Talking Point

Going private

Is state capitalism starting to retreat in China?

SINOPEC/EARNINGS

Getting investors pumped-up: Sinopec will spin-off petrol stations in potential $20 billion sale

One of the main economic themes in China over the last few years was guojinmintui – a phrase that translates as “the state advances as the private sector recedes”. The idea gained traction after Beijing launched its huge stimulus package in 2008. The $586 billion scheme saw state-owned enterprises (SOEs) exploit spending on public works programmes to muscle private companies out of the market, buy assets and rack up cheap debt (see issue 30 for our first mention of guojinmintui).

But a renewed debate about bringing private capital into state-owned industries suggests that this trend could be about to reverse. It might even be necessary to revamp the phrase too, changing it to guotuiminjin (i.e. the private sector advances as the state recedes).

A key pledge from Beijing after the Third Plenum last year was that private investors would get more access to industries previously open to state entities only. A rather dramatic piece in the People’s Daily this month reinforced the point. “The rise of great powers is made by thriving enterprises,” it claimed, adding that state-owned enterprises and private companies are both national companies with the same goals. “Mixed ownership is a means; advancing together is the goal.”

‘Mixed ownership’ envisages more private funds being invested in government-controlled behemoths. The goals? To make them more commercial and to dilute some of the influence of state capitalism in the Chinese economy. The thinking is that a more market-based approach will lead to more efficient allocation of resources and help China switch gears into a new era of growth.

Talk, but any action?

The first signs of the rhetoric turning into reality came from oil giant Sinopec, which has indicated it will be seeking to partner with more private capital. It has recently announced that it intends to sell a stake in its petrol stations unit, a deal that could raise more than $20 billion reports Bloomberg.

Sinopec is looking for private investors to take as much as 30% of its marketing arm, a business that has over 30,000 petrol stations across the country, Reuters says. The newswire points out that the division also accounts for nearly half of Sinopec’s annual operating profits.

There were no details on whether the deal might be a public offering or a private transaction. But perhaps there’s a model: PetroChina, another of China’s energy titans, previously sold an interest in some of its pipelines to a group of local insurance companies (see WiC202).

One analyst cited by the South China Morning Post said that Sinopec is looking for strategic investors with experience in the field – suggesting that large foreign players like Royal Dutch Shell or BP may get a commercial opportunity.

An industry source speaking to Reuters also said that private investors might increase the value of the marketing arm, by improving the way that the petrol station business is run.

The stock market has had its say too – Sinopec’s share price hit its 10% daily upper limit after the planned sale was announced, its biggest move in a single day since 2009, according to Bloomberg. (And a welcome turnaround from last year when Sinopec’s market value declined by Rmb70 billion – or $11.24 billion – after a series of managerial missteps.)

“It’s an indication the authorities are going to deliver on their promise to make these state-owned enterprises more market-oriented,” Tony Hann, head of emerging market equities at Blackfriars Asset Management, told Bloomberg.

Doug Young was also upbeat on his China blog: “This new policy shift looks like it could inject some much needed excitement and commercialism into some of China’s biggest and most protected sectors, bringing new innovation into the market and providing exciting opportunities for investors.”

And it’s not just Sinopec?

PetroChina’s parent CNPC also floated the prospect of attracting more private investment on the fringes of this month’s National People’s Congress (NPC). Its chairman Zhou Jiping said there are plans to introduce outside capital into its new upstream oil and gas projects, selling up to 49% of the business externally. It planned to pilot the move in Xinjiang, Zhou said.

Liu Yijun, an oil and gas expert at the China University of Petroleum told CBN that breaking up CNPC and Sinopec’s integrated business models would have “great symbolic significance”.

Southern Weekend also reports that Zhuhai’s municipal Sasac, the local organisation that manages state-owned companies, is looking for investors to take as much 49% of Gree Group – China’s leading manufacturer of air-conditioners. The newspaper sees it as the first step in a series of measures being taken to reform SOEs in Guangdong province. The target, says Guangdong Sasac director Lu Yesheng, is for 80% of local SOEs to switch to mixed ownership by 2020. International Finance News also points out that other major cities and provinces – such as Shanghai, Chongqing and Henan – have issued documents outlining their own plans for local SOE reform.

