The ultimate say

The Party reiterates its dominant role in China’s state-owned enterprises

China's Premier Li speaks during the "Third Meeting of Heads of Government of China and Central and Eastern European Countries" in Belgrade

Li: the mixed ownership man

‘Management by committee’ is a pet hate for corporate gurus. But for some of China’s largest companies it seems to be a core directive from their government. This follows news that at least 30 state-backed companies listed in Hong Kong are formalising the role of a Communist Party committee to advise their board of directors. As the Wall Street Journal reported this week, these include huge state firms (SOEs) representing more than $1 trillion in market value, which have been editing their articles of association to extend the Party’s reach. China Railway Group, for instance, now stipulates that “when the board of directors decides on important issues, it shall first listen to the opinions of the Party committee of the company”.

In some respects, the move merely formalises what has always been suspected: i.e. that on any important issues a Party figure has always wielded a key influence at the SOEs, though previously from behind the scenes.

But cementing the Party’s influence at corporate level is also going to make it easier for opponents of Chinese acquisitions overseas. Indeed, the argument that electricity grids or technology firms shouldn’t fall into the hands of the Chinese state will get extra spice from the shadowy presence of the Party too.

The directive also extends to companies domiciled overseas, indicating that Beijing is focusing on consolidating Party influence over its companies offshore. That’s likely to put off a few foreign investors at a time when Chinese firms are supposed to feature in more of the global equity indices. And another obvious question is what has happened to all the talk about giving the markets a “decisive role”? China’s leaders have spent years insisting that the state sector should focus on ‘mixed ownership’, an initiative championed by Premier Li Keqiang, to allow private sector firms a bigger say in the economy. There is some wriggle-room – boards are not obliged to follow the Party’s recommendations, it seems – but the fit with the freer hand of market forces is an uncomfortable one.

In fact, state planning looks to have been more in vogue as SOEs have strategically been merged into bigger national champions in sectors as diverse as railways, steel, shipping and nuclear power. The Economic Observer reported earlier this month that ChemChina and Sinochem have been in merger discussions to create the world’s biggest industrial chemical firm (the former has just completed a $43 billion takeover of Switzerland’s Syngenta) and coalmining giant Shenhua is reportedly in talks to combine with power generator China Guodian.

According to Caixin Weekly, the state holding company Sasac has plans to accelerate the consolidation of the SOEs under its direct control to about 80 from the current 101. It will classify its charges into three categories: investment, financial services and industrial. Twenty or so firms will be grouped into investment and financial services, the magazine says, where companies will be allowed more operational flexibility. Meanwhile, the industrial category will be assigned to companies that directly influence the economy (such as energy), and these firms will be required to stick more strictly to their core businesses.

Not all the SOE bosses have forgotten the promptings on mixed ownership. In what some may see as more encouraging news on this front, telecom carrier China Unicom said this week that it is raising $12 billion from about a dozen investors including the BAT tech trio Baidu, Alibaba and Tencent, ride-hailing company Didi Chuxing and retailer Suning. The investors will take a combined 35% stake in Unicom’s Shanghai-listed unit. Of course, cynics might question just how immune the new shareholders are to government guidance. And state-controlled insurer China Life will end up with the biggest slice of the investment round, with about a tenth of the shareholding.

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