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The Dangers of Privatization

China Security Memo: July 30, 2009

Stratfor Today » July 30, 2009 | 2004 GMT
The Dangers of Privatization

A protest at state-owned Tonghua Iron and Steel Group facilities in China’s northeast Jilin province turned violent July 24 when some 3,000 Tonghua workers shut down plant operations and demanded that the privately owned Jianlong Steel Holding rescind its bid to take over Tonghua. It is the second attempt by Jianlong to take over the state-owned enterprise (SOE) since 2005. Inflammatory statements allegedly made by Jianlong executive Chen Guojun prompted some of the protestors to storm a conference room in which privatization talks were being held and beat him to death.

By the end of the day, between 10,000 and 30,000 people filled an area around the Tonghua facilities and successfully resisted attempts by police and special security forces to disperse the crowd. There are conflicting reports on the actual size of the crowd, but even the most conservative estimate — 10,000 people — makes it a large protest. There also were reports of medical and security personnel being prevented by the crowd from reaching Chen. Protestors finally dispersed when the Jilin government announced over the provincial television network that the deal to take over Tonghua had been taken off the table.

China’s steel industry is by far the biggest in the world but is largely inefficient because of the patchwork of small plants left over from the Maoist era, when the government promoted industrial self-reliance for provinces and cities. In recent years, the central government has made a concerted effort to consolidate several sectors of the economy, most notably the steel industry. The global economic crisis has hastened this effort, and the central government is striving to streamline the steel industry and cut down on redundant and inefficient plants in order for industry to remain internationally competitive.

Private companies in China are “private” in name only. In fact, they are usually owned by descendants of high-ranking Communist Party officials known as “princelings.” In the case of Jianlong Steel Holding, the CEO of the firm, Zhang Zhiqiang, is the grandson of the former central committee vice commander in chief and remains well connected to the central government. What appears to be a private takeover of an SOE is really an attempt by the central government to consolidate its control over the steel industry. And it means lost jobs and angry workers in the near term, regardless of whether it’s a smaller SOE being absorbed into a larger one or a private Chinese business acquiring an SOE. The Chinese government is stuck in a delicate balancing act of retaining jobs in certain key economic sectors — such as the steel industry — to maintain social stability while attempting to consolidate and streamline the industry, a process that inevitably entails layoffs for redundant positions.

Indeed, the July 24 Tonghua incident highlights the dangers in the consolidation and privatization of SOEs. When word gets out, workers know that their jobs are on the line and potentially volatile situations quickly develop. There are conflicting reports about what Chen said to or about the protesting workers, but whatever he did say prompted the attack. It was an unusual act of lethal violence for a factory protest, but threats and lesser acts of violence against executives in such circumstances are not rare. In February, more than 600 employees of the Beijing Panasonic factory surrounded the executive manager’s office and trapped him and several other executives for several hours before help arrived. This occurred after Panasonic asked several hundred workers to voluntarily quit and take severance packages.

Another incident occurred June 2 in which 400 construction workers with three large tractors blocked the entrance to a gated community in Beijing, protesting delayed talks with the community’s management about laying pipe on the property. The protesters were dispersed when police arrived on the scene.

The Tonghua incident also reflects the need for preventive security measures to be in place ahead of contentious meetings. The day before the incident, 150 employees and family members protested the meetings that were under way, and on the day of the incident some 3,000 protesters initially gathered outside the building where the meetings were being held. This should have prompted security officials to deploy the necessary resources to deal with the escalating situation. As it turned out, belated security response and good coordination among the protesters in preventing medical personnel from treating Chen likely resulted in his death.

This was the second — and last — attempt by Jialong Steel Holding to take over Tonghua Iron and Steel Group. The reaction of the workers and ensuing violence prompted the Jilin provincial government to bar Jialong Steel Holding from attempting another takeover. And Chinese Premier Wen Jiabao’s trip to Jilin province July 25 represented the central government’s attempt to contain the volatile social situation — a typical after-the-fact response that raises the question of whether the government will learn from the incident. As China continues to privatize and consolidate its smaller state-owned assets, this scenario is likely to play out again in other regions — especially if proper preventive security measures are not taken.

July 23
  • The director of Hunan province’s agricultural department was detained by provincial law enforcement officers on charges of “severe disciplinary violations,” local media reported. According to the media, the director’s wife, son and younger brother carried out illicit activities under his name.
July 24
  • A security guard shot a hotel guest to death after an argument broke out in a hotel in Foshan, Guangdong province. Later, about 100 people gathered around the hotel and accused the guards of murder. The argument arose when the hotel refused the guest’s request for an escort service. Two other guards helped subdue the man. Foshan police are investigating the incident.
  • Five cab drivers were arrested for allegedly leading a mass strike for cab drivers in Mudanjiang, Heilongjiang province. The drivers had been protesting a local government policy that reportedly hurt their business.
July 25
  • A law enforcement official in Yulin, Shaanxi province, disclosed that three police officers have been suspended from their duties for colluding with local coal-mine operators to buy equity shares in a local mine.
  • More than 3,000 villagers of Shipu, Zhejiang province, blocked a road and clashed with riot police in a protest against local officials who allegedly bought their land at unfair prices. Ten people were injured in the incident, which the local government in investigating. Thousands of workers had already staged sit-ins at local salt fields that are thought to have been sold at below-market prices to the Changguo Saltern company.
  • The forced resignation of the Shishou city committee secretary was announced during a committee meeting over the mishandling of an incident June 17 involving some 10,000 local residents who clashed with police in Shishou, in Hubei province. Protestors burned a hotel and vehicles after alleging foul play involving local drug dealers that led to the death of a chef at the hotel.
July 27
  • An ongoing investigation into the case involving three police officers colluding with local coal-mine operators in Yulin revealed that four more officers have been implicated in the case.
  • Local media revealed details of the July 11 arrest of a major drug trafficker, Liu Siqiang, in Nanjing for trans-provincial smuggling and using a fake police identification card. A total of 4.7 kilograms of amphetamines was seized and 22 of 27 suspects were detained.
  • The Baotou intermediate people’s court in Inner Mongolia began the trial of former Chifeng Mayor Xu Guoyuan on charges of corruption. Xu allegedly collected illegal fees amounting to 5.33 million yuan over a six-year period. Xu’s charges include implementing public policy in return for bribes and paying money for political favors.
July 28
  • Chongqing police detained five men in connection with the “careless disposal” of spent shell casings and magazines and other gun components that were found beside a road July 26. Three of the men, all of whom were charged with endangering public safety, are linked to the local defense industry.
  • Taxi companies in Wenzhou, Zhejiang province, were forced to suspend their operations after 2,000 cab drivers went on a strike protesting low pay, rising fuel costs and illegal cab operations. Dozens of cab drivers and business operators who refused to join the strike had their vehicles and property vandalized. In response, the local government invoked emergency powers and ordered 100 taxis to provide essential services in the city. Police later arrested eight people suspected of instigating the strike. Taxi operations have since returned to normal.
  • Five chengguan (urban management officers) were dismissed after they allegedly beat a street peddler in the Minhang district of Shanghai on July 11. The incident occurred after the peddler refused to leave his stall during an unlicensed-peddler inspection. The district government also pledged that chengguan departments would be reviewed and less-qualified staff members discharged. Meanwhile, police detained the officers for possible trial on criminal charges.
July 29
  • Customs officials at Beijing Capital International Airport detained eight people suspected of smuggling Chinese workers to Europe under the guise of conducting business inspections overseas.