The granting of new banking licences to private sector entities is another incursion into the traditional dominance of state companies in finance. There has also been a push to allow non-state firms into the telecoms sector, granting them reseller rights on infrastructure owned by the big three state-controlled operators.

Even some of the bosses of the state firms have been calling for more competition. In last week’s issue we noted that the head of aluminium giant Chinalco would like to see the electricity grids broken up as a means to liberalise the energy market (few firms epitomise state capitalism better than State Grid, see WiC174).

A recent policy paper by Andrew Batson for the Paulson Policy Institute reveals why change is needed. The state sector is huge – 100,000 enterprises with $13 trillion in assets – but it is demonstrably less efficient than its privately-owned equivalent.

Using data from the industrial survey by China’s National Bureau of Statistics, Batson notes that the return on assets at SOEs (4.5% in 2009) is half that of non-state firms. In fact, the Ministry of Finance found that the aggregate return on assets for non-financial state firms had fallen further to 3.25% in 2011.

But ‘Mixed ownership’ has its sceptics…

The concept of mixed ownership isn’t new. The term was being bandied about in official documents at the CPC Congress way back in 1997, reports Southern Weekend. That shows that resistance to reform has been a major challenge. Sanpower Group chairman Yuan Yafei told a panel discussion at this month’s Chinese People’s Political Consultative Conference (CPPCC): “This idea of a mixed state and private economy is a case of putting new wine in an old bottle. If private investors’ stakes are restricted, Beijing’s idea of letting market forces play a ‘decisive’ role in the economy won’t be executed properly.”

“To be blunt, it’s only when an industry runs into a difficult time for development that private capital gets a chance,” added Guo Guangchang, head of the privately-owned conglomerate Fosun.

Others question the benefits of introducing private investors as minority shareholders. “I find it hard to imagine how bringing in marginal outside investors will have a fundamental impact on the behaviour of these companies,” Arthur Kroeber, head of research at Gavekal Dragonomics, told Reuters.

The Wall Street Journal took the same tack, after news of Sinopec’s petrol station spin-off had emerged. The problem, the newspaper argued, is that private investors will only get a minority stake. So they will be at the mercy of Sinopec’s politically-endorsed management, which may take decisions that put the state’s interests before those of shareholders.

The rationale for Sinopec doing the deal deserves attention too. After its annus horribilis in 2013 the oil firm was unable to execute its planned Rmb30 billion ($4.81 billion) capital-raising on the A-share market by issuing convertible bonds. In January regulatory permissions to go ahead with that scheme expired. So the sale of the retailing arm looks like a means to plug this financing gap, as much as an ideological commitment to ‘mixed ownership’.

Nor is there much clarity as to how proceeds from the deal will be used. If the past is any guide, Sinopec might be tempted to splurge on pricey overseas oil and gas assets. Were that the case, private investors would simply be financing the energy policy goals that Beijing has urged its oil majors to pursue for much of the past decade.

The big keep getting bigger

One drawback to declaring the decline of state capitalism is that many of the largest SOEs keep getting bigger. A case in point is food group, COFCO. Its domestic deals have included a major stake in milk giant Mengniu Dairy, and earlier this month it made its global ambitions plain with the $1.3 billion acquisition of a 51% stake in Nidera. The purchase of the Dutch grain trader puts COFCO firmly on course to challenge the established ‘ABCD’ of global agricultural trading houses: Archer Daniels Midland, Bunge, Cargill and Louis Dreyfus Commodities (Glencore Xstrata is another of the world heavyweights).

COFCO has 106,000 employees and its revenues last year were $31.7 billion (still not a match for Cargill with $136.7 billion).

Nor was this COFCO’s only deal in recent weeks. A joint-venture with Singapore-listed Noble Group will also give it a stronger foothold in the global sugar market. As one agribusiness banker told the Financial Times: “With COFCO’s Nidera move and with Noble, you’re almost creating another credible competitor to the ABCDs now.”

Moreover, COFCO has made clear this is just the beginning. Two years ago it announced it had assembled a $10 billion hoard for foreign acquisitions, which it would spend by 2015.

