are approximately 300 SASACs in China. In addition to the central government SASAC, there are about 30 provincial SASACs overseeing provincially controlled SOEs, and scores of municipal SASACs supervising local SOEs.” (U.S.-China Economic and Security Review Commission)

Before the establishment of SASAC industries were managed by various government ministries. The financial sector was handled separately from other industries. The Ministry of Finance set up the Central Huijin Investment Limited to manage the state’s shares in financial institutions including China’s four largest banks. “Huijin became a wholly state-owned subsidiary of China Investment Corporation, the Chinese sovereign investment fund directly controlled by the State Council, in 2007.” (Fu) SASC functions as an owner, including executing voting rights, the selection of management, and rights to shares of profit distributions. “SASAC is also responsible for the oversight of state assets in these large entities, and has the authority to appoint, remove and evaluate directors, executives and supervisors of most of the Central SOEs,” (Fu)

The SASAC was established with two primary aims in mind. First, to reform and unify the management system of state assets, and second, to clearly demarcate the jurisdictions of central and local governments to ensure that they didn’t overlap or conflict. (Mattlin) The new Company Law says that SASAC wields ultimate power over the SOEs. (Mattlin)

The SASAC has failed to resolve the conflict between profit and politics. SASAC functions as both a regulator and an owner, which can cause obvious conflicts of interest, often ending in failure. As part of a crack down on asset stripping and corruption SASAC put restrictions on ownership transfers, which seemed like a good strategy. On the other hand, the SASAC has been known to randomly reshuffle management, with chaotic results in SOEs. “while central government has a point in saying that SOE profits are not always reinvested in sound ways, there are no guarantees that a semi-governmental body with ambiguous goals and affected by political considerations will do a better job.” (Mattlin)

Under the administration of SASAC some SOEs have thrived, even becoming Fortune 500 companies. But the conflicting roles of the SASAC, both as regulator and owner, have been seen as an impediment to the further development of the SOEs. As a result, the 2014 government work report on SOE reform called for less government interference in the day-today operation of SOEs. The report stated the government’s goal of granting authority to SOE “board of directors to hire, evaluate and compensate senior managers.” (Fidelity World Wide Investments) To create fairer competitive environment for SOEs and POEs, the government said they would allow the markets to determine the allocation of resources, also, that SOEs would step away from certain sectors to give POEs a chance. (Fidelity World Wide Investments)

7. Singaporean Temasek model

While the PRC government has repeatedly announced that it would reform the SOEs, their plan does not involve simply privatizing all of the SOEs. Instead, several other options lie on the table, including the Singapore Temasek model. (The Economist)

The Chinese government determined to privatize the SOEs, following the Singaporean Temasek model. (Fu) Temasek Holding is a state-owned investment company in Singapore which creates alternative investment opportunities besides sitting on low-yielding U.S. Treasury bonds. (WSJ, 2007) By effectively managing capital, the state could focus on its investments and making sound, profit producing investment decisions, rather than getting bogged down in the day-to-day decision-making of SOEs. In keeping with the Temask model, “several state capital operating companies shall be established, and qualified SOEs shall be transformed into state capital investment companies.” (guoyou ziben yunying gongsi cited in Fu) This model calls for a three-tiered approach whereby SASAC would serve “as the regulator of state-owned assets, mid-tier state capital operating companies and state capital investment companies…fully-owned by SASAC, and the bottom tier Central SOEs and/or their subsidiaries.” (Fu)

The plan for implementation of the Singapore model is for both the government and the SASAC to step out of the daily decision making in the firms. Two Temasek-style firms will help setup to fund the SOEs and pressure them to increase profitability. SOEs will “cut perks for top executives, and give private capital more room to invest in SOE projects and offshoots.” (Huang) Under this new system the SOEs will have to increase profitability in order to attract investors. (Huang) Smaller SOEs will merge into larger companies which can compete globally. Some of these mergers have resulted in new companies which have become the largest in the world, in their sector. “For example China Shipping is merging with COSCO to create one of the world’s largest shipping companies.” (Orr)

In spite of reforms, problems linger. The largest company on the Shanghai Composite index is PetroChina. Even this huge SOE has been the recipient of government subsidies in the form of stock purchases. In September of 2015, when PetroChina’s shares experienced a drop, the government funded the purchase of the shares to buoy the share price. (Curran)

8. Employment in Modern SOEs

In the pre-reform days SOEs accounted for nearly 100% of non-agricultural employment. Pay was extremely low, but companies provided employees with health and welfare benefits. These jobs were extremely secure, generally with lifetime employment and benefits, and were often referred to as “The iron rice bowl.” (He et al.) Social welfare expenses, such as pensions were born by large SOEs. (O’Connora, Chow and Wu) These benefit and pension programs, combined with over-employment decreased the profitability of SOEs.

After the liberalization of the economy and the entrance of private firms, employment was no longer a given. As a result, employment contracts first came into being in 1986. (O’Connora, Chow and Wu) SOEs began following the Modern Enterprise System (MES), in 1993, whereby SOE employment was no longer guaranteed for life. “A large number of once protected white-collar staff have been reallocated to lesser positions, and the size of bureaucracies reduced.” (Bai and Bennington) SOEs then introduced financial incentives such bonuses. The change from lifetime state-employment to contract SOE or POE employment was a slow, but steady progression. By 1990, only 10% of workers were on contract. (O’Connora, Chow and Wu) By 2009, the percentage of workers in the Pearl River Delta region covered by contract had reached 62%. (Freeman and Li) By 2005, 70% of all employment contracts, across the entire country including SOEs and POEs, were fixed term. Even in SOEs, the percentage of lifetime or open-ended contracts had dropped to 20%. (Li)

The fixed term contracts have been the cause of the majority of China’s employment disputes. They are also the cause of friction and dynamism in the China job market. Because employees do not enjoy a feeling of employment security, they are more likely to change jobs, frequently, as they perceive better opportunities arising elsewhere. (Li)

To be able to attract the best managers and employees, the SOEs will need to be able to pay market appropriate wages, something they were unable to do in the past. “However this has been tried in the past and has not been sustained. When SOE executives are seen to be making a lot of money, paid for by state assets, political reaction has been very negative.” (Orr) A further problem of these increased payments to SOE managers is that offering more money to successful SOE managers doesn’t necessarily guarantee they will remain with the SOE. SOEs offer financial incentives and may still offer lifetime employment to certain key employees who are essential to the firm’s performance, due to training and experience. However, they may not remain, because these highly valuable employees are also the ones most coveted by the POEs. And so, if the POEs can offer them enough financial incentives, they will leave the SOE and move to a POE. (Li)

In spite of corporatization of SOEs, the Communist Part still remains influential in the modern SOE. In SOEs the state closely controls labor relations through the Communist Party, which oversees a system of policies, regulations, and ‘‘Party controls personnel’’. The Party can “intervene in enterprise decision making, including the appointing, firing, and promotion of divisional managers (Hassard et al., 1999 cited in O’Connor, Deng and Luo)

Party representatives with direct control over hiring and firing may make those decisions based on politics, rather than profit maximization. This reduces the benefits of delegating authority to competent managers. (O’Connor, Deng and Luo) “A survey shows that 92 per cent of the directors were members of the CCP which suggested a correlation between directors’ appointment and the power of the CCP over staff appointments.” (Hong Tan and Wang) Therefore it is questionable whether or not the directors can be called independent. (Hong Tan and Wang)

Over the years, SOEs have slowly changed their internal culture, approaching international norms, in order to be more competitive, globally. (Ralston et al.) As has been seen previously in this research, some of these changes include reducing staff, giving incentives and bonuses, increasing responsibility, and increasing pressure to turn a profit. All of these factors combine to make China’s job market extremely dynamic, with employees frequently leaving one company and joining another.

With the exception of some managers, SOEs tend to hire new graduates, rather than employees with experience at either foreign owned or POE companies. New SOE employees learn procedures and build relationships with coworkers and management, although job responsibilities “are not always clearly defined”. In 2010, the average employee turnover in SOEs was only 10%, while turnover at POEs was 18.5%. So, it can be seen that employee turnover in SOEs is much lower than in POEs. (Wang, P)

9. Employment in POEs

POE management structures are based on family or clan structures typical of the Chinese culture. But, given the smaller size of the average POE and the more competitive environment in which they must operate, they are more innovative, entrepreneurial, and reactive than SOEs. (Ralston et al.)

Even with the changes and modernization in SOEs many of the old cultural aspects carry over. Company dynamics in China are such that Chinese leaders and employees are thought to be especially concerned about relationships and tend to preserve interpersonal harmony in organizations. Supervisors are to take care of their employees in the same manner that the family patriarch is to care for his family members, while employees should be devoted and loyal to the supervisor. (YI) SOEs represent the traditional, Chinese collective culture, whereby interpersonal relationships and harmony are considered important concerns. (YI)

The POEs operate differently, largely because of the influence of multinational corporation (MNC). For the first two and a half decades of foreign direct investment (FDI) in China, the preferred means for MNCs to enter the Chinese market was to engage in joint ventures (JV) with local companies. (Dickinson) In general, FDI and JV can bring Western management methods and experience and help promote industry growth. But in a transitional economy, where the state still has tremendous direct influence and control over industry, the transition from command economy to market economy can be hampered. (O’Connor, Deng and Luo)

SOEs and POEs differ in a number of ways. In a POE, decisions such as the number of employees to maintain are determined by the market. But in SOEs this number is mandated by the government. In return for creating and maintaining employment, SOEs receive subsidies from the government, including both “direct subsidies, such as cash payments used to cover production losses, and capital subsidies, or low-interest loans from state banks.” (Bajona and Chu)

The presence of SOEs, POEs, and MNCs all in the same system, have made China’s job market extremely dynamic. POEs generally pay better than SOEs. But even MNCs in China have found it difficult to retain qualified employees because they are in such demand. (Machwurth)

10. Employee Turnover in China

In the modern Chinese economy, employee turnover is very high. According to a poll by an international recruitment agency, “35% of staff workers in China have changed jobs in the past two to four years…and 10.4% in the past one year.” ( Another study found that the turnover rate for skilled workers is 20-25% (Deloitte Financial Advisory)

Employee turnover will generally be higher in industries dominated by FDI and JV firms. These will also be the industries where performance-based incentives are used to attract and retain the best and brightest candidates. (O’Connor, Deng and Luo)
Through 2010 foreign companies were the companies of choice for top Chinese graduates. Since 2010, the employment climate has changed, with most grads preferring to work for domestic companies. But, many of these local Chinese companies are offering the bonuses and incentives once exclusive to foreign companies. “According to some reports, domestic firms looking to raid Western companies of experienced technical talent and executives are offering dramatic pay increases—often as much as 50%. “ (Schmidt) The SOEs are not offering such incentives.

MNCs are less likely to be influenced by trade unions, resulting in more frequent labor disputes. (Cooke) Employment pressure and job security are lower in MNCs and JVs, compared to SOEs, especially for older workers, who were used to having a lifetime contract, complete with retirement provisions. The highly competitive business climate in which the MNCs work also causes job uncertainty. For example, in 1997 Kodak and Fuji China became embroiled in a price war which resulted in 20,000 employees being made redundant. (Zhan, 2003 cited in Cooke)

The goal of the Chinese government economic reforms has been to become more market oriented, by adopting some, but not all of the Western management systems exhibited in foreign controlled businesses (FCB). (Ralston et al.) However, the reforms of “the Chinese government are evolutionary, not revolutionary.” The government seeks to streamline, to pare down the old dinosaurs, but not to completely eradicate the hierarchical culture. By thinning out the old companies, the new style SOEs can be more flexible in the modern transitional economy. (Ralston et al.)Thus, the hierarchical structure in the modern SOEs reflects both the Western and the Chinese styles.

