china flag.jpgWe’ve been raving on about the promise of China, and how Silicon Valley venture capitalists are scrambling to profit there. Other big Silicon Valley players are pouring resources into China too, the latest being Cisco, which just linked up with one of China’s biggest telecom companies, state-owned China Telecom, to build its next-generation Internet backbone.

But now and then, Beijing goes to its cupboard, pulls out its big red communist flag, and waves it to remind people it can do anything it pleases. A few days ago, it did it again: It reshuffled the bosses of its three big state-owned telecom companies, all publicly traded: China Telecom, China Mobile and China Unicom. They’re only the second, fourth and seventh largest Chinese companies in terms of market value — a trifling $100 billion at stake. They’re traded as New York ADRs.

Economist Donald Straszheim has been following China closely recently. He summarizes (note, we think his word “retired” should be in quotation marks):

The #1 person at China Telecom retired. The #1 at Mobile went to become #1 at Telecom. The #1 at Unicom (the worst performing) went to #1 at Mobile (the best performing). The #2 at Unicom became #1 at Unicom. Consider. No official explanation is yet available. No such action has ever occurred since China�s SOEs have been traded as ADRs. Such bureaucratic shuffles still occur in the government, but the SOE carve-outs are supposed to be different.

The lesson: Investing in State-Owned-Enterprises ain’t worth it. “We are not interested in these SOEs at this time,” Straszheim tells his clients. For more of his observations, check this: Download file