Trading places

Fat Dragon has long been antsy about how Chinese state enterprises – both those listed overseas and others yet to go public – appoint their top executives.

The appointments are made by the respective ministries or Communist Party personnel departments responsible for the companies, a practice that is in line with their ownership structure but completely at odds with the rhetoric about how they are independently managed.

Still, even by Fat Dragon's standards, the recent merry-go-round in late October at the top of China's giant telecommunications companies will take some beating as an exercise in political fixing.

In short, this is what happened. The head of China Unicom, the second largest mobile provider, was appointed to head China Mobile, its larger rival.

In turn, the top executives from China Mobile, China Telecom and China Netcom all traded top positions.

Three of these companies are listed overseas and the fourth, China Netcom, at writing, had been priced and was due to go to the market any day.

To understand just how corrosive this round-robin is to the distinctive corporate culture under construction at these companies, just consider the case of Wang Jianzhou, formerly the boss of China Unicom.

Wang was given the task of building a CDMA network at Unicom to compete with China Mobile's GSM service. With notice of barely a single day (apparently he was as bewildered as the rest of us by the move), Wang was moved to China Mobile where his job will be to trash the very CDMA network he has just built from the ground up.

So what was this exercise all about? Funnily enough, it might have been about stopping competition rather than increasing it.

The price wars between the different providers have cut into their profits. By forcing them into greater alignment – effectively by arming each with their rival's most prized business secrets – the government expects competition to cool and their dividend stream to be maintained.

But the more important message sent by the Ministry of Information Industry, which is responsible for the appointments, is crudely political. It is a reminder that the ministry is in charge, no matter how strong the pretensions of the CEOs (and all their expensive foreign consultants) were about how they were running businesses.

This is something that foreign investors should bear in mind as they gird their loins for the big China Construction Bank and Bank of China listings due next year.

For all of their transformation into shareholding companies, the intensive audits and the massive restructuring they are going through, they remain the property of the government through the Ministry of Finance.

It is early days yet, but investors might like to factor in a sharp discount for all the risk that such ownership structures still entail.