11. China and the WTO

In 2001, when China was admitted to the WTO, the US and EU argued that because of the dominance the SOEs still had in the Chinese economy, China should be considered a non-market economy (NME). (Chen and Whalley) A market economy is one that depends “heavily upon market forces to determine levels of production, consumption, investment and savings without government intervention.” ( According to the Legal Information Institute of Cornell University Law School, a country can be considered a market economy if: the currency is convertible, Wages are determined by bargaining between labor and management, if it allows joint venture and foreign investment, and exhibits reduced government control over raw materials, allocation of resources, and prices. (Chen and Whalley) Some countries felt that China did not match this definition.

It is actually hard to determine exactly how much of China’s economy is controlled by the government or the percentage of China’s GDP that is attributable to government controlled companies. SOEs can own shares in POEs and joint ventures (JV). The government can own controlling interest in a company by buying its shares on the stock market. Also, that company can in tern purchase controlling interest in a company where the government owns no shares. The US and other observers feel that the influence the SOEs have over the Chinese economy violates the definition of market economy. But other countries have agreed with China. “Approximately 150 countries have granted China market economy status, while most OECD countries (EU member states, Japan, United States and India) still label China as a NME.” (Chen and Whalley)

In the end, China was willing to compromise. China agreed “China’s accession terms explicitly allow other WTO members to treat China as a NME under their domestic laws until 2016.” (Chen and Whalley)

In becoming a WTO member, China had to sign agreements to adhere to regulations related to “trade policy, such as tariff reduction, elimination of quotas, and improved accessibility to domestic markets by foreign competitors.” (Bajona and Chu) These agreements opened China further for FDI.

12. Foreign Direct Investment (FDI)

Early restrictions within China’s command economy structure prohibited foreign direct investment (FDI). Following the economic reforms of the 1970s, FDI was allowed, but strictly controlled. At that time, FDI was required to be in conjunction with a local partner. And, it was restricted to four Special Economic Zones (SEZs). By the mid 1980s the laws were further relaxed as the government began courting FDI with tax incentives. Wholly foreign-owned enterprises were permitted, as were joint ventures and companies which brought new technology to China. (Girma, Gong and Görg)

In the 1980s many of the FDI investors were overseas Chinese, with the investments themselves coming from Hong Kong, Macao, Taiwan, Japan, Korea and Southeast Asia. (Cooke) In the 1990s the FDI, coming largely from the Pacific Rim countries, was small scale and involved low levels of technology. Today, the FDI comes from MNCs involved in large-scale strategic operations. (Cooke)

Large company acquisitions have to be approved by the Ministry of Commerce (MofCom). SASAC chair Li Rongrong named seven strategic sectors in which the Chinese government believes it must retain 100% control of the corresponding SOEs, for the purpose of national security. These companies happen to be some of the largest and most profitable. They include: defense, power generation and distribution, oil and petrochemicals, telecommunications, coal, aviation and shipping. (Mattlin) Foreign companies would be restricted from owning stakes in these companies but may be allowed to own stakes in “downstream” or value-added product production. (Mattlin)

Sometimes, the incentives and benefits given to FDI are exploited by local companies. This results in “round tripping,” (Song, Yang and Zhang) “Round tripping” is when a domestic Chinese company forms an offshore holding company which then buys shares in a domestic Chinese company, in order to benefit from being a foreign direct investment. (Chao and Xu)

FDI has become an important component of the Chinese economy. (Girma, Gong and Görg) In 2014, China became the world’s largest recipient of foreign direct investment. (Mathew) This is in part due to foreign companies wanting to gain access to cheap labor as well as cashing in on China’s exceptional economic growth. FDI is one of the main factors driving this economic growth, which is why attracting FDI has been a main focus of the government’s reform programs, beginning in 1978, with the open-door policy. (Cooke)

While FDI in the 1980s took the form of joint ventures with local companies, today, acquisitions are one of the main strategies for FDI. In becoming a member of the WTO, China had to allow increased access to FDI, which often takes the form of mergers and acquisitions (M&As). M&As require a lot of investigation into the firms which could be considered sensitive in China. (Cooke)

13. Mergers and Acquisitions (M&A)

Recently, there has been a lot of merger activity as the Chinese government pushes smaller SOEs to merge, in order to compete with MNCs. (Deloitte Financial Advisory) Other merger activity comes from MNCs merging with local companies. As China’s ascension to the WTO has created investment opportunities for MNCs many of these mergers occur in sectors which were previously blocked for FDI. (Deloitte Financial Advisory)

In 2003, the State Restructuring Regulations established the procedures for SOE restructuring, the M&A Regulations soon followed. (Cooke) M&A firms in China have existed for approximately twenty years, for the purpose of bailing out ailing SOEs. (Cooke) The original focus of Chinese M&A activity was to allow underperforming SOEs to be acquired by foreign MNCs who in addition to bringing much needed financing and world famous brands, would bring improved management, technology and efficiency to the firms. This type of corporate structure would also allow the government to maintain control over foreign companies operating in China. Allowing these joint ventures also has a capacity building effect whereby local companies can acquire skills and training from the foreign partner. Allowing MNCs into an industry reduces the government’s control of that industry. (Cooke)

M&A negotiations in a Chinese business culture are extremely inefficient and involve a large number of people and multiple meetings. Before a recent merger, Chinese insiders said that the Chinese company held ten internal meetings, each involving a dozen people, before even meeting the would-be foreign partners. Over 170 people/times were involved on the Chinese side, but the MNC only sent two representatives. And the MNC senior manager only attended a few of the more important meetings. The two representatives of the MNC knew exactly what they wanted from the negotiations. They had an agenda, and in the end, they won the necessary concessions. All of the cost of entertaining, hosted dinners, drinking sessions, and gifts were born by the Chinese side. The reason “why so many people were involved from the Chinese side is that nobody wants to take responsibility for the decision in case it goes wrong and yet everybody (especially those from the local government) wants to be involved and have a say in it.” (Cooke)

Mergers and acquisitions are still fairly new in China, often resulting in failures because of poor strategic planning or problems with quality control or intellectual property rights. Alternatives to mergers and acquisitions include: joint venture, organic growth and franchising. (Deloitte Financial Advisory) All of these methods have been used in China and may be better alternatives for some companies. Mergers and acquisitions in China have becoming extremely costly and problematic. For one thing, collecting data about the acquisition target may be extremely difficult as firms lack experience with mergers, data may be falsified, or firms may simply not want to reveal company information. Even determining the value of the company proves problematic as many companies use nonstandard accounting procedures. There may be lack of clarity of ownership and licensing restrictions. If the company is deemed to be in a strategic industry, the data may be sensitive and may not be shared even to other departments of the same company. (Deloitte Financial Advisory) There is a lack of transparency in Chinese firms, particularly when the data could be considered state secrets. (Cooke) Statutes of limitation rules related to tax debts are unclear and it would be possible to inadvertently buy a tremendous tax liability.

Local governments are highly involved with the SOEs and also maintain a balance across industries and regions. M&A activity with a MNC will disturb this balance. In some cases, local governments may under-quote the value of a poor performing SOE just to offload it. As MNCs enter the local market they drive up the cost of employment. MNCs also dilute the local talent pool by attracting the better, more qualified workers, which further decreases the performance of the local SOEs.

14. Changes in Corporate governance

In many of the privatized firms, the government remains the majority shareholder, which defeats the purpose of privatization. The reason the firms were privatized in the first place was that the state recognized that it was not good at company management. Unfortunately, however, even after privatization the state maintains a large enough percentage of stock that it still controls the operations of the company, which negates the advantage of private management and ownership. The Bureau of State Asset Management (BSAM) monitors the listed SOEs but the BSAM officials are government employees paid a standard civil servants’ wage. Their compensation is in no way tied to the performance of the firms they oversee, so there is no incentive for them to ensure that the SOEs maximize profit. (Hong Tan and Wang)

Good corporate governance is still not prevalent in the Chinese stock market. “Many SOEs are debt-ridden enterprises ‘repackaged’ for listing and continue to be
controlled by their parent companies, who having successfully seen to their IPO, look
towards them as cash cows for ready milking.” (Hong Tan and Wang) This statement demonstrates two very serious concerns. The first is the concept of “window dressing” intentionally making the company look financially better than it is, in order to make it more attractive for sale. Next, is the obvious conflict of interest that exists in the partial privatization of SOEs. The goal of a publicly traded SOE is not always profit maximization.

SOE managers are often motivated by goals apart from earning profits. “High ranking officials are often appointed as the top managers of SOEs, while high profile managers of SOEs are often appointed as government officials.” (Song, Yang and Zhang) The goals will often be a mix of economic and political. (Song, Yang and Zhang) The firms don’t fear bankruptcy and the politically minded SOE managers may lack entrepreneurship. (Lok and 駱佩傑.) Separating the SOEs from the government and implementing private sector managers would solve many of these problems. Privatizing some SOEs while corporatizing others, creates two conflicting systems in a single economy. The Chinese government refers to their hybrid system as “socialism with Chinese characteristics.” (Lok and 駱佩傑.)

The Chinese culture, political system and business management system are all in the shape of a pyramid. The pyramid structure of a Chinese SOE creates inefficiencies and inaccuracies in information transfer. Information has to pass through several layers of management before reaching the top. Along the way, it may be in someone’s self interest, either financial or political, to misreport the information or fail to forward the message all together. (Fan, Wong and Zhang) The system of having state asset management companies, rather than local governments, manage SOEs creates one more layer of management which information has to pass through, making the transmittal even less efficient. (Fan, Wong and Zhang)

To improve accounting, disclosure and corporate governance in general, in 1994, the Chinese government passed the PRC Company Law of 1994, which combined with the Securities Law of 1999 were instrumental in the early stages of securities regulation. Since then, The China Securities Regulatory Commission (CSRC) has published Code of Corporate Governance for Listed Companies to evaluate corporate governance. Furthermore, the CSRS and other agencies have created laws and regulations governing “disclosure, mergers and acquisition, accounting, related party transactions, independent directors and securities litigation,” (Hong Tan and Wang)

In this new free-market system the accounting practices and management style of many SOEs became outdated. Western style accounting systems were slowly introduced. And those “SOEs that face higher market competition make greater use of Western management accounting/controls.” (O’Connora, Chow and Wu) But not all companies follow the disclosure laws or corporate governance laws. “In China, there has been a huge gap between law and reality with regard to corporate disclosure.” (Hong Tan and Wang)

Currently, the purpose of financial reporting and disclosure in China seems to be to serve the needs of the tax authorities as opposed to the shareholders. Add to this that the financial data is often falsified to attract investors, and the system of disclosure and transmittal of information becomes very unreliable, even prosecutable. As was the case with Yinguangxia (Hong Tan and Wang)

China’s First Blue-Chip Stock was a firm called Yinguangxia. From 1999 to 2000 Yinguangxia’s share price nearly tripled, making it the highest ranking stock on the Shenzhen Exchange. When news leaked that Yinguangxia had forged their financial data the share price plunged. This caused a trading frenzy across China’s entire stock market, with many individuals and institutions losing large sums of money. This was really China’s first major case of securities law violations. The Chinese security laws clearly state that firms must make clear, accurate, and timely disclosure of financial data. Such a blatant case of fraud shook the confidence of Chinese investors who were new to the whole concept of having a stock exchange in their country. The case called into question the accounting standards of the company and how best to calculate and record corporate value, losses, and gains ( Since the Yinguangxia case, corporate governance ‘has become the primary concern of China’s regulatory agencies. (Hong Tan and Wang)

Another “window dressing” scandal was the firm Baiwen which was found to be faking its financial data. (Hong Tan and Wang) Zhengzhou Baiwen was converted from an underperforming SOE to a shareholding company which was listed in 1996. In 1999, after three years of losses, Baiwen faced bankruptcy. But rather than being allowed to fail, the company was rescued through a deal brokered with the Zhengzhou city government. Details of the case are widely published but the final outcome was that the court supported a buyout of the company by Sanlian and the restructuring of the company in such a fashion that the majority shareholders “had gone scot-free whilst the vast number of A-shareholders (ie minority shareholders) had to suffer loss by transferring their shares to Sanlian for free” (Green and Ho)

