City slickers

Various entrepreneurs have been styled as “China’s Warren Buffett” over the years, including Duan Yongping, the tycoon orchestrator behind Pinduoduo and OPPO (see WiC49), and Guo Guangchang, who founded biotech-to-property conglomerate Fosun (see WiC38). Until relatively recently, a small group of highly acquisitive insurers from China were even dubbed as “China’s Berkshire Hathaway” too, although such references have faded since the spectacular flameout and nationalisation of Anbang Insurance (see WiC399).

Intriguingly the Buffett comparison is back in vogue, however, this time for a group of investment firms backed by some of the country’s most affluent cities. So what role have local governments been playing in reshaping the business landscape around them?

Step forward Shenzhen’s investment flagship

Shenzhen Investment Holdings Co (SIHC) was established in 2004. With registered capital of Rmb28 billion ($4.3 billion), it is 100%-owned by the Shenzhen branch of Sasac, the State-Owned Assets Supervision and Administration Commission.

Five years ago SIHC reported about Rmb40 billion in annual revenue. By June last year – according to its latest annual report – that number had jumped to more than Rmb200 billion, putting SIHC into the Fortune Global 500 for the first time, with a higher income than French food giant Danone.

There are 133 Chinese companies in the Fortune Global 500 this year. Yet Trigger Trend – one of the most influential WeChat publishers last year according to financial data aggregator Hurun – said that investors should increasingly pay more attention to SIHC and other investment firms backed by Chinese local governments.

SIHC only has about 100 staff, half of them younger than 35, Trigger Trend noted in an extensively forwarded article this month. A large number are “financial technocrats” it added.

But SIHC also sits on more than Rmb700 billion in assets. Its major ownership stakes include the brokerage Guosen Securities, Hong Kong-listed logistics investment firm Shenzhen International and a series of property developers responsible for industrial parks in the Greater Bay Area. It also owns 5.75% of the financial conglomerate Ping An, whose market value stood at Rmb1.5 trillion as of this week.

In its most recent deal SIHC spent Rmb14.8 billion last month on a 23% stake in Suning.com. Ranking 324th on the Fortune Global 500 list, Suning.com is mired in debt following its parent firm’s expansion into new businesses such as Italian football (see WiC526). The transaction saw SIHC and Shenzhen Sasac replace company founder Zhang Jindong as the single biggest shareholder. The Nanjing-based retailer now says it will set up its south China headquarters in Shenzhen, with a new commercial focus on the Greater Bay Area.

State capitalism to the rescue?

SIHC’s investment in Suning.com is just one of Shenzhen Sasac’s rescue missions in the private sector.

In another high-profile swoop, Shenzhen Zhixin New Information took over Huawei’s budget phone unit Honor in a deal believed to be worth more than Rmb100 billion in November last year. The consortium is led by Shenzhen Sasac and comprises a number of regional distributors (including Suning.com) of the Honor brand.

With the all-cash purchase, the Shenzhen government could be cast as middleman in the acrimonious political row between Beijing and Washington. The deal keeps Honor alive by shaking off its direct connection with Huawei (as well as the Chinese central government). That keeps cross-border trade flowing too, allowing American tech suppliers to maintain their ties with one of the world’s best-selling smartphone brands.

A few days after inking the Honor deal, Shenzhen Talents Housing, a state-owned enterprise (SOE) set up by Shenzhen Sasac in 2016 to build affordable housing projects, also invested about Rmb25 billion for a 5.75% stake in Hengda, China Evergrande’s main property unit.

Missing a deadline on a plan to list in Shenzhen had meant that Evergrande was in crisis, needing to buy back up to Rmb130 billion worth of Hengda shares from a group of investors that had loaned it capital. The lifeline from Shenzhen Sasac helped Evergrande survive that cash call.

Evergrande seems to have forged a good relationship with the Shenzhen government since moving its headquarters there from Guangzhou in 2017. The relocation happened after the intervention of Shenzhen Metro Group, a subway operator owned by Shenzhen Sasac, which waded into a hostile takeover of Vanke, the city’s most iconic property developer. The battle had broken out between Evergrande and insurer Baoneng (see WiC352).

These higher-profile deals are the ones that captured media attention, Trigger Trend noted. But other local government investment funds have been just as active, often away from the headlines. Beijing and Shanghai also have their own Sasac agencies, which keep a lower profile but are even bigger than their Shenzhen counterpart.

Which city has the most powerful Sasac branch?

Shenzhen Sasac’s assets total Rmb4.1 trillion with annual sales of about Rmb800 billion, Trigger Trend has calculated. This revenue figure would put it ahead of BMW in 56th position of the Fortune Global 500 if it was classed as a standalone company. However, the Shanghai and Beijing Sasac agencies are even larger, reporting Rmb3.8 trillion and Rmb1.6 trillion in revenues from companies under their control during the most recent financial year. That would mean that Shanghai Sasac’s income exceeds Walmart’s, top of the Fortune Global 500 list.

Shanghai Sasac derives the bulk of its income from its holdings in a wide spread of financial affiliates and portfolio firms. It normally flies under the radar of public investors but in August last year it featured in a landmark deal for a 30% stake in Minsheng Securities. The transaction stoked interest because the seller was Oceanwide Group, an investment firm backed by a group of private-sector entrepreneurs who had also co-founded China Minsheng Bank (see WiC335). Following the deal, Minsheng Securities made an unusual move in relocating its headquarters from the Chinese capital (under the nose of Beijing Sasac) to Shanghai.

