Transcript: A glow-up for China’s state-owned enterprises

This is an audio transcript of the FT News Briefing podcast episode: ‘A glow-up for China’s state-owned enterprises’

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Sonja Hutson
Good morning from the Financial Times. Today is Wednesday, April 17th, and this is your FT News Briefing.

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Venture capital is betting big on the AI hype, and investors are giving China’s state-owned enterprises another look. Plus, we explore how Israel could face the same difficulties as Ukraine in air defence. I’m Sonja Hutson, and here’s the news you need to start your day.

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One of Silicon Valley’s most well-known venture capital groups is going all in on artificial intelligence. Andreessen Horowitz has raised a whopping $7.2bn to invest in tech start-ups and AI. It’s one of the biggest fundraising efforts by a venture capital firm in years. Andreessen plans to invest in companies at the leading edge of the generative AI revolution. You know when algorithms become as smart as people.

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Iran’s direct attack on Israel last weekend was massive by any standard. Tehran launched more than 300 missiles and drones, but nearly all of them were shot down. Now, Israel’s war cabinet is considering how to respond. But should the country enter a wider regional conflict, it could face some of the same challenges that Ukraine does when countering Russian air attacks. Here to talk to me about the air defences of both Israel and Ukraine is the FT’s John Paul Rathbone. Hey, JP.

John Paul Rathbone
Hi, Sonja.

Sonja Hutson
So walk me through some of Israel’s defences. I mean, how was it able to intercept so many of Iran’s weapons all at the same time?

John Paul Rathbone
So that was a complicated operation. And there are essentially three reasons, maybe four, why Israel so successfully managed to stop the vast majority of those missiles and drones from impacting any target inside Israel. The first is that the attack was telegraphed well in advance, so Israel and its allies had a lot of time to prepare. The second is that Israel has this highly sophisticated and multi-layered air defence system. The most famous is the Iron Dome, which can take out small rockets. The third reason is that Israel enjoyed considerable allied support. US, UK and French jets took out a lot of the incoming drones and missiles long before they reached Israel’s borders. And also it had co-operation from some Arab partners, including Jordan. And finally, because this was a punitive one-off strike, the first that Israel has ever experienced, Israel was able to throw all it had at this incoming attack.

Sonja Hutson
And how does Ukraine compare to that? I mean, I don’t think I’ve heard anything about the US or the UK shooting down Russian drones and missiles there.

John Paul Rathbone
That is a key difference. And Volodymyr Zelenskyy, the Ukrainian president, was fuming about that on Sunday when he condemned Iran’s attack and said but if only we had the same kind of support that Israel had enjoyed. So that is a major difference. And then some of the other key differences are . . . well, Ukraine has cobbled together its own defence systems that’s called the FrankenSAM. SAM for surface-to-air missiles. But perhaps the most essential difference is that Ukraine has been doing this for two years. It’s exhausted. Its stocks of interceptor missiles are not being replenished fast enough. Israel had a well-banked arsenal of missiles. It hasn’t faced a war of attrition in the same way that Ukraine has done. So again, it could throw everything it had at this attack without much regard for the (inaudible).

Sonja Hutson
Well, then going back to talking about Israel, it is the kind of protection and defence that we saw over the weekend, something that it could sustain in a longer war or a wider war, or would it suffer the same fate as Ukraine?

John Paul Rathbone
So, however sophisticated your air defence, if it’s being pummelled all the time, after a while it becomes exhausted and depleted. And Israel doesn’t reveal, for obvious reasons, how large its stock of interceptors is. But one can easily imagine a situation where in time it becomes depleted, and over time its allies may exhaust their goodwill towards Israel and may even be unable to continue supporting it in theory. The other point is that these air defence interceptor missiles are in huge demand everywhere. Ukraine wants and needs them. Israel wants and needs them. Then there’s also the European countries, who have donated large stocks of their interceptor missiles to Ukraine, they also need them to replenish. So there’s a limited supply of these interceptor missiles. There’s huge demand for them, and they take a long time to produce.

Sonja Hutson
JP, it seems to me, like, we could very well end up in a situation where there’s all this demand for air defence systems and, you know, not quite enough to go around. Could the world end up having to choose who to support Israel or Ukraine?