15. The Banking Sector

Prior to the 1970s all banks were state-owned and played a very small role in financing companies or driving the economy. The leading bank was the People’s Bank of China (PBC), which held about 80% of all deposits and accounted for 93% of all lending. Since that time, as China made its economic ascension, average wages and average wealth in China increased, as did bank deposits. Banks gained in importance as citizens reportedly deposited from 50-75% of their wealth. (Cull and Xu)

In 1978, the government separated the People’s Bank of China from the Ministry of Finance. Over the next year, other banks were created, including the Agricultural Bank of China (ABC), the Bank of China (BOC), and the People’s Construction Bank of China (PCBC). The People’s Bank became the central bank in 1983. The Industrial and Commercial Bank (ICBC) took over the role of accepting deposits and granting loans to businesses, accounting for half of all of China’s lending, making it the largest bank in the country. (Cull and Xu) Once carved from the same government mold, the big four have evolved into giant commercial banks which compete with each other. (Lin and Zhang) A much smaller but up and coming bank is the Bank of Communications (BoCom) which may become the fifth major player. (Dobson and Kashyap)

Changes in the banking rules allowed for the entry of new types of financial institutions, many of which were joint stock banks whose shareholders were SOEs or local governments. During the 1980s three smaller banks, Everbright, Hua Xia, and Min Sheng opened, as did several regional banks. At this time, other types of credit institutions were established, such as “credit cooperatives, trust and investment companies, finance companies associated with enterprise groups, financial leasing companies, securities companies, and credit rating companies.” (Cull and Xu)

In the 1980s, bank employees earned only slightly more than government employees. By the late 1990s, because of bonuses bank employees received for increasing bank profitability, their income levels rose to about three times those of government employees. This bonus system is thought to have improved the bank’s motivation to decrease the number of non-productive loans, where these types of cuts were politically possible. By the 1990s the government still mandated what percentage of loans banks could give to the various sectors, but bank employees now had some discretion, within a narrow band, to select profitable loans and reject potentially nonperforming ones. (Cull and Xu) Chinese banks began asking the kinds of questions and conducting the kinds of analysis of potential borrowers which were standard in more developed economies, such as asking about the products produced, geographic location, past history of profit and loss and so on. Even with this new discretionary freedom, banks were still sometimes forced by local governments to make nonperforming loans to SOEs. This extra level of bank scrutiny was thought to have had a positive impact on the corporate governance of SOEs. SOEs who borrowed from banks, as opposed to depending on direct government bailouts, tended to be more productive. (Cull and Xu) This increased productivity continued into the 1990s. But, as the weight of bailouts became a more difficult burden for the government to bear, they put pressure on banks to ease their lending restrictions. Under newer, softer restrictions, the positive correlation between bank credit and improved performance evaporated. (Cull and Xu)

Today, the Big Four state-owned banks sit at the top of a three tier system. The second tier contains 12 national-level domestic joint-equity banks, and the bottom tier is made up of 100 city-level commercial banks. Other financial institutions now exist, such as foreign funded banks, local credit cooperatives, trust and investment companies, finance companies, and leasing companies. (Lin and Zhang)

ABC is riddled with nonperforming loans and may face serious problems in the near future. (Dobson and Kashyap) “The Big Five banks show few signs of properly accounting for credit risk in the pricing of their loans, and they continue to show a substantial bias toward lending to state-owned and politically connected borrowers.” (Dobson and Kashyap)

China’s banking sector is still largely dominated by state-owned banks which do most of the corporate financing as the corporate bond market being very small. The lack of bond financing in China qualifies China as the least developed bond market in Asia. (Dobson and Kashyap) China’s state-owned banks are sometimes used to funnel money to ailing SOEs. Firms with close political connections will find it easier to obtain credit as well as lucrative contracts for government projects. (Firth, Lin and Wong) The SOEs were not only inundated with debt as well as failing to turn a profit, but they often also distorted their performance reporting, showing that they earned phantom profits, which resulted in a tax debt. The banks would then make loans to the SOEs, bailing them out. (Dobson and Kashyap) This accounts for the large percentage of nonperforming bank loans which banks are forced to carry. (Firth, Lin and Wong) The SOEs didn’t repay the loans and eventually, some of the banks needed a government bailout. (Dobson and Kashyap)

Most of China’s banks are still owned by the public sector, the central, provincial, or local governments. Their financial books still carry many nonproductive loans, made to SOEs. (Caprio et al.) These banks are under the control of bureaucrats who use the banks to further their own political and personal agendas, such as providing jobs and to bailing out failing businesses. Banks often fulfill the role of overseer, monitoring the activities of the firms they lend money to. But in the case of the state-owned banks, this role is compromised. (Firth, Lin and Wong)

As a condition of ascending to the WTO, China had to open its banking industry to foreign competition. Beginning in 2003, in preparation for this new competition, China has been improving the competitiveness of its banking industry. The performance has improved a great deal but still has a number of problems. (Dobson and Kashyap) Unemployment is a serious concern of the Chinese government. Demand for more jobs comes from China’s 260 Million Migrant Workers (Song), as well as workers downsized from recently privatized or restructured SOEs. (Dobson and Kashyap) Between 1993 and 1997 about 10 million SOE workers were made redundant. In 1997, the 15th National Congress of the Chinese Communist Party pledged to lay off an additional 4.3 million SOE employees. (Chen, 1999) Concerns about unemployment hamper the government’s reform efforts with both SOEs and the banks which provide funding to the SOEs allowing them to keep employment numbers high.

Research has shown that both foreign ownership and private ownership improve the performance of banks after privatization. (Lin and Zhang) A s6tudny conducted in 2006 showed that China’s big four state banks underperformed foreign join-equity banks and banks capitalized by foreign funds. (Lin and Zhang)

Public sector banks have performed poorly compared to private sector banks if Measured by nonperforming loans and return on assets. “Public sector banks have also demonstrated a poor collection record with their borrowers, especially in bad economic times, and thus tend simply to “roll over” their loans.” (Caprio et al.)

Rather than pushing for privatization of banks the Chinese central government has left the state ownership structure in place but taken a more hands-off approach to bank operations, allowing the banks to function more like a corporation. As a result the performance of state-owned banks has increased tremendously in the last five years with the percentage of non-performing loans dropping significantly. (Caprio et al.)

16. Corruption in SOEs

In accordance with the anti-corruption campaign under President Xi Jinping, within the first 10 months after the 18th Party Congress nearly 80 senior SOE executives were investigated by the Disciplinary Commission of the Central Party Committee. (Fu) President Xi’s anti-corruption campaign is considered to be the most impactful such campaign in PRC history. In total, more than 100 top SOE executives would be detained. Some of the SOEs whose executives were named include PetroChina, China Southern Airlines, China Resources, FAW and Sinopec. (Anderlini) Many of the private sector firms included retired senior government officials on their boards, which created opportunities for bribery and other forms of misconduct. Over 40,700 officials have resigned, in order to avoid being implicated, or have been removed from SOEs. (Yibing)

In a larger organization, such as an SOE, a government agency, acting as owner, may sit atop a pyramid shaped hierarchical structure. Below the owner is a manager who may have some decision making authority in order to carry out the daily operations of the company, without involving the owner. According to agency theory, an owner can allow a manager more and more authority, to allow the business to run efficiently, until the manager has so much authority that he begins acting in his own, and not the owner’s best interest. At that point, the owner would step in and take control away from the manager. A fundamental problem facing an SOE, however, is that there is no physical owner. (Fan, Wong and Zhang) This departure from the standard agency model may help to explain two points; first, why there is so much corruption in SOEs and second, why SOEs often fail to perform financially.

This is not to suggest that government has no control over the SOEs. Obviously in the case of direct SOEs they can fire a manager. In the case of corporatized SOEs they can exercise voting rights and restructure the management. (Fan, Wong and Zhang) It is more a question of motivation and volition. A faceless state-owner would be less likely to step in and protect its rights as owner than would a private individual or board.

17. Stock Market Listing

The Shanghai Stock Exchange (SSE) was founded on November 26th, 1990 (Krishnamoorthy) SSE opened with 8 companies listed. The Shenzhen Stock Exchange (SZSE) followed shortly after. A mere decade later, the two exchanges had 1,088 firms listed. (Wang, Xu and Zhu)

Prior to the 1990s, State-owned enterprises (SOEs) were wholly owned by the Chinese government. After that, as part of the “grasp the large and let go of the small’’ strategy (O’Connor, Chow and Wu) the government began listing and selling off some of the smaller SOEs. (Ralston et al.) Some of the larger SOEs were corporatized, and turned into shareholding companies. (Wang, Xu and Zhu) Once listed, depending on share class, the shares could be bought by virtually anyone, from SOEs to private individuals or other privately held companies. (O’Connor, Chow and Wu)

As the economy increased in both size and liberalization, the stock market became a more and more important source of funds for companies wishing to expand or take on large projects. As a result, more accounting transparency was needed, as this was a requirement for listing on an exchange. And so, more western accounting and management practices were adopted. (O’Connor, Chow and Wu)

Listing on a stock exchange is one of the methods of privatizing SOEs, as shares will be sold to private citizens and companies, which will become the new owners. After initial public offering (IPO) state-owned firms often underperform, but one reason why this might be true is because pre IPO they inflated their profitability to appear more desirable. (Wang, Xu and Zhu)

Most IPOs in developed countries occur when a privately held company becomes large enough to go public. But in China, most IPOs are of state-owned companies moving toward privatization. But the resulting company will have a mix of state and non state shareholders. In neither the SOE or the publicly traded corporation is the owner a manager. Before the IPO the owner is the state. After the IPO the owners become the shareholders, which may or may not be the state or organizations controlled by the state. Either way, a management structure is hired, and put in place to operate the company in the stead of the owners. In this instance, the agency model applies.

Generally, privatization through the sale of shares should decrease state control of a company. But, in the case of China, as shares could be owned by the state and legal persons, controlled by the state, the state remains, effectively, the majority shareholder of most listed firms. (Wang, Xu and Zhu) Shleifer and Vishny (1994) have found that the interference of government shareholders in joint stock companies is often at the expense of profitability because many of their decisions are motivated by political gain or cronyism. This is one reason why Chinese SOEs generally demonstrate higher profitability after listing. (Tian and Estrin) Many of the listed SOEs are now profitable and their management and accounting standards are similar to those of western companies but the government still exerts a lot of control over them. (Tian and Estrin)

Chinese SOEs going public creates additional agency problems. Once a company goes public the shareholders become the owners and are thus entitled to a share of the profits. The agent is still the management team, who, according to agency theory, will eventually work in their own interest, possibly to the detriment of the owners, if the owner doesn’t step in and protect his interests. (Gibbons) When the state was the sole owner, the motivation for the state to step in was higher than it is in the diluted ownership of a publicly traded SOE. By the same token, the private shareholders, as minority owners, may fail to exercise their rights to step in and control the agent. Theoretically, the conflict between agent an owner can increase after an IPO and result in lower performance. (Wang, Xu and Zhu) In the case of Chinese state-owned enterprises going public, it is not hard to imagine this conflict arising. As there is a mix of state and public shareholders, the state may still retain significant control through majority voting rights.

