More SOEs being turned around

Reforms, financial deleverage, M&As, tech focus help revive government firms’ fortunes

Last week, the 19th National Congress of the Communist Party of China learnt that since the last congress in 2012, as many as 34 central Stateowned enterprises, or SOEs, have been restructured, with their overall number falling to 98 from 117.

An outstanding feature of the ongoing SOE reform has been the sustained drive to improve the companies’ financials, mainly through sophisticated debt management.

The reform, which went beyond mergers, acquisitions and rationalization, helped improve central SOEs’ efficiency and competitiveness, thus bolstering China’s longterm march toward emerging as the world’s largest economy, overtaking that of the United States.

Central SOEs posted a record high net profit of 1.11 trillion yuan ($167.2 billion) from January to September, thanks to supply-side reforms, which helped bring down the asset-liability ratio requirement and curbed capital outflows.

As a result of the reform, financials of 2,041 “zombie companies”, all subsidiaries of 81 major central SOEs, also improved, with their losses shrinking by 88.5 billion yuan, compared with the same period of 2015. (“Zombie companies” are economically unviable businesses, usually in industries with severe overcapacity, kept alive only with aid from the government and banks.)

China will accelerate its efforts to prevent systemic financial risks from arising and infecting the broader economy, said senior government officials during the 19th CPC National Congress.

The ongoing supply-side structural reform — cuts to overcapacity in certain sectors such as steel and coal— and more flexible financial polices will be sustained, they said.

From January to August this year, debt risk at central SOEs was under control as these companies maintained a steady debt-to-asset ratio over the past five years, according to State-owned Assets Supervision and Administration Commission, or SASAC.

By August-end, the average debt-to-asset ratio of central SOEs dropped to 66.5 percent, 0.2 percentage points lower than the level at the beginning of this year.

“The debt risk level at central SOEs is reasonable and controllable,” said Huang Danhua, vice-chairwoman of SASAC.

“Apart from asset restructuring, central SOEs can also direct their resources toward competitive companies or industries through equity cooperation, asset swaps, strategic alliances and joint ventures,” she said.

Under the government plan, debt-to-equity swaps will be pushed forward, with State investment funds encouraged to participate in the process. Central SOEs will speed up the pace of mergers and acquisitions, or M&A’s.

Already, the SOE sector has seen a merger of two of China’s top high-speed train makers and another of two major steel producers.

To cut the leverage ratio, SASAC has also encouraged SOE behemoths to optimize capital structure via initial public offerings, and supported efforts toward asset securitization. Huang said central SOEs have made headway in cutting outdated capacity, reining in debt risks and improving competitiveness.

Given the favorable conditions, more effort is needed to cut the debt level of SOEs and a guideline will be formulated, he said.

As the debt-to-equity program is considered a significant and efficient method to tackle debt woes, China Shipbuilding Industry Corp, one of Chinese Navy’s biggest contractors, converted debt into equity by offering eight investors stakes in two of its unlist-