Asset managers to hold China’s SOEs

This makes it easier for the market to play a decisive role

CHINA is preparing to overhaul its bloated and inefficient state-run companies to bolster an economy expected to grow at the slowest pace in more than two decades, according to informed sources.

The proposal would include consolidation and reduce the government’s role in stateowned enterprises (SOEs) by stripping ownership stakes from the agency that regulates them, sources said. Under the plan, to be released as soon as this month, the companies would be bundled by industry and control handed to state asset managers, the sources said, asking not to be identified because the talks were private.

The shake-up is poised to affect thousands of companies, including some of the world’s largest, such as China National Petroleum and China Mobile Communications. The country’s parastatals are perceived to be so rife with corruption and poorly run that Sanford C Bernstein estimates that they trade at discounts totaling $2-trillion (R25trillion).

“State-enterprise reform is a make-orbreak issue for the Chinese economy,” said Zhao Yang, the chief China economist at Nomura Holdings. “This is but the first step of many others that will need to be taken.”

The proposal follows a road map laid out by the Communist Party in 2013 to make SOEs more efficient and separate their government overseers from their daily managers. The plan may be released soon after the conclusion of the National People’s Congress session, according to the people.

The changes would reduce the Stateowned Assets Supervision and Administration Commission (Sasac), which holds parastatal stakes, to the role of regulator, the people said. Similar changes could be expanded to the provincial and local levels.

“It’s a step towards the right direction, as a capital holding company would make it easier to allow the market to play a more decisive role,” said Shi Yan, an analyst at UOB-Kay Hian in Shanghai. “Any time you have a regulator surrender some functions to the market, it’s a win for the market.”

Sasac did not immediately respond to a request for comment.

Premier Li Keqiang set an expansion target for the economy at about 7% this year, the slowest pace since 1990. Chinese policymakers are trying to reduce the role of debtfuelled investment and move towards greater consumption and services.

SOEs accounted for about a third of the economy and more than a quarter of them were unprofitable, Barclays analysts wrote.

“Putting SOEs under the supervision of asset-management companies that will focus on improving the efficiency of investment would be a major step towards putting China on a more sustainable growth path,” said Arthur Kroeber, Beijing-based research chief for Gavekal Dragonomics.

The government is pushing Chinese companies in key industries, including communications and power generation, to expand overseas, a plan outlined by Li in his report to the annual legislative session on March 5. The ongoing merger of the state’s two biggest train-equipment makers and the technology ministry’s “Made in China 2025” plan to remake the manufacturing industry are part of the broader plan.

The overhaul comes as state-run companies increasingly find themselves the target of President Xi Jinping’s nationwide corruption crackdown. The changes would affect some of the same 26 major firms named as inspection targets last month by Wang Qishan, China’s antigraft chief.

Sasac’s former chairman, Jiang Jiemin, was removed from his post in September 2013 in connection with a broader investigation into China National Petroleum, where he had previously been chairman.

The 123 Chinese state enterprises listed in Hong Kong have a total market value of $3trillion and, if not for the stigma of being state owned, they would be worth $2-trillion more, according to Bernstein.

The switch to asset managers mirrors a structure already being used in the financial sector, where China Investment manages the state’s share of its largest banks through Central Huijin Investment.

The asset managers would be empowered to restructure enterprises with the goal of making them more competitive and reducing overlap, the sources said.

Hong Hao, the chief China strategist at Bocom International Holdings, said the plan appeared to be an administrative reshuffle. He cited the government’s use of assetmanagement companies in the 1990s to offload bad debt from state-run banks.

“It is difficult to see how competition can benefit,” Hong said. “SOE ownership hasn’t changed fundamentally.”— Bloomberg