Under the old system, SOEs were not used to having to contend with such factors as investor demands, public access to corporate information, disclosure, competition for capital, or even competition. O’Connor, Chow and Wu found that the degree to which SOEs used western accounting methods decreased as government control increased.
Research has also found that even partial privatization, whereby the public is permitted to purchase some percentage of shares, even if the state remains the majority shareholder, has a positive effect on SOEs. The stock market fulfills a monitoring role, overseeing the corporate governance of the listed firms. Also, the market rewards well-performing companies through increased share prices, which can translate into increased wealth for the stakeholders, including management. (Aivazian, Ge and Qiu)

All stock market listings of Chinese companies have to be approved by The China Securities Regulatory Commission (CSRC), which seems to favor SOEs for listing, over POEs. In fact, as recently as 2007, 80% of listed companies were SOEs. (Mattlin)

The State Planning Commission regulates the listing of PRC companies on the Shanghai and Shenzhen, as well as the Stock Exchange of Hong Kong (SEHK) and international exchanges, and limits the number of shares issued. The two share classes include A-Shares, denoted in RMB and only sold to domestic investors, and B-Shares, denoted in US or Hong Kong Dollars, and sold to foreign investors. Some A-Share firms are also permitted to issue B-Shares. H-Shares are those listed on the SEHK and N-Shares are listed on the New York Stock Exchange. Many of the H-Share firms listed on the SEHK are also listed as A-Shares in the PRC, but are not permitted to issue B-Shares. A-Share firms are required to comply with PRC GAAP, but B-Shares with the IASC. NYSE and SEHK listed firms must comply with the prevailing accounting standards. (Ferguson, Lam and Lee)

18. Domestic Listing

PRC firms listed on the Shanghai and Shenzhen Exchanges tend to disclose very little information beyond what is required by law. There are a number of theories why this is true. One suggests that the firms lack the sophistication and experience with financial reporting, as the first PRC accounting standards were only introduced in 1992. (Ferguson, Lam and Lee ) Another theory says companies fear giving away too much information to competitors or to the tax authorities.

Publicly traded companies in China issue two classes of shares; A-Shares, denominated in RMB and only sold to domestic investors, and B-Shares, also detonated in RMB, but sold to foreign investors. H-Shares are sold in Hong Kong and N –Shares in the US. (Wang, Xu and Zhu)

There are five types of share ownership: state-owned, legal person or institutional, employee-owned, individual-owned, and foreign owned. State and institutionally owned shares cannot be sold on the stock exchange. Their sale requires the permission of the China Securities Regulatory Commission (CSRC). “State shares are held by government bodies such as state asset management agencies, or …wholly state-owned investment companyies” Legal persons can include SOEs or companies controlled by SOEs. (Wang, Xu and Zhu) Non-government shareholders can include “another domestic industrial company; b) investment fund, securities companies and other investment firms; c) foreign investors; d) family or individual investors.” (Tian and Estrin)

Profit is one of the metrics for delisting. But since the establishment of the Chinese stock market until 2002, although a number of firms should have qualified for delisting based on profits, only six companies had been delisted. Many of the loss-making SOEs that should have been delisted have been protected by the government. (Hong Tan and Wang) This government protection of listed firms seems like a violation of a market economy and more in line with the old style command economy.

19. Hong Kong Listing

The Stock Exchange of Hong Kong SEHK is the source of much of PRC firm’s foreign capital investment. (Ferguson, Lam and Lee) SOEs may issue H-shares on the SEHK to raise cash to support welfare and pensions. (McGuinness and Ferguson)

Lack of management experience, corruption, over employment and over compensation, government interference, and lack of disclosure have all been cited as concerns of potential H-Share investors. “In addition to H-Share firms’ lack of prior history, important investor concerns include management quality, the potential for asset stripping or misappropriation, de-capitalization through excessive wage increases, and the role of the government as a major shareholder.” (Ferguson, Lam and Lee)

In order to list in Hong Kong Chinese SOEs have to meet certain voluntary disclosure requirements. Disclosing information is not something the SOEs are used to, but they do it in order to get financing. The cost of disclosure could be increased political or competitive pressure. Lack of disclosure is often attributed to firm management worrying that too much disclosure could leave the firm vulnerable to competitors or regulators. The benefit to complying with the disclosure requirements however will be greater access to capital and more international exposure for the company. In the case of H-Share firms, since they operate in industries of strategic importance to the PRC government, they are less vulnerable to competition. One theory suggests that the PRC government carefully selects the firms that will list internationally as a way of showcasing the success of the Chinese economic system. In this way, firm disclosure becomes a kind of PR for the country. (Ferguson, Lam and Lee)

Red Chips are PRC companies incorporated internationally and listed on the SEHK. ( In order to maintain their listing, Red Chips are expected to fulfill SEHK disclosure requirements. ( Currently, “Red chip companies are generally not allowed to trade on the Chinese A-share market on the Shanghai Stock Exchange or the Shenzhen Stock Exchange.” ( According to the rules of the SEHK, non-Red Chip, PRC firms may sell H-Shares. Red Chips, however, are incorporated in Hong Kong, although they are largely controlled by PRC state shareholders. They often have significant business interest in Hong Kong, functioning as subsidiaries of PRC firms and are frequently unaffected by government reforms in the PRC. They are also barred from listing on the PRC domestic exchanges. (Ferguson, Lam and Lee)

20. Overseas listing

There are numerous reasons why high profile Chinese companies, such as Baidu and Sina chose to list overseas. First some companies working in technology or other sensitive sectors may not be eligible to list in China. So, they restructure their companies, using a variable interest entity (VIE) structure. (Fong) First a Wholly Foreign-Owned Enterprise (WFOE) is established in China, which then contracts with the VIE, which invests in the restricted sector. (Millman) Other companies list overseas because they don’t meet China’s financial requirements. Some find the listing procedure time consuming and poorly defined. Finally, firms may list overseas in order to avoid having the Chinese regulatory agencies overly-involved in the operations of the company. (Fong)

Additional political and economic factors also motivate companies to list overseas. The “going out” strategy of the Chinese government encourages the largest SOEs to list on overseas stock exchange. ( Among the economic motivations for Chinese SOEs to list overseas are: to find funding, support growth, and expand product markets. The political reasons include: circumventing government regulations, to showcase China’s economic power, and “to implement national economic objectives by grooming a selected group of firms for global competition.” (Hung, Wong and Zhang)

Overseas listing provides the firms several other advantages as well, such as meeting the disclosure and corporate governance requirements of overseas stock exchanges will result in “higher board professionalism, better accounting disclosure, and greater investment efficiency for these firms.” (Hung, Wong and Zhang) This concept is known as the bonding hypothesis, basically that corporate efficiency and performance will improve when a company lists overseas, particularly in the US, because the company will be forced to comply with US listing regulations. (King and Segal)

The Chinese government strictly controls the number of firms that can list, either in China or overseas, and listing requires a number of government approvals. (Hung, Wong and Zhang)

21. Government Control of Stock Markets

While the Chinese government has given up apparent control of many former SOEs, by selling shares to the public, in cases where they still retain 51% their degree of control may not be reduced at all. In China, it appears that minority shareholders do not take a unified stand against the decisions or influence taken by the majority shareholder. (Tian and Estrin)

As recently as 2002 the PRC government owned an average of 45 percent of shares on the market. Since government shares can’t be sold, this reduces the liquidity of the entire stock market. (Hong Tan and Wang) Hostile corporate takeovers don’t really happen in China because most of the shares are non-tradable. As a result, acquisitions are negotiated. (Hong Tan and Wang)

Some investors wish to capitalize on China’s tremendous growth, but also want to avoid companies that are controlled by the government. Investment funds are one way that investors have found to achieve these two goals. WisdomTree China would be an example of one such fund. WisdomTree China is an ex-State-Owned Enterprises Fund (CXSE) which allows investors to invest in a wide array of PRC stocks, excluding SOEs. (Yahoo Finance) WisdomTree’s CXSE allows investors to invest in China’s dynamic POE sector, avoiding government owned companies which they feel are influenced by goals other than maximizing profits. (Yahoo Finance)

WisdomTree CXSE is a way of owning PRC stocks without owning the government run companies. (Greenberg) The state is an owner in almost all Chinese companies which have been listed. So, even with WisdomTree it is difficult to completely avoid government ownership. To qualify for inclusion in WisdomTree a company must have less than 20% government ownership. Because WisdomTree doesn’t invest in companies with large percentage of state ownership, the fund tends not to invest in banks or energy stocks, two industries almost completely dominated by the government. Instead, the fund includes a lot of technology firms, internet firms like Alibab, Baidu, and, and US firms listed in China. (Greenberg)

22. Outbound Investment by SOEs

One of the reasons for Chinese SOEs to expand overseas is to make them larger and less of a target for liquidation under China’s policy of cutting the smallest SOEs. (Fu)

To compete in the global economy, the Chinese government has adopted a “going out” strategy investing in foreign countries. (Song, Yang and Zhang) Much of China’s overseas investment is carried out by SOEs. “By the end of 2009, China’s 108 central government-owned SOEs had invested in 5901 foreign firms,” accounting for nearly 38% of total profits for SOEs (SOASAC, 2010, cited in Song, Yang and Zhang) Many of these acquisitions are in the fields of minerals and energy to guarantee China’s access to raw materials. (Song, Yang and Zhang) Chinese SOEs dominate certain global sectors. In fact, the international raw material sector is dominated by China, purchasing commodities used for the production, which fuels China’s economy. The SOEs are in a better position to invest abroad than are privately owned firms, as the SOEs have better access to bank loans. (Song, Yang and Zhang)

Through mergers and acquisitions, some Chinese SOEs are the largest companies in their sector, in the world. However, their names remain virtually unknown outside of China. The Chinese companies with global recognition are all POEs. And they include Alibaba, Tencent, Baidu and Xiaomi, all of which are too small to make the Fortune Global 500 list. (Cendrowski) Chinese some Chinese SOEs have grown so large that they are now purchasing companies in foreign countries. For example, state-owned oil company CNOOC Ltd., the world’s largest energy explorer, took over the Canadian firm Nexen. In 2012, China was rated by UNCTAD as one of the top twelve outbound investors in the world. (Dobson)

Chinese outbound investment includes construction projects in the USA. “China Construction America, Inc. (CCA) is a wholly owned U.S. subsidiary of China State Construction Engineering Corporation Limited (CSCEC)…listed on the Shanghai Stock Exchange.” (U.S.-China Economic and Security Review Commission) SASAC is the primary owner of CSCEC. In 2009, when the company went publicly, it was the largest IPO in the world. (U.S.-China Economic and Security Review Commission)

China’s SOEs, whether on an outbound or inbound basis, are involved with countries in both the developing and developed world. For example, 400 Canadian businesses currently operate in China, making China Canada’s second-largest export market. Some Canadian companies have entered into joint ventures with Chinese SOEs. Once such company is Bombardier, the Quebec-based aerospace and rail transportation firm. (

Chinese outbound investment can be found everywhere and in every sector. Chinese SOEs even invest in energy projects in Africa. (Tan-Mullins) Some African energy projects include The Gibe III dam in Ethiopia, Kajbar dam in Sudan, and the $729 million Bui project in Ghana. (Hackley and Westhuizen)

The PRC government is considering investing in renewable energy geothermal energy, and infrastructure in Wes Sumatra, Indonesia, where other Chinese firms are already working on microhydro power plants (PLTMH), road infrastructure and agribusiness. Additional Chinese companies have invested in energy, agriculture and tourism. (The Jakarta Post) In 2015, after the US Iran nuclear deal lifted sanctions, Sinopec Group, parent of Sinopec Corp and China National Petroleum Corp was read to start producing at the Yadavaran oilfield. (Aizhu)

So far, this paper has demonstrated that historically, the SOEs were large, inefficiently run enterprises, which operated in a domestic market where they often had a monopoly. Risk analysis wasn’t something they had to worry about as they often enjoyed a monopoly advantage. The lack of competition also meant they didn’t have to focus too much on advertising or marketing. The lack of competition meant they didn’t have to be concerned with advertising or marketing. They were given preferential access to raw materials and when all else failed, and it frequently did, they simply obtained direct aid from the government or preferential loans, which they weren’t expected to pay back. Expanding into foreign markets has been a bumpy ride for Chinese SOEs.

The PRC’s aggressive outbound investment strategy has been met with some resistance. China has been repeatedly criticized for “buying up the world.” Developed countries which are receiving large amounts of Chinese SOE outbound investments often raise security concerns related to having a foreign government controlling domestic assets. (Dobson)

Once the SOEs left the comfort and privilege of their home market, they faced challenges and obstacles they were ill prepared for. This resulted in a number of their overseas investments failing. For example, 12 of the highest profile overseas investments by Chinese Investment Corporation (CIC), China’s largest sovereign wealth fund reported losses. (Yibing) It is clear that Chinese outbound firms are facing a steep learning curve as far as complying with international trade rules and regulations. (Dobson) Disclosure and due diligence seem to be two areas where Chinese companies have opinions which differ from western industry norms.