In doing so, the state-owned firm is being guided by strategic priorities. China has long pursued a policy of self-sufficiency in grain, but increasing incomes, more lavish (meat-based) diets and the loss of agricultural land (as cities sprawl) have all turned it into an importer. COFCO’s mission is to secure supplies. For Beijing this is about food security.

This aspect of its mandate clashes with all the talk about ‘mixed ownership’ closer to home, not least because its financial strength is also a result of the privileges it enjoys domestically.

As the FT points out: “Not everyone is cheering. Private feed producers such as New Hope Group, China’s largest private agricultural business, have lobbied for many years to open China’s corn imports but still have limited access to imported grain.”

The FT also quotes analyst Ma Wenfeng in putting COFCO’s overseas expansion in the context of guotuiminjin: “There must be an enterprise to take the lead when it comes to China’s overseas agricultural business. Right now, COFCO is doing it, but I hope more private enterprises in China will be able to participate as well.”

Definitions matter too…

Another challenge in tracking the progress of guotuiminjin is the ownership status of many Chinese companies – working out whether they are privately-owned or state-backed can be difficult.

That was evident once more in a recent New Yorker magazine profile of Wang Jing, the businessman who has won the concession to build a Nicaraguan canal designed to rival Panama’s own waterway.

Wang – who Nicaraguan leader Daniel Ortega described as “a brother born in that great nation, the People’s Republic of China” – is the boss of the Hong Kong Nicaragua Canal Development Investment Company. But as the New Yorker points out: “Wang who is 41, had no record of accomplishing anything on the scale of a canal; indeed, he seemed to have little public record of any kind. But he was confident that he would be able to raise money in China and elsewhere and the canal would be completed in five years.”

The writer of the article – which WiC recommends – spoke to many of the 22 Nicaraguan businessmen who joined Wang on a tour of five Chinese cities. They went to China thinking the whole canal project something of a bluff, but instead were astonished by the work already completed by China Railways Construction Corporation, an SOE.

“The visitors had little doubt that Wang was supported by the Chinese state. Everywhere they went, mayors and regional Party chiefs turned out to meet them,” says Arturo Cruz, a former Nicaraguan ambassador to the US. “Their message to us was: this canal is going ahead,” agreed Jose Adan Aguerri, another local business head.

What makes the canal project more mysterious is that so little is known about Wang, who was “nearly invisible” before he bought telecom company Xinwei in 2010. But talking to AP last summer, Wang shrugged off his relative anonymity: “Before anyone gets famous, little is known of him. My resume? It is simple. Born in December 1972 in Beijing and a Chinese citizen.”

The interview went on to say that Wang had studied traditional Chinese medicine at an undisclosed university and made his first fortune in gems and gold mines in Thailand and Cambodia.

Former ambassador Cruz told the magazine: “There is an urban legend that his father was some top general who died. He has the demeanour of someone who grew up in the barracks – at a very high level – and who is used to giving orders.” Wang has denied this version of his past, but any military connection would also hint at where the financing for the Nicaraguan could be coming from (estimated construction costs for the project are forecast at $40 billion). Influence over the new waterway makes geopolitical sense, particularly as China’s share of global trade is so significant.

Last year staff at Wang’s company Xinwei’s posted photos of senior Party leaders visiting its company premises. But Wang told the South China Morning Post that this did not signify that he relies on contacts with the ruling elite: “Xinwei is an ordinary company, run by ordinary people, and Wang Jing is an ordinary person. I think the Chinese government wants to see Chinese companies step forward, create Chinese standards and Chinese intellectual property rights – it gives us the right to speak out when we compete with Western countries. There is nothing else to it.”

So is this state capitalism or not? It’s hard to say, and certainly Wang is keener to be seen as a tycoon in his own right. But when the New Yorker asked University of Miami academic June Teufel Dreyer about Wang’s acquisition of the canal concession, the expert on China’s international relations didn’t waver.

“Of course the Chinese government is behind it, though of course the official reply is that this is just a business deal,” Dreyer replied.

So some recent trends do seem to suggest an effort to boost the private sector’s involvement in China’s domestic economy. But having grown so large, the apparatus of state capitalism won’t be dismantled easily. And in situations like the one in Nicaragua, it may even be developing new guises.


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