China’s central government has been trying to speed up the liberalisation of its financial services industry in recent years. Restrictions on foreign ownership in key sectors including brokerage and credit rating agencies have been loosened or lifted. Against this backdrop, Shanghai Sasac has also been busy in the sector and taking up sizable stakes in new brokerages set up by foreign firms such as JPMorgan and DBS in Shanghai.

More deals are ahead, Trigger Trend predicts, as Shanghai tries to bolster its claims as a key international financial centre.

How about other Chinese cities?

Beijing, Shanghai and Shenzhen are China’s most affluent cities. Their stronger economies mean that they have more to invest than lower-income rivals. For others to catch up, they need to take more risks.

Some of the gambles have turned out to be disastrous. Wuhan’s Rmb128 billion investment in semiconductor firm HSMC flopped after a poorly-planned rush to produce microprocessing chips (see WiC513).

The Chengdu government’s Rmb600 million bailout of Smartisan in 2018 also failed to keep serial entrepreneur Luo Yonghao’s smartphone firm afloat (see WiC519).

Other local governments fared just as badly from a stampede into renewable energy in the 2000s. There were brief successes, such as Suntech in Wuxi, but a slew of spectacular failures soon followed (that said, Suntech’s former boss is making a comeback, trying to ride on Beijing’s pledge to go carbon neutral by 2060, see WiC532).

Chinese media outlets are discouraged from reporting too extensively on the government’s investment blunders, with critical articles often censored too. On the contrary, in cases where local government units have invested successfully, news of their achievements are widely forwarded. That was the case when Trigger Trend reported last year on how Hefei, the capital city of Anhui province, had become a hotbed for venture capital investment. “The article caught a lot of attention. A senior official from Hefei called me up and we had a very cheerful conversation at midnight,” the WeChat publisher recalled.

What was the role of Hefei Sasac in all of this? In 2007 it had invested about a third of the city’s fiscal income into the maker of a new display technology. The ploy paid off, bringing in more than Rmb10 billion via other investment in the likes of BOE Technology (a supplier of Huawei’s foldable phones, see WiC444).

In 2011, Hefei’s Sasac team made headlines again with another Rmb10 billion investment in DRAM memory chip producers such as Changxin.

The latest bet: another Rmb10 billion in new energy investment, including a stake in electric vehicle (EV) maker NIO last April (see WiC505) at a time when the carmaker was in deep financial trouble.

It was a well-timed investment: NIO was one of the best performing stocks in the second half of 2020.

As part of the deal NIO promised to move more of its production capacity to Hefei and it opened the new headquarters of one of its subsidiaries in the city last October. But as the race between China’s leading EV brands quickens, so too does competition among cities to become the country’s “EV capital”.

WM Motor concluded an Rmb10 billion funding round of its own last September, led by a couple of units under the control of Shanghai Sasac (including SAIC Motor). In the same month, New York-listed XPENG Motor received Rmb4 billion in funding from Guangzhou Sasac. As part of this investment, XPENG will benefit from policy incentives in setting up a factory in an industrial park in the city.

Even Faraday Future is eyeing state-backed investment as a way of funding a comeback. The EV franchise started by the disgraced internet tycoon Jia Yueting is reported to be opening a production plant in Zhuhai, with financial support from the local government. Zhuhai Sasac divested its stake in appliance maker Gree in 2019, recouping about Rmb40 billion for its investment warchest. Since then it has invested in nearly 20 listed firms, according to Securities Times. “It sold one Gree and it is trying to incubate many new Grees,” the newspaper said.

So state capitalism lives on?

Back in 2010, when WiC talked about Sasac’s stewardship of trillions of yuan of state-owned assets, we noted how the state investment body could easily put Warren Buffett’s Berkshire Hathaway in the shade in terms of its size and reach. Sasac still supervises more than 100 of the “central SOEs”, including electricity giant State Grid, telecoms carrier China Mobile and aircraft manufacturer Comac. Most of the companies under central Sasac’s control are from strategically important sectors and they are often tasked with delivering priorities agreed at national level. The Sasac branches at different levels of local governments are less well understood outside China. But the rise of investment vehicles such as SIHC points to another trend in which local governments are reshaping the business landscape.

Whether the most successful of these investor groups are more skilled than the largest of the privately-held venture capital firms is open to question. Their investment mandates are often more skewed towards generating jobs and tax receipts in their home cities than maximising the returns on investment in the target companies. Yet the state-backed agencies bring financial firepower of a different order of magnitude and they boast a web of political relationships that can buoy their investee companies.

Trends like these throw light on the ebb and flow of state capital across the economy too. Many of the SOEs were reported to have regained their old ascendancy in the years after the global financial crisis, as described by the phrase guojinmintui, which translates as “the state advances and the private sector retreats” (see WiC30 for our earliest mention of the term). Policymakers have tried to push back against that claim by talking up “mixed ownership reform” in more recent years – in which private sector firms have been encouraged to take stakes in the SOEs, bringing capital and new management expertise. Most analysts think that progress has been mixed, at best, in this regard. The investment record of the local Sasacs also highlights a countervailing trend in which the state is the more active player in the relationship.

China Youth Daily is claiming a newer twist in Shenzhen Sasac’s latest round of deals, however. It says that state-backed capital is being put to work without the firms necessarily ceding managerial control to their new investors. This is “reverse mixed ownership reform”, it claims, where investment from local governments strengthens some of the best companies in their neighbourhoods.

The goal of this approach is best articulated in the newer term guojinminjin, meaning that the state and private firms can both advance together, the newspaper argues.

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