State secrecy laws sometimes prevent disclosure and due diligence, as well as impede fair competition for foreign companies against SOEs. One example would be the Rio Tinto case where Australian steel executives were charged with espionage, bribery and stealing state secrets. The steel industry is one of the key industries which the Chinese government closely guards and they felt that stealing secret information in that sector undermined national security. (Areddy) In the Rio Tinto case, the charges of bribery were eventually accepted by the company, and the employees were fired. It remains unclear whether bribery or simple due diligence was the actual reason for the case being brought in the first place. Either way, Rio Tinto stands as a cautionary tale about how difficult it can be in China to obtain or to disclose company data.

China maintains a strict battery of laws against unfair competition, secrecy, and bribery, but in the case of SOEs, many outsiders feel the enforcement is selective. “China’s Criminal Law and Anti-Unfair Competition Law are the basis for the state’s corruption and bribery legal regime.” (Silk and Ashley) These laws, in part, involve state secrets and make it illegal to attempt to get an “improper benefit” A company who holds classified commercial data would be considered to have an “improper benefit.” The normal disclosure and due diligence related to listing can result in state secrets, data from SOEs, being leaked. PRC companies listing abroad, for example in the US, may be forced to violate state secrets laws in order to comply with US listing requirements. This may hamper the ability of a PRC firm to expand into the US. (Silk and Ashley)
Despite bumps in the road, failings, and setbacks, China SOEs are some of the top outbound investors in the world. In China, the SOEs account for 69% of outbound stock investments. In 2013, The Industrial and Commercial Bank of China (ICBC) and China Construction Bank, which were numbers one and two on the Forbes Global 2000. In 2012 alone, according to The China Entrepreneur Research Institute Chinese companies expanded into 117 countries. (Dobson)

23. Conclusion
This paper has given a brief history and over of the SOEs, of bother their problems and strengths. It has also looked at POEs, MNCs, bank, and other types of companies which operate in the Chinese economy. The findings are that SOEs, on average, have lower employee turnover, but also lower return on assets than POEs. The problems inherent in the SOEs include corruption, over capacity employment, non-performing loans, political constraints and unprofitability. The strengths of the POEs, however, are preferential access to artificially low-priced raw materials, easy credit availability, monopoly and sector protection, and sheer size. While the number of SOEs in China have decreased, as have their employee numbers, the SOEs are still a driving force, accounting for a significant percentage of Chinese total GDP and making up the bulk of China’s stock exchange listed firms. SOEs are also an incredibly powerful vehicle which China can employ to expand into foreign countries, and secure raw materials, energy, and foreign markets. For all of their problems of low return on assets and high government intervention, the modern, corporatized SOEs are some of the largest firms in the world. And this trend, if China’s SOEs growing in size and importance, both at home and globally seems to be the trend of the future.

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25.About the Author

Brooklyn Monk, Antonio Graceffo is a lecturer at Shanghai University. He is also a PhD candidate at Shanghai University of sport, writing his dissertation on comparative forms of Chinese wrestling, in Chinese, with expected graduation in June of 2016. He is expected to graduate his China MBA, from Shanghai Jiaotong University, in January, 2016. Antonio is the author of the books, “Warrior Odyssey”, “The Monk from Brooklyn,” and several others. He has published hundreds of articles in the fields of linguistics: second language acquisition, as well as martial arts. Antonio is the host of the web TV show, “Martial Arts Odyssey,” which traces his ongoing journey through Asia, learning martial arts in various countries.

The Monk from Brooklyn, the book which gave Antonio his name, and all of his other books, the book available at His book, Warrior Odyssey, chronicling Antonio Graceffo’s first six years in Asia, including stories about Khmer and Vietnamese martial arts as well as the war in Burma and the Shan State Army, is available at
See Antonio’s Destinations video series and find out about his column on
Brooklyn Monk fan page
Brooklyn Monk on YOUTUBE
Brooklyn Monk in Asia Podcast (anti-travel humor)

Recap of the Chinese RMB Devaluation

In Uncategorized on September 13, 2015 at 10:54 am

By Antonio Graceffo (安东尼)


In August 2015, the Central Bank of China chose to devalue the national currency, the Yuan, by nearly 4%. The currency of the world’s second largest economy dropping so abruptly sent reverberation which were felt in China and around the world. This paper, consisting of information available through early September 2015, will first explain the RMB devaluation. Second, it will illustrate how the exchange rate for the RMB is set by the Chinese government. Next, it will analyze the former peg rate used by the Chinese government in the days before the Chinese economy was liberalized and more exposed to market forces. Then, the paper will go on to explain the currency conundrum, China’s competing interests in maintaining both a stronger and a weaker currency. Next t be addressed will be, how the drop in China’s currency affects the Yuan becoming an international currency. This is followed by an analysis of the poor economic indicators leading to the drop in the Yuan. Afterwards, the paper will discuss both the realized impact and predicted impact the Yuan drop will have on the Chinese, Hong Kong, and then foreign economies. Finally, the political reaction to the Yuan devaluation will be discussed.

The Yuan Devaluation

For the last decade, while China grew to become the world’s second largest economy, China’s national currency, called the Yuan (FX symbol, CNY – Chinese Yuan Renminbi) has been steadily gaining in value. (Wei) But, in a surprise move, on Tuesday, August 11, 2015, the Chinese government began devaluating the Yuan, leading to a 2% drop in by the close of trading. This was the largest devaluation since the 1994 beginning of China’s modern-exchange rate system. (GOUGH and BRADSHER) In fact, it was the largest one-day decline in the Yuan ever. (Mullaney) The devaluation continued for two more days, through Wednesday and Thursday, resulting in a total devaluation of 4.4%. (GOUGH and BRADSHER)

To prevent the Yuan from sliding further, Chinese state-owned banks sold off dollars, decreasing their reserve of foreign currency. (SWEENEY and JIANXIN) “’Apparently, the central bank does not want the Yuan to run out of control,” said a trader at a European bank in Shanghai.’’” (SWEENEY and JIANXIN) The Central bank used the dual techniques of selling US Dollars and buying Yuan on currency markets to stem capital outflows from China. (Cendrowski)

Analysts speculated about how to interpret the move. Some believe that the significance goes far beyond a one-off correction. “In a recent webcast, Tom Orlik, the Chief Asia Economist at Bloomberg Intelligence, said this shift “wasn’t just about devaluation of the currency, this was also about a shift in the way China manages its exchange rate.” (Bloomberg Professional service)

How the Yuan exchange rate is set

The value of the world’s seven most actively traded currencies, called the major currencies: Euro, British Pound, Australian Dollar, Canadian Dollar, Japanese Yen, and Swiss Franc are generally expressed in terms of their value against the US Dollar. The exchange rates for the majors are market-determined, based on the value of daily trading in the world’s foreign exchange markets. (Evans)

The value of the Yuan, however, is not strictly market determined, but effectively controlled by the Chinese government. Largely ignoring daily trading activity, a reference rate is set each morning by the People’s Bank of China (PBoC), the Central Bank of the People’s Republic of China. (Fast FT) Using this fixing rate as a mid point, the central government only allows the Yuan to move plus or minus 2% above or below. (Wei) The Yuan is closely tied to the Dollar because China manages the exchange rate against the US dollar. When the US dollar rises against other major currencies so does the Yuan. (Cendrowski)

In recent years, the PBoC has progressively allowed the Yuan to fluctuate more and more, over the course of the trading day. (Fast FT) Part of the fallout of the August devaluations is that the Chinese government stated that they will permit more market information to influence the value of the Yuan. The fixing point, for example, will be influenced by how the Yuan closes in the previous day’s trading. (Wei) This should allow the currency to rise or fall more rapidly. (Inman, Farrer and Ryan)

The recent drop in the Yuan will create more competition for US exporters, as Chinese export goods will become cheaper. Some experts warn that opening the Yuan to market forces could weaken the Yuan, putting even more exchange rate pressure on the US, as Chinese goods would continue to become cheaper. (GOUGH and BRADSHER)

Currency Peg

Governments can maintain artificial peg rates by closely monitoring international currency exchange markets. They then use foreign currency reserves to purchase their own currency when the rate drops below a desired point. Conversely, they can sell off currency when the rate goes too high. (Ding) Prior to 2005, the Central Bank of China employed this type of strategy to keep the Yuan tied to a government peg rate. When the peg was removed in 2005, the RMB was immediately revaluated, going from the peg rate of 8.27 to 8.11 against the dollar. (Ding)

From 2005 through the August, 2015 devaluation, the RMB was no longer pegged to this government peg rate. Instead, the currency has been able to float in a more market driven scenario, with the value floating within a narrow range of 0.5% around the central parity published by the People’s Bank of China. (Ding) After the devaluation in August, the Chinese government said that they will liberalize the exchange even further, allowing market forces greater influence on the value of the Yuan.

Currency conundrum

In the valuation of the Yuan, the Chinese government is confronted with two conflicting goals. On the one hand, a cheaper Yuan would help Chinese exporters, as this would make Chinese products cheaper overseas. But on the other hand, opening the Yuan to market forces could weaken the currency, which could lead to capital outflows. By artificially buoying the Yuan China can help curtail capital flight which would weaken the economy as a whole. (Cendrowski) Other concerns for the Chinese government include avoiding a trade war with the US which could happen if the Central Bank of China chooses to dramatically weaken the Yuan. This could lead to other countries devaluating their currencies to keep the price of their exports competitive with Chinese made products.

Another potential issue for China is that the central government wants to increase the use of the Yuan as an international exchange currency. In fact, China has been campaigning to have the IMF recognize the Yuan as a reserve currency. (Cendrowski) The IMF maintains a basket of reserve currencies, called Special Drawing Rights, the composition of which it reviews every five years. The most recent review took place in 2010. ( With the next review planned for 2015, the Yuan will have to meet several requirements if it is to be included. The Yuan must be proven to be “freely usable,” or widely used to make international payments and widely traded in foreign exchange markets. (Lange) “Freely usable” in IMF terms means that the currency is widely accepted in international trade. ( China must demonstrate that the Yuan is strong, stabile, convertible, and that the value is market determined. But at the same time, China wants to maintain a competitive edge on exports. Some of these goals could best be achieved through a strong Yuan and others through a weak Yuan.

These conflicting benefits of both a stronger and weaker currency present China with a currency conundrum.

Impact on RMB becoming international currency

For years, voices in the American Congress have accused China of artificially depressing the Yuan to gain a competitive edge on exports. (GOUGH and BRADSHER) Consequently, the devaluation was called an unfair tactic by U.S. lawmakers, who saw it as an attempt to save China’s slowing economy. (SWEENEY and JIANXIN) The US has typically been one of the biggest critics of The People’s Bank of China’s policy of keeping the Yuan pegged to the dollar. This resulted in an artificially low Yuan, giving Chinese exports a price advantage. Since the peg was removed in 2005, the Yuan has steadily appreciated. (Fast FT)

Ironically, although it was tight government control that allowed the move to happen, some saw the Yuan devaluation as a sign that China is moving toward a more market driven economy. (Wildau) And, as China moves to a more market driven exchange rate, devaluation is an unavoidable consequence. (Wildau) Adjusting the Yuan exchange rate is not necessarily the first step in causing an exchange rate war. (Wildau) It may simply be the effect of normal market forces.

