Mixed signals

Is China making progress on SOE reform?


NDRC’s Lian: SOE takeover pledge

First the government tried snapping its fingers. Then it tried rapping their knuckles. When that didn’t work out, it decided to break a finger to save the other nine digits.

That is according to Liu He, the vice premier tasked with administering some tough love to China’s inefficient state-owned enterprises. Late last year, the Harvard-educated economist used his finger-breaking analogy to explain how Beijing plans to get to grips with deepening the reforms to the public sector.

And that same commitment has resurfaced at the annual meeting of the Chinese parliament this month. Two of the messages sent out: President Xi Jinping’s administration doesn’t want to sideline private sector companies; but it believes these firms should help more with SOE reform.

Indeed, one of the most important sound bites came from the National Development Reform Commission’s deputy head Lian Weiliang. He told reporters that the government plans to allow private firms to take over SOEs in “fully competitive industries” (this refers to sectors which have been opened up for competition such as auto, compared to what the Chinese government has identified as ‘natural monopoly industries’ such as oil).

The government also announced that it has compiled a list of 100 more SOEs that will be candidates for the fourth round of Beijing’s so-called mixed ownership reforms .

These represent another statement of intent from the central government, which has spent five years trying to inject private capital and expertise into SOEs as a means to improve performance. The effort is picking up pace: after all, the first three rounds covered just 50 companies in total.

However, there have always been questions as to whether tycoons can really influence the SOEs if they only hold minority stakes.

To date, the ‘mixed-ownership’ flag-bearers have been China Unicom and Sinopec. In Unicom’s case, this now appears to be paying dividends. Back in 2017, the telecom carrier sold Rmb75 billion ($11.8 billion) of its equity to a group of 14 investors including the BAT troika. Since then, it has forged a number of partnerships such as a tie-up with Alibaba Cloud, which has helped to drive profits at its industrial internet division.

As a result, Unicom’s net profit surged more than 4.5 times during 2018 to Rmb10.2 billion. Analysts calculated 11.6% of the carrier’s pre-tax profits were linked to private sector partnerships, higher than Unicom’s 8.77% target. By 2020, it wants to raise the ratio to 23.35%.

SOEs have always produced lower returns on equity (ROE) but Unicom has turned its own around – albeit from a lowish base – achieving a 2.86% ROE (versus 0.2% in 2016), higher than the company’s 2% target. By 2020, it hopes to hit 5.4%

Where Sinopec is concerned, the oil giant sold a stake in its retail arm (i.e. its chain of petrol stations) valued at Rmb105 billion to a group of 25 outside entities in 2017. Investors will get a more detailed update on the unit’s financial health soon as Sinopec is planning to spin off this retail arm in Hong Kong this year.

China’s massed ranks of retail investors avidly follow which of the listed SOEs the government might target for ‘mixed ownership’ next. Increasingly, that is the case for private equity investors too.

Xiong Yang, chairman of Beijing-based private equity firm Wealth Capital, recently said that mixed ownership reform would provide the biggest investment opportunities for institutional investors over the next two decades, particularly through partnerships with government-owned restructuring funds such as China Chengtong and China Reform Holdings (the former was one of Unicom’s strategic investors).

That said, another move in the telecoms sector this month emphasised that some corporate governance practices in the upper echelons of the SOE world are still stubbornly ossified.

That was the reaction of foreign analysts to yet another instance of musical chairs at the top – in this case Yang Jie’s resignation as chairman of China Telecom to take on the same role at rival China Mobile. It’s hard to imagine Coke and Pepsi, or even Alibaba and Tencent, rotating between them a figure privy to so much sensitive internal company information.

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