The development of "conglomerate economy" was an important suggestion made by Anbound during China's economic transition. Here, "conglomerate" can also be understood as "consortium." Based on the general definition, a consortium is a monopoly group controlled by a few financial oligarchs, the likes of which usually are a small number of large banks, insurance companies, as well as a larger number of business entities. For this reason, in China consortium are often considered to be somewhat ideological institutions. In reality, however, consortium are simply conglomerates, and in the Chinese context, conglomerates are a type of industrial social organization that encourages technological innovation based on the following structure: industrial capital takes the lead; finance, technology, and the supply chain serves as the main linkages; and the management of cooperation and mutual supervision function as levers of the system. The development of a consortium then, requires the building of an industrial economic group that has strength, quality, and status.
As an economic phenomenon, conglomerate economies have a rather long history, especially in Japan, where it contributed greatly in promoting and facilitating the country's economy and industrial development. So, why is Anbound suggesting that China develop its own conglomerate economy? What has this to do with solving China's economic development issues? Anbound's scholars are convinced that this has all to do with China's current and future economic situation.
In 2013, when China's previously rapidly growing economy started to emerge against obstacles, we had already suggested that China could secure its economic growth by taking a leaf out of the "conglomerate economy" book. Once again, in 2015, when China's economic growth drastically slowed down—to the point that it formed an L-shaped graph—we suggested that China should promote economic growth by vigorously developing a "conglomerate economy." Now, as the current global trade environment continues to worsen and China's economic growth continues to slow down, we are putting out yet another call for China focus its efforts on developing a "conglomerate economy" so that it may concentrate social capital and revive the financial resources of the market in order to inject the Chinese economy with new vigor.
The reason why we have repeatedly brought up this suggestion is because the Chinese economy is currently in a highly stressed situation, not least due to various domestic and international pressures. Some of the most salient issues China's economy is facing include a beleaguered real economy and significantly worsening debt risks. These have in turn weakened the foundation of China's economic transformation and restructuring. A conglomerate economy will be able to provide China with a way out of this dilemma, and what's more, if it is implemented properly, it might even prove to be a solution to all the above problems.
At the macro level, a conglomerate economy will be able to play an active role in China's economy and effectively solve the many problems plaguing it, especially in the following aspects:
First of all, conglomerates are an important type of industrial organization system. As a business group that is composed of inherent capital relationships and equity links, one of its main functions is to organize and coordinate with the industry. The conglomerates found across various countries share a few key attributes: financial capital is at the core of the system, there is cross-shareholding between companies within the consortium, while industrial development (especially the manufacturing industry) serves as another keystone. Japan's conglomerates place high emphasis on building up the interdependence between enterprises to form what is known as a "community of common destiny," whereby risks, external competition, developments, and resources are undertaken, resisted, and enjoyed together. Essentially, the role of industrial organization can be understood on two levels, the first of which is the macro level, viz. the organization and layout of the industry. This means that according to different market conditions, subsidiary companies will be encouraged to develop in multiple industries in order to form an industrial system with diversified development. This in turn will ensure that all these subsidiary enterprises will be able to develop within growing industrial fields at different times and in different markets. The second is on the level of microenterprises, whereby the conglomerate assists its subsidiary enterprises by helping them to find market opportunities, allocating financial resources to them, providing them with supporting and intermediary services, and supplying them with the talent they need. All of this will help subsidiary enterprises to achieve success within their respective target markets.
In China, it is common to see the government taking control of the industry. However, if the government wants to control the industry, it will also need to take on the roles of organizing and investing in the industry. Likewise, it must also bear the costs and consequences of the policy failures that arise. An alternative scenario would be so: the government only manages the conglomerates through its policies and allows private conglomerates to make their own decisions about industrial development. In this case, not only will the pressures, responsibilities, and financial burdens have to be borne by the private conglomerates themselves, but also the problem of lack of policy will also be resolved.