The International Monetary Fund (IMF) has commended China’s devaluation of the Yuan. (Herman) The IMF “told Beijing Friday it wants the yuan to float freely within three years, applauded the Chinese central bank on this basis.” (Smith) China’s subsequent decision to allow a wider band of exchange rates for the Yuan will increase the flexibility of the Yuan, which is a necessary step if China wishes to integrate its currency into global financial markets. (Herman)

Beijing has been trying to get the Yuan added to the IMF basket of reserve currencies known as Special Drawing Rights (SDR), which would make the Yuan a more international currency. (SWEENEY and JIANXIN) “The SDR is a reserve of foreign currency assets created by the IMF and the basket comprises four key international currencies—the US Dollar, Euro, British Pound and Japanese Yen.” (Bhattacharya) China has been pushing for the Yuan to be recognized as the fifth SDR currency. (Mullaney) Such acceptance would be very prestigious for China. “This is ‘an elite reserve currency status’” (Spence and Chan) If this happens, China’s global influence would increase, as the Yuan would sit beside the world’s most important currencies. (Wei)

Until now, “The IMF has said that “significant work” is needed for the Yuan to be added to the group.” (Spence and Chan) “To win so-called Special Drawing Rights status, China has to demonstrate that its currency is ‘freely usable,’ a conclusion the IMF has refused to draw as recently as 2010.” (Mullaney) If the devaluation reflects a change in how the Peoples Bank of China will manage the Yuan exchange rate, namely, making it more market-driven, this may speak in favor of the Yuan being included in the SDR. (Bhattacharya) Fortunately for Beijing, the IMF saw the devaluation as positive. In addition to applauding the Yuan devaluation, the IMF has said that “Beijing should aim for an effectively floating exchange rate within two to three years.” (SWEENEY and JIANXIN)

Almost in compliance with the wishes of the IMF, the Chinese side has vowed to allow the Yuan exchange rate to be more market-influenced. “’The PBoC said in its statement that from today, the reference rate “should refer to the closing rate of the Inter-bank foreign exchange market on the previous day’”. (Fast FT)

In addition to the prestige factor and increasing China’s influence, being included in the SDR could have some very real economic benefits for China. For example, it could make borrowing cheaper for Chinese businesses. It could also mean that raw materials and commodities could be purchased in Yuan. But to get to that status more of the world’s central banks will have to hold reserves in Yuan, which would help to stabilize its value. (Mullaney)

Some saw the devaluation as a hybrid, fulfilling two goals with one move; both a desperate act to control a falling economy and a move that might help convince the IMF that the Yuan will now be more closely controlled by market forces. “’The PBOC has astutely combined a move to weaken the Yuan with a shift to a more market-determined exchange rate,’” said Eswar Prasad, a Cornell University professor and former China head of the International Monetary Fund.” (Wei)

Poor economic indicators leading to the devaluation

Theories on why the Central Bank of China decided to devalue the Yuan are as varied as the speculation about what the long-term impact will be. Some analysts such as Albert Edwards, from Societe Generale, believe the answer is as simple as the fact that the Yuan had been overvalued for years and that it needed to be corrected. (Inman, Farrer and Ryan) The fact that the Yuan dropped after increased exposure to market factors suggests that it was in fact overvalued, which is not the fault of the Chinese government. (Smith) While some saw the devaluation of the Yuan as either proof of the Chinese economy’s lack of stability, or the government’s inability to control it, others see the move as not only justified, but as a positive indicator of the Chinese government’s ability to transition to a market driven economy.

Another theory is that the Chinese authorities were concerned about a slowing Chinese economy, leading to lower demand for commodities. (Mullaney) Over the last year, consumption in China has slowed, as have China’s exports. ( “Exports fell by 8%, followed by a 6.6% drop in car sales and slower business investment in July. Factory output for the month of July fell short of the 6.6% projected growth, coming in instead at 6% year-on-year.” (Inman, Farrer and Ryan) In addition to a downturn in the general economy, Chinese stocks have dropped significantly over the last several months, with the Shanghai index losing 32% of its value. (Yan) This forced the government to take steps to stabilize the economy, and a currency devaluation is one such step. (Hu) Currency devaluation is a sign that the government is concerned about the economy’s slow growth. (Wei)

Capital outflow is another worrying sign of a softening Chinese economy. China has seen an outflow of $500 billion in foreign currency reserves. (Sender) These outflows of foreign capital reserves have resulted in the spot rate for the Yuan trading weaker than the rate set by the Central Bank of China. (Wildau) One of the factors contributing to the foreign currency outflows has been the central bank selling dollars to artificially prop up the Yuan. (Wildau)

A weak property market, combined with lower domestic demand and exports have caused the Chinese economy to register growth of only 7%, the lowest in six years. To counter the economic slowdown the government is planning to offer tax breaks and interest rate cuts to companies. (Wei) Some foreign analysts do not believe the government’s reduced growth numbers, believing that the truth is even more grim. “Some economists believe China’s economy is already growing only half as fast as official data shows, or even less.” (SWEENEY and JIANXIN)

While China closely monitors and controls the Yuan’s exchange rate to the Dollar, it does not as tightly control the Yuan against other currencies, such as the Euro. A rising Yuan, against the Dollar, has caused China’s July exports to the European Union to become more expensive, and consequently fall by 12% compared to a year ago. (Wei)

Since the early economic reforms of Deng Xiaoping many in the West have held some type of faith in this Communist government’s ability to manage the complexities of a fast growing, modern economy, in terms of currency, debt, interest, and other aspects of a market driven economy. (Smith) But what many outsiders forget, and what is demonstrated by the drop in the Yuan, is that the current government has not even a fraction of the control over the economy that they did in the days of the Command Economy.. (Smith)

Those who favor free markets in China have been calling for less government intervention over the years. But many of those same voices will be calling for more government control now. The question is, do these reformist voices call for free-markets in China only when it is good for their own bottom lines, but not for China’s? (Smith) Rather than seeing the devaluation of the Yuan as grounds to panic or criticize, one could also see the Yuan devaluation as a perfectly reasonable measure for a government to take, given the current economic climate. “To encourage growth—in this case by supporting export industries with a weaker currency—was a good thing, not an occasion for markets to gyrate and politicians to erupt in protest.” (Smith)

“William Dudley, head of the New York Federal Reserve, also said an adjustment to the yuan was probably appropriate if the Chinese economy was weaker than the authorities had expected.” (SWEENEY and JIANXIN) Economic data would suggest that the Chinese economy has indeed been weaker than expected, in spite of government spending on infrastructure projects. (GOUGH and BRADSHER) In fact, a 24.1% increase in fiscal expenditure was not enough to pull economy out of its downturn. (SWEENEY and JIANXIN) The state-owned banks are also being pressured to lend money to companies for investment in factories. (GOUGH and BRADSHER)

Impact of the Yuan devaluation in China and Hong Kong

The effects of a currency devaluation in a country the size of China were immediately felt at home and around the world.

For China, a drop in the Yuan means an increase in the price of servicing foreign debt, calculated in US dollars. (MAKINEN and MASUNAGA) The manufacturing sector would also be impacted by the higher cost of raw materials. Commodities, which are priced in US Dollars immediately became more expensive for Chinese manufacturers, who are some of the world’s largest importers of oil, copper, and coal. (Mullaney) In fact, Chinese demand for raw materials is so significant that when the Chinese economy first began slowing down, in summer 2014, oil prices dropped significantly, from $110 per barrel to $50. Other commodities, such as nickel, copper and aluminum dropped to lows not seen since 2009. (Inman, Farrer and Ryan)

Chinese airline stocks immediately dropped as investors estimated the negative effect the higher fuel prices would have on the airlines’ profit margins. (Mullaney) Chinese exports suddenly became cheaper for international consumers. However, those exported products are now being made with more expensive commodities, which is bad for Chinese manufacturers. (Mullaney) While a drop in the Yuan will make Chinese products more competitive overseas, Bloomberg professional services estimates that the higher cost of commodities and raw materials will have a net negative impact on the Chinese economy. (Bloomberg Professional service)

One industry hit particularly hard by the devaluation would be the automotive industry which is heavily dependent on importing metals. Less than 5 percent of Chinese manufactured vehicles are sold overseas. Therefore, the less expensive Yuan doesn’t help very much in gaining market share abroad. Meanwhile, a slowing Chinese economy, combined with higher raw material costs are hurting domestic sales. Auto sales in China experienced the first year-over-year drop in more than six years. (Bloomberg Professional service) A weaker Yuan should depress auto sales even further.

Back in 2000, it was predicted that a devaluation of the Yuan could have impact on the Hong Kong Dollar. (WEI et al.) Now that the Yuan has dropped, it is unclear if this cut was dramatic enough to impact the Hong Kong Dollar, but, the effects will be felt in other areas of the Hong Kong economy. The Hong Kong retail sector could be one of the hardest hit as Chinese tourists may reduce their shopping in the Specially Administered Region. If retailers begin earning less, retail landlords may even be forced to reduce rents. (Li) One sector which is benefitting from the Yuan depreciation, however, is the Hong Kong money changers and banks, as Chinese from the mainland scramble to move their cash out of the country. Hong Kong has always been a doorway for cash from China, to the rest of the world. (Steinberg)

Impact on the US

U.S. stocks fell, as did commodities which China is a significant importer of, such as copper and oil. There was much speculation that the Yuan devaluation was a sign that the Chinese economy had slowed and that demand for raw materials would remain low. (MAKINEN and MASUNAGA) The US Dollar has been strong recently, making US export products less attractive. A dropping Yuan makes the Dollar-priced products even more expensive, which could result in decreased demand for US products. At the same time, Chinese products have become even cheaper in the US which may hurt domestic sales of US products. “Some analysts worry that China’s devaluation may be exporting deflation around the world.” (MAKINEN and MASUNAGA) Many reports used the term “currency war” as there were fears that countries would begin devaluating their currencies to compete with China. At the same time, manufacturers in other countries may cut prices for goods sold overseas. The reduced income, plus the cheaper products from China could drive prices down further, causing deflation.

The US dollar has already risen against the currencies of many of its trading partners, such as Europe and Japan, which has increased the price of US goods overseas. The drop in the Yuan will further exacerbate this problem. However, many US manufacturers maintain factories and suppliers across Europe and in emerging markets as a hedge. (Hu) So, there is both evidence in favor of, and against this Yuan devaluation having a strong impact on the US economy. Of course, fears still remain that this cut may be the first of many. A steadily dropping Yuan could make many of these negative possibilities become realities.

Impact on the UK and Australia

Stock exchanges across both Asia, and Europe suffered losses of about 1%, with the London FTSE 100 dropping almost 2% at one point, with a net loss of 1.4%. (Inman, Farrer and Ryan) In addition to a 1.1pc drop in the FTSE, the slowdown in China is expected to negatively impact mining companies and to put further pressure on British stock indices. (Spence and Chan) Makers of luxury goods, as well as British retailers dependent on Chinese consumers, have been hard hit, as a drop in the Yuan made luxury imports more expensive. Burberry, for example, which has 65 locations in China experienced a drop in share price of 4.4pc. (Spence and Chan)

China is a large commodity importer and the largest trading partner of Australia. The drop in the Yuan makes raw materials from Australia more expensive, which may negatively impact Australia in the form of reduced demand. (Kicklighter) Immediately after the RMB devaluation The Australian Dollar plunged to a new six-year low. (Powell) Analysts at Credit Suisse consider the Yuan to be 5 per cent to 10 per cent overvalued, and consequently predicted a continued devaluation, which will put further pressure on the Australian Dollar, as well as US and Japanese exports. (Powell) Asian stock exchanges declined, which could affect Australia indirectly, as many of the nations hit are Australia’s direct trading partners. (Powell) Analysts in Australia also believe that a weaker Yuan will result in decreased demand for raw materials, which will drive commodities prices down. (Powell)

Impact on Asia

While some experts believe that the devaluation of the Yuan will have very little net impact on the US, they believe that it may have a great impact on other countries who have China as a significant trading partner. The devaluation may force other countries, such as Australia, Malaysia and South Korea to devalue their currency as well. While the drop impacted those currencies immediately, a larger drop in the Yuan and the consequent impact had already been predicted by some experts, prior to August. “an analysis by Morgan Stanley in March predicted that a 15 percent drop in the yuan, much larger than today’s move, would cause a 5 percent to 7 percent drop in other Asian currencies.” (Mullaney) This multiplier effect, if true, could be very worrying, particularly if the Central Bank allows the Yuan to drop further.

