23 February 2006

Chinese Boxes

Milan's Stock Exchange

The system of Chinese boxes is a financial invention that allows for the control of big groups with a minimum investment of capital by using a pyramid structure of companies that are ever smaller as they go up.

It’s a perverse mechanism that has taken hold in Italy and is seeing the disappearance of the industrialists, the ones with the money, as they are being replaced by finance people, who ask for money from third parties and dump big debts on the controlled companies.

The Chinese boxes system can have catastrophic effects on the development of the companies, as it makes it possible for there to be total control by possessing a fraction of the share capital, often for a tiny sum. The principle of control through the ownership of a fraction usually means that there is no capacity to sustain development.

This is a situation that is often called “capitalists without capital”.

The Chinese boxes system makes it possible to remove control from the shareholders of the companies quoted on the Stock Exchange. In fact, in the long chain of Chinese boxes, the company at the pinnacle, the one that makes the final decisions, is often not quoted on the Stock Exchange and is thus completely closed to the participation of third parties.

The system of Chinese boxes tends to take the profits towards the top. This leaves the groups that are controlled without the possibility to face up to the competition for lack of investments and so they lose value over time.

So who pays? The usual tribe of small-scale investors, who if brought together, possess the majority of the shares in the company without having any authority about management choices.

In the next legislature, my party will commit to eliminating the mechanism of Chinese boxes. We will introduce new visibility into the Stock Market with proper payment to small-scale investors and a true flow of capital.

Posted by Antonio Di Pietro in Economy