SOE Reforms See Private Capital Grab Bigger Stakes in China’s State-owned Companies

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Domestic analysts expect mixed-ownership reforms of China’s state-owned enterprises to accelerate in the second half of 2017, with private companies taking bigger stakes in government concerns.

Speaking to Securities Daily Haitong Securities chief economist Jiang Chao said the current round of SOE reforms has already entered “phase 2.0,” with a heavy focus on the use of mixed-ownership reforms to achieve “breakthroughs” in the SOE sector.

China has already made increasing use of mixed-ownership reforms to raise the efficiency of its often ailing and heavily indebted public companies, with Reuters reporting that Beijing oversaw 40 deals by June 20 that permitted private capital to invest in SOE’s.

These deals were worth a total of 11.04 billion yuan (USD$1.62), for a ninefold increase compared to the same period last year.

According to Pan Helin, an expert in applied economics from the Chinese Academy of Fiscal Sciences, “the original intention of mixed ownership reforms is to further spur the operating efficiency of state-owned enterprises by means of the introduction of private capital.”

Pan said that SOE reforms in economically developed parts of China such as Beijing, Guangdong, Shanghai and Zhejiang will in future focus primarily on raising the “asset securitisation rates” of SOE’s.

This will mean “promoting asset securitisation by means of capital operations, properly employing market value management methods to exploit the resources of listed companies, and thus achieving optimised integration of internal resources as well as realising maximisation of the vale of state-owned assets.”

The Chinese government has launched an increasing number of mixed-ownership reforms of major provincial SOE’s since the start of the 2017.

An outstanding example is the listing of Zhejiang Materials Industry, in which the Chinese government currently holds an equity stake of 54.42%, with remaining shares held by strategic investors and ┬áthe company’s senior management.

A new and unprecedented trend in the current round of SOE mixed-ownership reforms, however, has been the ceding of majority equity holdings to private parties, as has been the case with pharmaceutical company Yunnan Baiyao Group.

Following the implementation of ownership changes at the start of June, the Yunnan province government was left with a 45% equity stake in Yunnan Baiyao, with a 45% stake held by Fuzhou-based private company New Huadu Industrial Group, and the remaining 10% held by Jiangsu Yuyue Medical Equipment.

Pan Helin points out that in the past mixed-ownership reforms of local SOE’s usually left 51% of equity in government hands, and that cases where public and private equity are on an equal footing have been rare in recent years.

For this reason the ceding of such a large equity stake in Yunnan Baiyao to private concerns exceeded expectations, and in Pan’s opinion will be of benefit to “the use of private capital to establish a modern corporate governance structure with equity at its foundation.”

In the case of Yunnan Baiyao Pan expects New Huadu and Jiangsu Yuyue to use their experience as private companies to help the formerly state-owned pharmaceutical concern to transition towards more market-oriented corporate governance structure.

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