Immediately after the Yuan devaluation, Commodities indexes declined to 2003 levels. “Broad indexes of Asian stocks, excluding the Japan market, fell 2 percent, plunging to a two-year low.” (Herman) Asian currencies were also hit. The Vietnamese national currency, the Dong was hit especially hard. Vietnam, like China, is a country moving form a centrally planned economy to a more market driven economy. And this transition is reflected in the handling of exchange rates. The exchange rate for the Vietnamese Dong is officially considered a managed floating rate, but is also similar to a crawling peg. (Joiner) Vietnam also widened the exchange band for the Dong. “Vietnam’s move means ‘a currency war started almost immediately,’ said Marshall Gittler, head of Global FX Strategy at IronFX, based in Cyprus.” (Herman) Two of Southeast Asia’s most vulnerable currencies are the Malaysian Ringgit and Indonesian Rupiah, both of which dropped significantly. (Hu) In fact, the Malaysian Ringgit dropped by 4.2 percent within days of the Yuan drop, hitting the lowest point since 2009. (Patterson) At the same time, the Rupiah hit a 17-year low. The Australian and New Zealand Dollars fell to six-year lows. (Herman) Other Southeast Asian currencies, such as the Thai Baht hit lows not seen in years. (MAKINEN and MASUNAGA)

Impact on India

Some experts believe that India is largely insulated from downturns in the Asian markets and that India’s bull market will continue. “’The Rupee is relatively less impacted in Asia as India is less export dependent,’ said Sue Trinh, head of Asia foreign exchange strategy at RBC in Hong Kong. “A weaker Yuan is arguably beneficial for India.’” (Shaaw and Goyal) Contrary to bullish predictions for India’s stock market, the currency was also hit hard, dropping by one Rupee to the US dollar. (Bhattacharya) Indian manufacturers, particularly in the textile and chemicals sectors will have trouble competing with a cheaper Yuan. (Ashworth) A further drop in the Yuan would most likely result in a drop in price of Chinese exports to India. (Bhattacharya) These cheaper exports will mostly be in the sectors of iron and steel, bulk drugs and chemicals. (Bhattacharya)

India has long run a trade deficit with China. “India’s trade deficit with China has almost doubled from $25 billion in 2008-09 to $50 billion in 2014-15.” China accounts for 35% of India’s total trade deficit. (Bhattacharya) A cheaper Yuan will tip these numbers further in China’s favor. Indian importers of Chinese goods may derive a slight benefit from a cheaper Yuan. India imports all sorts of cheap products from China, everything from shoes to components for the electronics sector. Because of the Yuan, these imports just became a little cheaper. (BBC News) On the other side, Indian textile manufacturers and chemical producers will now have a harder time competing with Chinese manufacturers. (BBC News) India’s exports have been steadily decreasing, if they decrease further, because of the Yuan, it could impact India’s trade balance. (BBC News)

Impact on Africa

The Yuan drop was particularly felt in Africa. China is not only the largest trading partner of many African countries, but, some African nations have even added the Yuan to their foreign exchange system. (BBC News) “In 2011, the Nigerian Central Bank pledged to store between 5%-10% of its foreign reserves in Yuan, alongside Dollars and Euros.” (BBC News) Nigeria, and some other African countries, attempted to use the Yuan to protect local currency from volatility in the petroleum sector. (BBC News) Africa, like Australia, exports commodities to China, which will now become more expensive for Chinese manufacturers. This could have a long-term impact on African currencies. (BBC News)

Impact on Brazil

Moving on to South America, China is Brazil’s main trading partner. Normally, a drop in the Yuan would be devastating for Brazil, but Brazil’s economy had already fallen to lows not seen in 20 years. As a result, the impact from the drop in the Yuan is less significant. (BBC News)

Potential future impact of the Yuan devaluation

There is much speculation about what the long term implications of the Yuan drop could be. But, given that China is the world’s second largest economy, the effects will be felt around the globe. (Kicklighter)

The Yuan devaluation is expected to have minimal impact on manufacturing in China. Much of China’s manufacturing sector is engaged in assembling products for foreign companies. (Herman) Companies such as Apple and Nike have their products assembled in China. (Pierson) The drop in the Yuan has very little effect on the price that foreign companies pay to have their products assembled in China. (Herman)

Other analysts believe that in spite of the increased cost of raw materials, the devaluation will have a net positive impact on China’s economy. “Analyst Gus Faucher of PNC Bank said the change in currency exchange policy is likely to ‘support growth in China.’” (Herman) While the lower Yuan will make Chinese products more competitive in foreign markets, it could cause political tensions with the US. (GOUGH and BRADSHER) China’s Ministry of Commerce confirmed the net gain hypothesis, and that a cheaper Yuan will increase the attractiveness of Chinese exports. (SWEENEY and JIANXIN) If the Yuan devaluation leads to a decrease in Chinese demand for raw materials, mining companies across the globe may see a drop in revenues, particularly in the metals sector. (Bloomberg Professional service)

If the long term effect of the Yuan devaluation manifests itself in reduced production, the loss of jobs could be a potential danger for China. Analysts, agree, however, that this current devaluation shouldn’t have an impact on that scale. (MAKINEN and MASUNAGA) Any drop in the Yuan reduces the income US companies derive from sales in China, even if demand remains the same. Lower earnings could result in job cuts. (USA TODAY) Obviously if there are further devaluations of the Yuan then the impact on the US would be even greater.

Other experts have an opposite opinion, believing that further drops in the Chinese economy would have minimal impact on the US economy. “Goldman Sachs analyst David Kostin says a 1 percentage point drop in China’s annual economic growth would shave 0.06 percent off U.S. gross domestic product.” (Mullaney)

It was expected that the US Federal Reserve was poised to raise interest rates this Fall. But the drop in the Yuan could potentially delay that increase. “The yield on benchmark 10-year Treasuries fell more than 5 percent in U.S. trading today, moving down to 2.12 percent.” This may keep US mortgage rates low. (Mullaney) A strong U.S. dollar could hurt US exports, having a negative impact on the US economy which would be worsened by a change in interest rates. (Wei) If the Fed fails to raise interest rates, it may help certain type of mortgage holders, but not savers. (USA TODAY)

A drop in the Chinese Yuan, could, cause a currency war in Asia, with other Asian countries devaluating their currencies, in order to make their exports cheaper. Many emerging market currencies have already depreciated against the dollar. (Hu) A full-scale currency war would impact the average consumer in these countries who would find his buying power reduced when he went to the market. (Herman) A currency war, with emerging markets devaluating their currencies, could motivate investors to pull their money out of emerging markets and back into US Treasuries. (Hu)

Some financial analysts also believe this could be the beginning of a deluge of cheap goods from Asia, as other Southeast Asian countries devalue their currencies and flood foreign markets with cheaper and cheaper products. (Inman, Farrer and Ryan)

A question which remains unanswered is whether this Yuan drop is a one-time fix for the currency or part of an ongoing strategy of devaluation. Some currency analysts have already downgraded their year-end forecast for the Yuan. BMI Finance Ltd in Hong Kong, for example, has predicted a “year end rate of 6.83, down 10 percent from previous forecasts.” (SWEENEY and JIANXIN) The two questions this leads to are, will this devaluation really happen? And what will be the net impact on China and the world?

Brooklyn Monk, Antonio Graceffo is a lecturer at Shanghai University. He is also a PhD candidate at Shanghai University of sport, writing his dissertation on comparative forms of Chinese wrestling, in Chinese, with expected graduation in June of 2016. He is expected to graduate his China MBA, from Shanghai Jiaotong University, in January, 2016. Antonio is the author of the books, “Warrior Odyssey”, “The Monk from Brooklyn,” and several others. He has published hundreds of articles in the fields of linguistics: second language acquisition, as well as martial arts. Antonio is the host of the web TV show, “Martial Arts Odyssey,” which traces his ongoing journey through Asia, learning martial arts in various countries.

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The Monk from Brooklyn, the book which gave Antonio his name, and all of his other books, the book available at His book, Warrior Odyssey, chronicling Antonio Graceffo’s first six years in Asia, including stories about Khmer and Vietnamese martial arts as well as the war in Burma and the Shan State Army, is available at
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Brooklyn Monk in Asia Podcast (anti-travel humor)

The Never Ending Bokator Argument

In Uncategorized on September 5, 2015 at 9:43 am


By Antonio Graceffo

A friend sent me a Phnom Penh Post story about yutakhun khom the traditional Khmer martial art of Master Chan Boeunthoeun. In the article, Chan Boeunthoeun claims that his martial art is older and more authentic than the Bokator of Grand Master San Kim Saen. Chan Boeunthoeun has apparently gone so far as to solicit UNESCO to remove Bokator from the Intangible Cultural Heritage, martial arts list, in favor of his yuthakhun Khom. The whole argument is preposterous on so many levels. But before I explain how baseless this argument is, let me first say one thing. I have huge respect for Chan Boeunthoeun who taught his son Chan Rothana to combine traditional Khmer martial arts with bradal serey kick boxing, which Chan Rothana then used, successfully, in over 90 professional bradal serey kick boxing fights. Chan Rothana even used a combination of traditional Khmer techniques, plus bradal serey and some modern MMA to become a One FC fighter and to amass a professional MMA record of 3 wins and 1 loss.



There should be no question about Chan Rothana’s courage, or the fighting effectiveness of his martial. He definitely walks the walk. And I respect that. But there is no evidence of any kind to prove that yutakhun khom is older than Bokator or that the word yutakhun khom even existed prior to 2012.

Leading up to 2004, Chan Boeunthoeun used to be friends with Bokator Grand Master, San Kim Saen. They had both been part of the Hopkido federation and worked together to found the original Bokator Federation in 2004. They then had a falling out, and Chan Boeunthoeun left (or was asked to leave) the Bokator federation. Chan Boeunthoeun continued to teach Bokator out of his home until about 2012, when he suddenly decided that he was one of the two last remaining masters of yutakhun khom, which he claimed was the real Khmer traditional martial art.

In 2012, The National Olympic Committee of Cambodia, working together with Grand Master San Kim Saen, managed to get Bokator recognized by UNESCO on the Intangible Cultural Heritage, martial arts list. Before 2012, Cambodia had NOTHING on the UNESCO Intangible Cultural Heritage, martial arts list. Thailand had Muay Thai. Japan had Judo. Korea had Taekkyeon, but Cambodia had no official martial art until 2012, when the Bokator of Grand Master San Kim Saen was recognized. Since then, a number of other Cambodians have suddenly come forward, claiming to be teaching even older styles of Cambodian martial arts. In 2004, most of those masters, including Chan Boeunthoeun, were at the national meeting in Phnom Penh when the Bokator association was founded. Many of them were founding members of Bokator. So, if they actually knew of some other, older, better martial art, why did they wait until 2012 to talk about it?


A Google search for “yutakhun khom” revealed the earliest online mention of the art was a post in a forum in 2012.

The Phnom Penh Post story had this quote from Benoit Rigallaud, the manager of Chan Rothana and owner of the studio where yutakhun khom is taught, “’UNESCO giving bokator Intangible Heritage Asset status was a concern to the yutakhun khom community, and should be to all Cambodians, because ‘they failed to conduct a full investigation”’” Full investigation! Of what? The only evidence yutakhun khom has is the legend of a magical book of the ancient martial arts techniques which was allegedly hidden for Centuries and then finally destroyed by the Khmer Rouge.

Is it possible that someone who has a financial interest in yutakhun khom being recognized has a slightly biased opinion? And, when did opinion become fact? There doesn’t seem to be a shred of evidence to support the claims of yutakhun khom having existed. In fact the word does not appear in the 1936 dictionary of the Khmer language. Neither are there any ancient writings using that word, apart from the magical book which was destroyed by the Khmer Rouge.

Another quote from Benoit Rigallaud, “This is crazy, because we are talking about history and culture here, and if heritage is lost then it is gone forever.” If Benoit Rigallaud and Chan Boeunthoeun succeed in getting Bokator removed from the UNESCO list, then Cambodia will be losing its cultural heritage. And I agree, that is crazy.

