State-Owned Enterprises Slowly Letting Go; From Shanghai to Guangdong, private investors will be welcomed under a new phase of SOE reform

03.19.2014 19:17
State-Owned Enterprises Slowly Letting Go
From Shanghai to Guangdong, private investors will be welcomed under a new phase of SOE reform
By staff reporters Yu Hairong, Wang Xiaoqing, Lin Jinbing and Zhang Yuzhe
(Beijing) – A conglomerate with interests ranging from appliance manufacturing to port management has made a first step in the latest round of reforms to state-owned enterprises (SOEs) by opening the door to private investors.

The provincial government agency that oversees SOEs, the Guangdong State-owned Assets Supervision and Administration Commission (SASAC), approved the diversification plan for Gree Group in February. As a result, private investors will be allowed to buy up to 49 percent of what’s now a state-owned stake in the Zhuhai-based company.
Key questions – including who might invest and through which channel or channels – have yet to be answered.
Indeed, authorities in Beijing and provincial capitals around the country are still working out details of the SOE reform initiative ordered in November by the government at the third plenum of the Communist Party’s 18th Central Committee.
China has been working on SOE reform projects since the 1990s. In the first phase, the government merged, reorganized or shut down unprofitable state-owned companies. The next step involved adjusting the ownership structure of surviving SOEs by, for example, allowing some companies to issue stock.
The latest round focuses on reforming SOEs operating under the wings of SASAC agencies run by governments in Guangdong Province, Shanghai and other regions nationwide.
What was made clear at the third plenum is that Beijing wants to “actively develop a mixed-ownership economy” and “encourage development of mixed-ownership enterprises, not controlled by public capital,” said Zhou Fangsheng, deputy director of the China Enterprise Reform and Development Institute.
Immediately after the plenum, local governments across the country climbed aboard by starting to look for ways to introduce private investors to local SOEs. Their approaches have varied according to local conditions.
Conditions for local governments in central and western regions, for example, are shaped by mounting pressure to repay debt. Moreover, the business landscape for many central and western SOEs is worsening, said the chief strategic analyst for Ping An Securities, Wang Ren.
But economies are strong in eastern regions such as Guangdong, Wang said, which has motivated governments to strengthen their SOEs by reorganizing assets and reforming company management.
Gree plans to invite strategic investors willing to accept a combined stake that would not exceed 49 percent. They’d support a new company built with 51 percent of Gree subsidiary Gree Real Estate Holdings, and 100 percent of both a port management firm and an airline investment company. The new company would also assume other assets and Gree Group debt.
Overall, most SOEs across the country are grappling with issues related to excess capacity, which has contributed to rising debt pressure. Local governments could relieve this pressure by welcoming private investment.
SOE finances have deteriorated since the 2008 financial crisis. The Ministry of Finance says SOEs outside the financial sector generated investment returns averaging 3.25 percent in 2011, down from 5 percent in 2007.
Governments are particularly interested in selling stakes in SOEs with low profit potential, such as banks and construction contractors. But in general, private investors will not be invited to support SOEs in strong business sectors such as energy, transportation-related manufacturing and pharmaceuticals.
Don’t Delay
The move by Guangdong to open Gree’s door came two months after the Shanghai government became the first SOE owner to unveil a plan for applying the third plenum’s order. Then, on January 14, the Guangdong government approved a provincial SASAC plan aimed at partially privatizing commercial, tourism and hotel assets.
Beijing authorities have ordered local governments to move quickly, and they are expecting concrete results in 2014.
At the central government’s economic work conference in December, local governments were ordered to delegate authority in ways that promote SOE reform.
The third plenum’s order did not directly address questions surrounding whether the state should be allowed to expand its holdings in competitive industries. But its report called for a “focus on more important industries and key domains directed toward the nation’s lifeblood – national security and the economy – should be provided through public services; developing important and strategic industries; by protecting the environment; by supporting scientific and technological advancement; and by protecting national security.”
Local governments are to switch roles from “SOE management” to “managing state-owned assets,” thus functioning as investors rather than micro-managers. Third plenum also decided governments should set up so-called capital operation companies to support SOE reorganization.
It’s not an easy job, a SASAC source said. “As far as SASAC is concerned, it’s not hard to reduce state holdings and state share-controls in competitive fields. What’s difficult is figuring out how to switch from managing assets to managing capital.