SOEs use capital market for reform

By Ma Jingjing Source:Global Times Published: 2017/7/12 18:33:40

Revitalizing State-owned enterprises is becoming the new momentum for economic growth and operation efficiency

An increasing number of State-owned enterprises (SOEs) are optimizing their assets through mergers. It seems that the capital market has served as a platform for these enterprises to carry out reform. Mergers are considered a good choice, however, some experts say that SOEs still need to reform their internal system and mechanisms to stimulate enterprise vitality. They forecast that the implementation of reform plans will accelerate in the third quarter as a way to welcome the upcoming 19th Communist Party of China National Congress.

Capital markets are thought to be a major platform for China's State-owned enterprise (SOE) reform, with SOEs - especially those in the electricity, coal and steel sectors - increasingly carrying out mergers and acquisitions to optimize their assets.

In the current economic situation, promoting reorganization and integration between the centrally administered SOEs is Chinese authorities' crucial move to actively embrace and lead a new normal, Shen Ying, chief accountant of the State-owned Assets Supervision and Administration Commission (SASAC), said at a press briefing on Tuesday.

Generally speaking, the effectiveness of the practice gradually appears over time and will soon play a bigger role, she said in response to a question about rising mergers between SOEs.

There is market speculation that central State-owned coal-based energy enterprise China Shenhua Energy Company will merge with coal-fired power generator GD Power Development Co, after the two simultaneously announced continuous trading halts in separate stock filings on July 3 due to "important asset transactions." The two companies' listed arms stopped trading of stocks starting from June 5.

On June 28, China's leading expressway constructor Huabei Expressway Co announced that its consolidation with its counterpart China Merchants Expressway Network & Technology Holdings had been approved by the SASAC.

Boom in SOE mega-mergers

So far, a total of 48 SOEs listed in Shanghai and Shenzhen bourses have suspended trading - 19 are central SOEs and 29 are administrated by local governments - due to reasons such as "important merger", "important event" and "considering important merger," the Beijing-based Economic Information Daily reported on Monday, citing statistics from information provider Wind.

Since 2016, 43 centrally administered SOEs and 63 local ones have carried out major restructuring, according to the report.

The SASAC will steadily push forward SOE mergers in sectors like coal power, heavy equipment manufacturing and steel, and will endeavor to reduce the number of centrally administered SOEs to below 100, deputy secretary-general of the SASAC Peng Huagang said during a news briefing on June 2, domestic news portal reported the same month.

Latest data from the SASAC showed on Tuesday that the number of centrally administered SOEs has been reduced to 101. In December 2016, there were 102 registered in comparison.

SOE reform is a long march that needs continuous efforts. Cutting the number of centrally administered SOEs can't be accomplished in one stroke, according to Liang Jun, a research fellow at the Guangdong Academy of Social Sciences.

In the first half of 2017, centrally administered SOEs posted revenue of 12.5 trillion yuan ($1.8 trillion), an increase of 16.8 percent year-on-year, Shen said, noting 48 of them reported more than 10 percent  growth rate in net profit.

As centrally administered SOEs aim to become bigger and stronger by taking advantage of capital markets, local SOEs are also speeding up reform, of which mergers and acquisitions have become an important part.

For example, North China's Shanxi Province released a document on June 8 encouraging the province's listed SOEs to merge and avoid homogenization competition.

"This new round of SOE reform features mechanism improvements, assets optimization as well as quality and efficiency enhancement," Dong Weiwei, SOE reform fund manager at Shanghai-based Everbright Pramerica Fund Management Co, told the Global Times on Monday.

In the second half of 2017, SOE reform in China will be extended into local SOEs, instead of being mainly concentrated on the centrally administered companies like before, Dong said.

Now, the reform mostly occurs among large SOE's subsidiaries. In the following months, more reforms will be seen among large parent companies, according to Dong.

The fund manager predicted that the implementation of reform plans will accelerate in the third quarter to stimulate market vitality, welcoming the 19th Communist Party of China National Congress.

 "Sustainable economic growth relies on innovation and productivity improvement rather than infrastructure, property and export. In this sense, SOE reform will provide new momentum for the domestic economy by revitalizing SOEs and improving efficiency, considering the country's huge amount of SOEs with relatively low productivity," Dong explained.

What is essence?

Although mergers and acquisitions can help improve these companies' market influence and capability of risk resistance, SOEs still need to attach importance to reform of its internal system and mechanism to engender enterprise vitality, experts noted.

The core of SOE reform is improving management structure, Liang told the Global Times on Tuesday.

Indeed, injecting assets into listed companies, then introducing an independent director system and disclosing information for public supervision can help improve SOE governance to some extent, but it's not the only way toward reform, he said.

If SOEs don't change existing systems and tackle mechanism problems, corporate management and efficiency may decrease after mergers, Xu Baoli, director at the research center of the SASAC, told the Global Times on Monday.

Significant efforts have been made to coordinate and integrate companies after the merger, especially in groups that own many listed subsidiaries, Shen said.

For example, after the merging of Baosteel Group and Wuhan Iron and Steel Co, some low-end capacity needed to be cut, and thus more than 30,000 staff members had to be replaced.

Xu also suggested implementing mixed-ownership reform at the group level rather than at lower corporate levels may further trigger private investors' interests. In fact, some local governments are already on their way to doing so.

State-owned assets supervision and administration authorities of East China's Jiangxi Province held a promotion conference in Hong Kong in June to encourage private investment in the province's eight SOE reform projects, three of which are group-level mixed-ownership reform, according to a post on the website of the SASAC of Jiangxi.

Five projects related to SOE reform were signed during the event, attracting a total investment of 11 billion yuan, said the post.

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