SOE reforms may provide opportunities for foreign investment

Since the Third Plenary Session of 18th CPC Central Committee set the mixed ownership as the basic principle of reform of State-owned Enterprises (SOEs) in 2013, the long-awaited detailed policies were issued by the State Council just last month, the “Guidelines on Deepening the Reform of State-owned Enterprises” and the “Opinions on the State-owned Enterprises to Develop a Mixed Ownership Economy”.

Though the reform has been widely discussed in a short time in many aspects, what it means to foreign investments, which is this article’s aim, has been seldom mentioned.

To answer the question, it is essential to understand the background.

According to the Ministry of Finance of China, at the end of 2011, the 144,700 State-owned enterprises, though only accounting for about 3 percent of the total firms, provided 43 percent of China’s total industrial and business profit. The scale is impressive but the cost is too high.

The SOEs enjoy many favorable treatment, such as direct subsidies, concessionary financing, State-backed guarantees, preferential regulatory treatment, exemptions from antitrust enforcement or bankruptcy rules. They are not only provided more than 80 percent of bank loans but also more convenience to be listed in stock market, but their efficiency is under suspicion.

In China’s stock market, the total 334 central SOEs’ average return on asset is 2.2 percent, which is much smaller than private listed companies’ 5.2 percent and foreign companies’ 6 percent. But these 334 central SOEs out of all 2,780 companies control more than 80 percent of the total assets.

SOEs’ profits and revenues have been facing problems for past several years. The total revenue of SOEs in 2014 was 48.06 trillion yuan ($7.58 trillion) with a yearly increase of 4 percent and the total profit was 2.48 trillion yuan with a yearly increase of 3.4 percent. Both the figures are much lower than the GDP growth rate. The total revenue between January and July in 2015 was 25.37 trillion yuan with a decrease of 6.1 percent and the total profit at the same period was 1.42 trillion yuan, a decline of 2.3 percent. The negative growth is unbearable, but it seems that the trend is not a short-time phenomenon.

In fact, with overcapacity, inefficient cost control, and slow industrial upgrading, they are hindering the urgent transition of economic growth pattern in a big scale. Though the reforms of SOEs have been undergoing for many years, the SOEs have grown bigger and bigger. This time, the reform is needed to be different.

Under such a background, the reform is very much anticipated.

According to the two files, the reform is aimed at introducing “mixed ownership” by bringing in private investment. The initiative also set out to improve the competence of SOEs and turn them into fully independent market entities. These measures finally may provide more space for other forms of enterprises.

Since China has liberalized foreign direct investment (FDI), provided channels such as QFII and RQFII, has simplified the investment procedures and given foreign companies national treatment, the foreign companies can share the opportunities along with the private companies.

First, since the reform encourages private capital including foreign investment to participate in State-owned enterprises, the non-State firms including foreign companies will be encouraged to join the process through various means, including buying stakes and convertible bonds from or conducting share rights swaps with SOEs.

Second, since the reform divide the SOEs into two categories, for-profit entities and those dedicated to public welfare and the former will be market-based and stick to commercial operations, the foreign companies may have more opportunities in the for-profit entities. But they can also take the advantage of the latter categories in that the reform encourage that non-State firms provide public goods and services through public–private partnership and other forms.

Third, since the reform will change the way the SOEs are managed by playing a role more like fund managers, which means that boards of directors will have greater decision-making powers and intervention by government agencies will be forbidden, the foreign investors can be more safe to participate as financial investors or strategic investors to play special roles in improving corporate governance.

We expect that the newly issued reforms of China’s state sectors can provide opportunities for foreign companies and foreign companies can contribute as a unique force to help China’s economic transition, too.

Text: China Daily by Wu Jiangang/30 ott 2015

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