John Paul Rathbone
That’s a very good question. And the answer is we don’t know because that kind of information about the stocks is classified. So who has got how much where and how much they’re willing to share out is a sort of unknowable equation until the moment actually happens. But in theory, yes. And just the fact that people are wary about the limits of our defence, no supply is infinite, I think, suggests that one could easily imagine arriving in that situation.

Sonja Hutson
John Paul Rathbone is the FT’s defence and security correspondent. Thanks, JP.

John Paul Rathbone
Thank you.

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Sonja Hutson
The US economy is surpassing all expectations. It’s on track to grow at nearly double the rate of any other G7 country. That’s according to the International Monetary Fund. The IMF said yesterday that strong consumer spending and investment would push US growth to 2.7 per cent this year. Global stock markets were not too thrilled about the news. They basically tanked. European stock markets even suffered their worst day in nine months. Investors are thinking that such a strong US economy likely means that the Federal Reserve will hold off on cutting interest rates. Fed chair Jay Powell said yesterday that it was likely to take, quote, longer than expected for inflation to return to the 2 per cent target.

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China’s state-owned enterprises, or SOEs, are often seen as clunky and inefficient by investors. But some recent policy changes by Beijing have resulted in a bit of a stock market glow-up. Now, SOEs listed in Hong Kong have been outperforming the city’s benchmark index, and investors are taking notice. Here to talk with me about it is the FT’s William Sandlund. Hi, William.

William Sandlund
Thanks for having me on.

Sonja Hutson
So to start off, can you tell me a little bit about why investors have historically kind of turned their noses up at these state-owned enterprises?

William Sandlund
Well, there’s a number of reasons. But first and foremost, the government’s majority ownership of these companies has always presented a complicated picture because they’ve tended to use them as a vehicle for their own policy priorities rather than benefiting shareholders. So if the government needed state-owned enterprises to employ more people, that’s what the state-owned enterprises would do. Now, that wouldn’t obviously always be in the interests of a minority shareholder who maybe wanted a larger dividend payout. And so these are somewhat notorious for lots of bureaucracy and not as efficient as China’s private enterprises in many instances. So that often affected valuations of these companies.

Sonja Hutson
OK. Well, what has changed then to make them more attractive to investors now?

William Sandlund
Well, the government has come out with recent reforms where they’re starting to use the market valuation of these companies to assess senior management. And this is the first time they’ve ever explicitly tied, you know, the stock market performance of a state-owned enterprise to how the leadership of these SOEs is being assessed by Beijing. So there’s some hope now that, along with some other initiatives they’ve done around SOE reform, including encouraging more dividend payouts and better return on equity, there’s hope that these SOEs will actually increase efficiency and be more friendly to minority shareholders.

Sonja Hutson
What are some of the policy goals of the Chinese government in trying to make this sector more attractive? Like, why are they doing this?

William Sandlund
Well, there’s a lot of different reasons, but I’d say the most compelling one was trying to replace a revenue stream that, you know, as land sales have fallen in China, the government has needed to find new ways to raise money. And increasing dividend payouts at these large state-owned enterprises would be a way for the government, who’s the largest shareholder of these businesses, it will create sustainable cash flow for them. So that’s one incentive. And then the other would be, you know, they’ve had longstanding efforts around improving efficiency at SOEs, this is something that goes back decades. And it’s always run into different walls. But that has to do with things like managing down debt and just having a more efficient state.

Sonja Hutson
What are some of the risks then for Beijing in this new approach to sort of let market forces guide performance of these SOEs?

William Sandlund
The risk is that if the government is successful in reforming these SOEs but as a result would lose a degree of control over them, and that they rely on to achieve many of their political and economic objectives. So one of these big worries of policymakers in Beijing is, you know, higher unemployment leading to social instability and economic downturns. And so SOEs have been a great policy tool for helping ensure higher rates of employment in economically depressed regions. You know, if they had to run their operations more like a fully privately owned enterprise, they would maybe return money to shareholders rather than pay out a larger workforce, right? So there’s a balancing act here that the government is trying to pull off that will be very interesting to watch unfold.

Sonja Hutson
William Sandlund covers breaking news in Asia for the FT. Thanks, William.

William Sandlund
Thanks so much. It was great to be on the show.

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Sonja Hutson
You can read more on all these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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