Beijing Weighs Bigger Private Role in State Firms; Reforming State-Owned Enterprises Has Been Thorny Because of Their Size, Political Clout

Beijing Weighs Bigger Private Role in State Firms

Reforming State-Owned Enterprises Has Been Thorny Because of Their Size, Political Clout

Nov. 11, 2013 11:26 a.m. ET

BEIJING—China is considering letting private investors take larger stakes in state-controlled firms, according to one official, in what would be a modest move toward greater private-sector involvement in areas of the economy dominated by Beijing. “We welcome private capital to invest in the state-owned enterprises. And there are many ways to do that,” said an official from the State-owned Assets Supervision and Administration Commission, or Sasac, in response to queries following a report by the state-run China Daily newspaper on Monday that said Beijing will allow private investors to hold up to 15% of state firms.The person at Sasac—which oversees more than 100 of China’s largest state enterprises—said the size of stakes allowed hadn’t been decided yet. The person also didn’t name sectors that may be affected.

The comments come as top leaders of the Chinese Communist Party are meeting in Beijing to sketch out an economic road map for the world’s No. 2 economy. China’s state-owned enterprises are widely believed to be one topic leaders will consider at the gathering, known as the Third Plenum. Potential changes believed to be under discussion include lower barriers for private-sector players in industries dominated by state-owned firms, or raising the share of profits the companies direct back to the government.

In the months leading up to the party meeting, as Chinese leaders have discussed potential reforms and drafted documents for discussion, a number of possible policies have been leaked or floated as trial balloons. A government think tank, the Development Research Center, published a 200-page blueprint of liberal-leaning reforms with recommendations ranging from interest-rate liberalization to giving farmers the right to sell their land.

How to reform state enterprises has been a particularly thorny issue because their size and revenues give them enormous political clout, but as China’s growth slows some economists say it has become more important to address what they see as the protected businesses’ inefficiencies.

Sasac said last month that reform of state firms could include giving private investors greater access to market segments that have been dominated by the state.

What ends up winning endorsement by the party’s Central Committee won’t be clear until Tuesday when the nearly 400 members end their meeting and release a communiqué. That document, if past practice holds, is likely to contain broad policy directions, with the details to be filled in by senior officials in coming months.

Chinese state-owned companies dominate industries ranging from energy to banking to telecommunications. Economists say their dominance thwarts private-sector development and leads to inefficiency and poor service.

Currently, private investors are able to buy shares in major state-owned companies listed on a stock exchange, but that normally amounts to small holdings distributed among many investors. Larger stakes could potentially give private investors a seat at the table of some of China’s key industries as the companies look for ways to increase efficiencies or improve corporate governance. Such measures would also give state enterprises a way to tap private capital.

Still, analysts said Beijing is unlikely to give up significant control. “Even for listed state-owned companies that are more transparent in corporate governance, private investors don’t have a say in them,” said Lu Zhengwei, economist at Industrial Bank.

“The key is not how much private investment is allowed,” Mr. Lu said. “The key is to improve governance of these state companies.”

The proposal would also depend on details such as whether it would apply to state-owned enterprises that have already listed shares on public markets, he said.

Many economists predict only modest changes, due to the political connections of China’s state-owned enterprises. “We expect little clarity on areas where the political economy is an obstacle, such as leveling the playing field with SOEs,” said Louis Kuijs and Tiffany Qiu, economists with RBS, in a note last week.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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