As for the “history” of Bokator, I interviewed Chan Boeunthoeun, the first time, in 2007 in connection with the TV show, Human Weapon. At that time, Chan Boeunthoeun still called his style Bokator. He mentioned the book which had been destroyed as proof of the art. While telling me the history of Bokator, he told me that King Jayavarman VII, the patron of Bokator, and now apparently of yutakhun khom, and Bodhidharma (Da Mo) the founder of Shaolin Kung Fu, were “classmates.” According to Chan Boeunthoeun, Bodhidharma was Khmer, not Indian. Next, he said that King Jayavarman VII taught Bokator to Bodhidharma and Bodhidharma brought Bokator to China and called it Kung Fu. This story astounded me, given that Bodhidharma lived during the 5th and 6th Centuries and King Jayavarman VII lived during the 12th and 13th. When I asked him why history had recorded the story differently, he blamed Thailand. Those damned Thais and their political influence! They got the entire world to change the history of both India and China, just to repress the Khmer martial art of yutakhun khom.

Chan Boeunthoeun’s story, since 2012, has been that he has been teaching yutakhun khom all along and that it was yutakhun khom that King Jayavarman VII supported and that it was yutakhun khom that was in the ancient book which was destroyed.

According to the Phnom Penh Post story, “Boeunthoeun claims yutakhun khom dates back 2,000 years to the Funan kingdom of Southeast Asia, but it was King Jayavarman VII at the height of the Khmer Angkorian empire nearly 1,000 years ago who could be credited with cementing the yuthakun khom philosophy that survives to this day.”” This is the exact same story that has been told about Bokator. And, there is no evidence of either the word Bokator or yuthakun khom in any historical document in Cambodia. During the nearly ten years that I researched my book on Khmer martial arts, I also searched French documents. I searched in Thailand, Lao, and Burma. I spoke to Khmer martial arts teachers and students in USA, Australia, Canada, and Europe. And NO ONE had a book. No one had any evidence of any kind. And during those first many years, pre 2012, I never heard the word yuthakun khom. In fairness, I did here the word yuthakun used for martial art. And there was a yuthakun martial arts club that trained at the techno university in Phnom Penh. But their martial art was admittedly synthetic. They never claimed it to be original Khmer. It was basically a mix of everything from Khmer to karate, to taekwondo and even kung fu and probably judo.

But not one person I interviewed, including Chan Boeunthoeun used the term yuthakun khom.

Given the complete lack of evidence, it would seem more constructive for Khmer people to be happy that they made it to the UNESCO list at all. They should support the traditional martial art, whether it is called Bokator or yuthakun khom, and simply move on. There are so many other problems in the country which need to be addressed before tearing down work that has already been done and replacing it.

Brooklyn Monk, Antonio Graceffo holds a black krama in Khmer martial arts. He is the author of the book, Khun Khmer: Cambodian Martial Arts Journey. He works as a lecturer at Shanghai University. He is also a PhD candidate at Shanghai University of sport, writing his dissertation on comparative forms of Chinese wrestling. He is expected to graduate his China MBA, from Shanghai Jiaotong University, and his PhD in Spring, 2016. Antonio is also a martial arts and adventure author living in Asia, the author of the books, “Warrior Odyssey’ and “The Monk from Brooklyn.” He is also the host of the web TV show, “Martial Arts Odyssey,” which traces his ongoing journey through Asia, learning martial arts in various countries.

The Monk from Brooklyn, the book which gave Antonio his name, and all of his other books, the book available at His book, Warrior Odyssey, chronicling Antonio Graceffo’s first six years in Asia, including stories about Khmer and Vietnamese martial arts as well as the war in Burma and the Shan State Army, is available at

See Antonio’s Destinations video series and find out about his column on
Brooklyn Monk fan page
Brooklyn Monk on YOUTUBE
Brooklyn Monk in Asia Podcast (anti-travel humor)

The Myth of MMA Fighting Out of Poverty

In Uncategorized on September 3, 2015 at 2:03 pm

By Antonio Graceffo

Rocky Marciano was born poor and died rich. But that was boxing, not MMA.

In 2011 when I took the Cambodian team to fight MMA the first professional tournament in Malaysia, a lot of people were putting pressure on me to sign them to one of Asia’s most prestigious MMA promotions, even though the Cambodians had no way to train, learn ground fighting or even eat. I still remember a number of people using the phrase “A chance to fight their way out of poverty.” The terms of the contract were 3 fights at $300 per fight. I don’t know where those people learned their economics, but where I studied, I learned that $900 USD a year isn’t exactly a ticket out of poverty. The counter argument was always, “But if they win, they could get more on their next fight.” How much more? Double? Triple? Quadruple? That still qualifies as poverty.

In MMA even top fighters will only have a handful of fights at the tens-or-hundreds-of-thousands-of-dollars level. This is true even of the Ultimate Fighting Championships (UFC), which is generally thought to be the best paying promotion in the world.

My theory is that, while it is hard to become rich in other sports, it is nearly impossible to even earn a living in MMA.

MMA Compared to Other Sports

By this point, most people probably know that MMA fighters are paid less than professional athletes in most other televised sports. The three boxers with the highest lifetime earnings are Floyd Mayweather Jr. with $756 million, Oscar De La Hoya with $696 million, and in third place, Manny Pacquiao with $661 million. (Cramer).
The three top earners in pro wrestling earned quite a bit less: The Rock, with $70 Million, Steve Austin with $45 Million, and John Cena with $35 Million. (Campbell)

As amazing as the lifetime earnings are for the outstanding boxers and wrestlers, the average salary for a major league baseball player in 2014 was $3.82 million. (Badenhausen) And basketball pays even better than baseball. The average NBA player, for example, earns $4.5 million per year. (Gaines) Because of the higher pay and longer playing life, the lifetime earnings of basketball players exceed those of most other pro athletes. The average NBA player plays 4.8 years and has lifetime career earnings of $24.7 million. (Gaines) In the history of the NBA, 25 players have had lifetime earnings of over 125 Million each. (Gaines)

While it is obvious that ball players and champion boxers earn a lot, what about an average boxer? According to The U.S. Bureau of Labor Statistics, people who list professional boxer as their profession on their tax return earned an average of $75,760 in 2012. (Guerra) That’s a lot lower than Floyde Mayweather, but still nearly double the lifetime earnings of the average MMA fighter.

The expected lifetime earnings of a professional MMA fighter are $38,000. (Shmoop)

MMA earnings are low compared to what?

Obviously, not everyone can be a top ball player or a professional boxing champion, but MMA is not even a good career when compared to other jobs. In 2013, the average high school teacher earned $55,360, with the bottom 10% earning $37,230.
( Said another way, the lowest paid high school teacher’s earnings for a single year were nearly equal to the lifetime earnings of the average MMA fighter.

Of course, being a high school teacher necessitates earning a university degree, which some fighters feel they can’t do. But other careers also pay infinitely better than MMA fighting. In 2013, police officers averaged $90,700, with the bottom 10% earning $32,670. (

Not everyone can get on a well-paid police force. But nearly anyone who is healthy, free of felony convictions, and has a high school diploma can join the army. The average salary for a solider is $21,032 – $76,175 (Army, U.S.) Maybe you don’t want to join the army. Fine, you could be an auto mechanic. The salary for a mechanic ranged from $20,920 to $61,210, with an average salary of $36,710, in 2013. ( Ok, let’s say, you’re a convicted felon, with no high school diploma, who is unable to learn to be an auto mechanic. Fine, you can work in fast food. The average salary for a fast food crew member was $16,000 per year. (

Therefore, if you’ve been paying attention, the lifetime earnings of the average MMA fighter is about the same as what the average McDonalds worker earns in a little over two years.

UFC Earnings

Most MMA fighters aspire to fight in the UFC, the most prestigious MMA organization in the world. But even in the UFC, the average fighter barely earns a living. According to an article published in the MMA Sentinel, the average wage for a UFC fighter is just $30,500 per year. (MMA Sentinel) “The 18 fighters in the nine undercard bouts at UFC 162 were paid a disclosed total of $1.167 million, an average of $64,833.33 per man.” (Iole)

Through 2014, the top three lifetime earners in UFC were Michael Bisping $5,694,000, Anderson Silva $4,717,000, and Georges St-Pierre $4,457,000. (Fox) They each had lifetime earnings about equal to what the average NBA player earns in a single year. Of course, for most people, $5.9 Million sounds like a good amount of money. But in the UFC, the money drops off dramatically as you go down the list. The Number 62 highest earner in UFC history, Thiago Alves and number 63, Chris Leben had lifetime earnings of less than $1,000,000. And, number 438, Lance Benoist had less than $100,000. At the bottom was a bunch of people you have probably never hear of, with earnings of $2,000 each. (Fox)

To achieve his ranking of 438th best paid UFC athlete, and to achieve his less than $100,000 lifetime earnings, Lance Benoist fought 9 fights between 2010 and 2014. If he had worked as a school teacher, cop, soldier, or auto mechanic for the same five-year period he would have earned well over $100,000. But he did earn more than the $80,000 he would have earned if he had spent those five years flipping burgers.

Even in the big show, it’s hard to make a living. But not everyone makes it to the big show.


After the UFC, Bellator is one of the more respected MMA promotions in the world. The payouts for Bellator 106 looked like this: Michael Chandler was contracted to receive $95,000 appearance fee, plus a win bonus of $95,000. Daniel Straus could max out at $40,000 ($20,000/$20,000). Muhammed Lawal and Emanuel Newton, competing for an interim light heavyweight title, could earn $20,000 ($10,000/$10,000). The loser of the “Fight Master” reality show finale would get $5,000. The winner of the lowest paid fight on the card, Darren Smith vs. Josh Smith would earn $3,000 ($1,500/$1.500). (Bratcher)

While the top salaries in Bellator are admirable for most MMA fighters, they are considerably less than those in the UFC. And once again, the fighters in the middle rungs will barely earn a living. And those in the lower rungs can’t possibly survive on fight purses.

One FC

When former Bellator champion, Ben Askren, signed for One FC, he was guaranteed a $50,000 appearance fee and a $50,000 win bonus. (Symes) According to his Serdog record, he had 14 fights between 2009 and 2015. And of course, he wasn’t paid One FC level money for all of those fights. This is where the low lifetime earnings for MMA fighters come from. Most fighters only receive top payouts for a very small number of fights, at the peak of their careers. And in this case, top money is $100,000 for a win.

Ben Askren was highly critical of former UFC fighter and MMA legend, Phil Baroni, whose record is 15 wins and 18 losses. Apparently, in an attempt to rejuvenate his own, failing career, Phil has called Ben out. (Marrocco)

“’It’s gross how desperate he is to get a fight,’ Askren said. ‘He probably doesn’t know what else he’s going to do with his life, so he’s trying to talk himself (into) a fight.’” (Marrocco)

Phil Baroni has been fighting since 2000, having fought in many of the top MMA organizations: UFC PRIDE, Strikeforce, Cage Rage, DREAM, EliteXC, and ONE FC. If Ben Askren is right, and Phil Baroni has trouble making a living, how can the average fighter?

Brooklyn Monk, Antonio Graceffo is a PhD candidate at Shanghai University of sport, writing his dissertation on comparative forms of Chinese wrestling. He is a martial arts and adventure author living in Asia, the author of the books, “Warrior Odyssey’ and “The Monk from Brooklyn.” Antonio is also the host of the web TV show, “Martial Arts Odyssey,” which traces his ongoing journey through Asia, learning martial arts in various countries.

The Monk from Brooklyn, the book which gave Antonio his name, and all of his other books, the book available at His book, Warrior Odyssey, chronicling Antonio Graceffo’s first six years in Asia, including stories about Khmer and Vietnamese martial arts as well as the war in Burma and the Shan State Army, is available at
See Antonio’s Destinations video series and find out about his column on
Brooklyn Monk fan page
Brooklyn Monk on YOUTUBE
Brooklyn Monk in Asia Podcast (anti-travel humor)


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