It may not be much consolation to Gautam Adani, but he is not the first “national champion” to be brought low by having his accounting practices questioned on the world stage. As much as the rise of India’s (ex-)richest man was meteoric, it pales in comparison to the rise of Chinese businesses in the 2000s. With an incredible sustained double-digit growth rate after the opening of its economy under Deng Xiaoping, the new millennium marked the point when cash-rich Chinese companies went global, buying up companies in other countries as a way to expand their footprint.
The problem was that Chinese companies operated in a very different business environment at home than what they found abroad. Most of the major Chinese companies were – and continue to be – either state-owned or state-linked. Part of this is crudely political, as the Communist Party of China exercises control and makes sure that the top managers of such companies are Party operatives, or at least Party affiliated. Another part of it is the economic conditions that this political control has created. Since banks in China are mostly state-run, and the Party sets the agenda of development, a state-owned (or linked) firm, often has an insight into the direction of where the state will want investment to flow, and the banks are encouraged to lend in that direction.
This is not so much a state-run economy as a state-directed one; with permits, financing, and business combining into a “whole of society” approach to development. Unfortunately, to an external observer, it all looks like a great deal of insider trading. And, of course, it comes with its own risks. For example, there is the real estate crisis in China, where huge unfinished, unaffordable, or merely empty “ghost cities” have created a massive strain on the Chinese economy. (As Vivek Kaul explains, we have “ghost structures” too, even if at a smaller level.)
These ghost cities were built by companies because it was what the government indicated. They were financed by loans made easy because the banks also knew that this is what the government wanted. Now, because they are overpriced, and Chinese incomes have not achieved the targets that the state might have wanted, they are a headache for real estate companies, banks, and China.
A decade ago, there were only a few murmurs of caution about problematic business decisions and accounting issues in China, usually only within the domain of experts. The problems only came into clear focus when China’s “national champions” went to town by buying abroad. It was part of China’s great coming out parade. The problem was that they were just not used to operating in a more sceptical environment. No government was giving them the nod, and no state direction would ease the way. In fact, in the states that they now invested in, the regulatory institutions were far more likely to ask questions instead, and it did not really matter if your CEO was a bigwig in the government, or their son or daughter.
As David Shambaugh documents in China Goes Global, “In 2010 the US Securities and Exchange Commission (SEC) launched an investigation into the accounting practices of Chinese firms that had tried to list in the United States, and found at least twenty-five had fraudulent accounting in their filings.” Many companies delisted in 2011, buying back their stock.
What this exposed, though, was not really the companies themselves, but the business environment in China. As Shambaugh drily notes, “Transparency and corporate governance are not exactly attributes associated with Chinese companies, whose decision-making processes are usually opaque, whose business practices are frequently corrupt, and whose accounting procedures are often fraudulent.”
The humiliation of Chinese companies, as China’s “national champions” was also seen as a humiliation of the country, because of what it revealed about the nature of its regulatory institutions. In the defence mounted by Adani, he has described the Hindenburg report as an attack not just on Adani, but on India as a whole. One hopes he is not drawing a similar parallel.
Omair Ahmad is an author and journalist.