Second, conglomerates can function as important economic intelligence centers. This is because in order for conglomerates to effectively manage and coordinate multiple enterprises and investment agencies, it must have a grasp on a significant amount of information, only then can the complex decision-making, management, and resource-scheduling process of the consortium system be carried out smoothly. In the case of Japan and South Korea, their conglomerates managed to develop impressive intelligence capacities—including gathering, integrating, disseminating, and analyzing information—in order to fulfill their immense information needs. For example, Mitsui Group's research department covers the following topics: economy and industry, society and region, scientific and technological research, and information systems research. Furthermore, Mitsui outsources all of its research and regularly hires researchers from universities to collaborate with them.
In the meantime, the information capacities of Chinese enterprises are still rather rudimentary, and both state-owned and private enterprises suffer from a general lack of systematic information capabilities. There are obvious deficiencies in terms of the organization, systematization, collection, and analysis of information, which has in turn greatly affected the scientific decision-making of these enterprises. Overall all, it is still necessary for China to develop its own consortia in order to bring about meaningful change in Chinese corporate investment. A good place to start would be systematic fostering and enhancing the intelligence capabilities of corporate consortia to build up the economic intelligence units of consortia.
Third, conglomerates can serve as a framework for a healthy relationship between the government and businesses. In today's society, government-business relations are a fixture of every industry; the only variable is how healthy the relationship is. There is always a reciprocity between politics and business, though this relationship might be manifested differently based on the country or region, the institutional environment, and the cultural backdrop. For one, government-business relations in Asian countries—especially in the context of East Asian cultures—differ starkly from those in European and American markets, in the sense that the former is not only more complicated and delicate but also infiltrates the business culture more thoroughly. Historically, Japan has had a tradition of "political business," while China likewise had "red-cap businessmen"—public officials who used their power and connections to conduct personal business. While such traditions have lasted to this day, government-business relations in East Asia have gradually developed and "improved" with the advancement of society, politics, and civilization. In any case, government-business relations have gradually transitioned from being centered on the exchange of politicians' personal interests to the government's "public interests". In other words, such exchanges, which used to be completely opaque, have slowly attained a certain degree of transparency thanks to standardization. Against this backdrop increasing political civility, government-business relations in China urgently need to develop healthily. Chinese enterprises and conglomerates need to build a relatively civil and healthy relationship with the government, and in the even that private conglomerates are not able to wean themselves off of governmental aid and support, the government should rigorously encourage the healthy development of these enterprises (especially private ones), in order that China may develop internationally-competitive private conglomerates that can serve as a stable and dynamic support base for the national economy. Therefore, it is of utmost importance that the future development of China's private conglomerates is built upon government-business relations that are institutionalized.
Fourth, conglomerates can effectively promote the development of the manufacturing industry. Turning to the examples of Japan and South Korea once again, we see how conglomerates played a crucial role in developing the manufacturing industries of these countries. In fact, it can be said that one of the main missions of Japanese and South Korean conglomerates is to develop a robust manufacturing industry not only because these conglomerates were primarily built upon the manufacturing industry but also many of their subsidiaries have been engaged in manufacturing. From the beginning, Japan had already come up with strategies that focused on trade and manufacturing to build up the country. With regard to trade, the main focus was to first get a grasp on internationalized commercial rights related to trade, which was essentially the lifeline of Japan's economy. With regard to manufacturing, the goal was to develop a robust manufacturing industry in order to bring about industrialization. Thanks to the rigorous efforts of Japanese conglomerates, after the Second World War, the country managed to achieve its goals to base the economy on trade and manufacturing. Furthermore, it even gradually began to come up with a new development framework based on technology. In recent years, China has been experiencing a downturn in the development of its manufacturing industry alongside a flight of capital from the industry. The main reason why a lot of manufacturing enterprises have not been able to overcome such challenges because they are all trying to go it alone. However, if they would only come together to form a conglomerate, they would most likely get the support they need—including support from the industrial chain, financial resources, information, and mutual cooperation—to get over these hurdles.
