China's state owned companies on a "bumpy" merger road

Published by MAC on 2017-09-08
Source: The Australian

Coal and steel investments at top of list

China’s SOEs merge in restructure

Rowan Callick
China Correspondent

The Australian

7 September 2017

The long-awaited transition of China’s state-owned enterprises is under way, but it’s a bumpy road.

The structures of some of the biggest SOEs are changing. But whether that amounts to “reform” of the sort sought by economists and investors remains less clear.

Two big restructures illustrate how, as the 19th five-yearly Communist Party congress which frames deadlines for major change in China gets closer — it kicks off on October 18 — the pressure to conclude the deals has intensified, resulting in some mismatches and back-tracking. The latest mega-merger that is a strong feature of this SOE evolution is between China Guodian and the Shenhua Group, the largest coal producer in China, which has had a setback or two in Australia, the federal government recently paying $262 million to buy back 51.4 per cent of its exploration lease on the Liverpool Plains 400km from Sydney.

China Guodian is a major power generator. The two corporations are being put together as China Energy, a move that reduces the number of giant central government-owned and controlled SOEs that are managed by the State-Owned Assets Supervision and Administration Commission below the target of 100.

SASAC now supervises 98 such firms. The commission’s director Xiao Yaqi says that the mergers haven’t stopped yet, and that the aim is to create giants that can compete globally.

But whether sheer size is sufficient to succeed internationally remains unclear, especially when consolidating the deals is likely to take a considerable time.

Although the presidents and chairmen of these central SOEs are heavyweight party politicians — and frequently obtain promotions to jobs as senior officials in provincial governments or the national party-state apparatuses — they are often fierce competitors.

Despite the ambitions of the party to ensure a harmonious framework among cadres, China in the broader sense retains a highly individualistic culture, making such mergers very difficult to pull off smoothly.

Many, perhaps most, of the big SOEs being merged are listed, and China’s retail-dominated sharemarkets in Shanghai and Shenzhen, heavily driven by government policy pronouncements since many of the companies operate in oligopolistic markets, love to see such action.

When the big steelmakers — and buyers of Australian iron ore — Baosteel and Wuhan were forced to merge at the start of the year, many observers warned that this might for a while hold back the development of the better managed Baosteel. For it would have to absorb at first the excess labour and costs of the latter. But the share price of the listed arm of China Baowu, the new entity, soared.

The Guodian-Shenhua merger also pleased stock investors, since it appeared to guarantee the generators of the former a reliable coal source as prices are rising.

Another SOE move saw China Unicom, the country’s second- largest telco, raise a much-needed $16 billion for 29 per cent of the firm, from an apparently carefully orchestrated group of nine investors, including the entrepreneurial principals of some of China’s biggest private corporations such as Alibaba, Tencent, Baidu and JD, and from their companies.

This was slated to improve the telco’s 4G networks and set up next-generation 5G networks, after it had suffered a 96 per cent profit plunge last year, to help ensure it stays competitive — with its state-owned sister China Mobile.

It was intended to showcase another route to SOE reform, “mixed ownership” — usually involving, as in this case, private investment without meaningful influence. It was not announced who would take up the new board representation — three or four seats — although this was believed to come mostly from the major new state-owned investors among the nine, led by China Life and the SOE Restructuring Fund.

This was going to be a pioneer, a model, with clusters of other big SOEs including Air China and COFCO set to follow the mixed-ownership route.

Punters liked the deal, as they like all such deals. Especially when it seems as if their stock is receiving such a huge cash injection.

But within a few days, the China Securities Regulatory Commission had brought the curtain down on this particular show.

It warned that while it would continue to support such reforms, “any items related to the capital markets must strictly stick to existing laws, regulations and rules”.

The capital-raising appeared to have violated rules on deal sizes and pricing mechanisms of private placements that the regulator had only put into effect in February.

So it stressed that while the China Unicom semi-rescue package would proceed, it was an exception not to be repeated.

Yanmei Xie, a researcher at Gavekal Dragonomics, said the placement appeared to have been “an effort to force deep-pocketed state and private firms to subsidise a struggling company, and to score political points ahead of the 19th party congress … amid widespread worries that SE reform had bogged down,” rather than a serious effort to improve corporate governance and efficiency.

Effective state ownership in the restructured China Unicom remains about 58 per cent with the Tencent and Baidu investment vehicles really joint ventures in which state firms hold stakes.

Xie said that SOE reform had coalesced around two strategies in parallel: the consolidation of the unlisted centrally controlled groups, overseen by SASAC, which has organised about 30 China Energy style mega-mergers since 2012, “not all with obvious commercial logic”.

Mixed ownership is the other major strategy, with two rules: state shareholders must always take the lead, and the unlisted parents or holding companies of the entities attracting private investment, are not themselves eligible for mixed ownership.

This is not the privatisation route many had envisaged.