Fifth, conglomerates can integrate financial resources. A common attribute shared by conglomerates of various countries is their control over a portion of the country's financial resources. In China, however, private enterprises are generally engaged in manufacturing, and the problem with this is that it is exceedingly difficult for companies engaged in so-called "physical industries" to initiate the establishment of banks. Indeed, only in 1996 was the first private joint-stock bank set up since the founding of the People's Republic, and as lately as 2015 the China Banking Regulatory Commission published the "Guiding Opinions on Promoting the Development of Private Banks" and subsequently opened up a channel for private enterprises to establish private banks. Although the current participation of private enterprises in the finance industry is now much better than it was before, the influence and financial resources of private capital in China's finance industry is still far from satisfactory. This in turn has created a rather peculiar situation whereby on one hand, private enterprises are the main contributors to China's economic growth, but on the other hand, state-owned financial institutions still maintain absolute control over the country's financial system. Nonetheless, compared to a purely financially-based financial industry, a financial industry built upon industrial capital will always have a better understanding of the financial services required by industrial development as well as the opportunities and risks present in the industry. With regard to the worry about the issue of managing the risks involved in allowing private industry capital into the financial industry, well, all can be managed by taking extra precautions through the establishment of regulatory systems.
Sixth, conglomerates can function as pioneers in a market, for they are corporate communities of common destiny that are linked by both capital and equity. Moreover, enterprises have a more competitive edge within a conglomerate economy as they will not have to go alone when setting out to create new market spaces. It can thus be said that conglomerates are crucial in enabling enterprises to expand both domestically and internationally, especially in terms of the services and assistance that the former provides to the latter. For example, Mitsui & Co., one of Mitsui Group's subsidiaries, has played the role of an organizer of cross-border supply and demand in the global steel industry for a long time. At the same time, in controlling core distribution businesses, Mitsui & Co. has made efforts to get through the various auxiliary links in the production chain to secure its control of the upstream sector. Here, it is evident that general trading companies (sogo shosha) have contributed immensely to the competitiveness of Japan's manufacturing industry.
Seventh, conglomerates can promote research and development (R&D). R&D requires a significant investment in resources that most enterprises, especially private ones, are not able to come up with due to limitations of both profit and size. This indicates that, on one hand, the private economy needs to increase its scientific and technological innovation especially in relation to the state-owned economy, and on the other hand, monetary and profit-related constraints have a significant impact on the private economy. Here, conglomerates have a role to play, for they have a unique capacity to upscale the economy; a conglomerate can easily accomplish something that an individual enterprise would not be able to be on its own accord.
Overall, it is evident that a conglomerate economy will be highly beneficial to China's economy today, which is now facing not only a capital surplus but also a partial lack of market liquidity. Some other severe challenges include a sharp decline in private sector investment as well as a beleaguered manufacturing industry and real economy. All of the above problems may be solved with the development of a conglomerate economy. Nonetheless, it is also worth noting that the development of a conglomerate economy requires both legal and policy support—this is crucial for China to stimulate the growth of its economy and to ensure the stability of its markets. The development of a conglomerate economy will also help to reduce excess volatility within the market and avoid an over-implementation of policy. In the case of the depreciation of the RMB, we need to avoid capital controls as much as possible while preventing the trade war from affecting the stability of the Chinese economy so that it does not come to a hard landing. At this moment, the Central Bank has introduced measures such as a targeted reserve requirement ratio (RRR), but this is still only a macro-level regulation that will not solve the big problems. For one, certain institutions that were given money used it to buy property; such cases indicate that there is still a lack of organization within China's domestic economy. Therefore, utmost priority should be given to revamping the original policy model in order to develop a conglomerate economy under the leadership of the party and the government.
Final Analysis and Conclusion:
The relevant departments should amp up the research on conglomerate economies in order to come up with systematic and strategic policy solutions, so that China may have a conglomerate that is able to compete in the international arena.
