Asking for a thing at the right time pays off for Citic Group
As reform of state-owned enterprises moves anew to the top of the agenda, it appears many rules have been bent to allow asset injection
In China’s corridors of power, where one man’s decision can override rules and regulations, asking for the right thing for the right reason at the right time is a make or break matter.
Citic Group chairman Chang Zhenming is certainly a master of the art.
He has successfully lobbied for the injection of Citic Group into subsidiary Citic Pacific, something which “would not have been possible six months ago” according to one retired state enterprise chairman.
Indeed. Six months ago, the country’s largest conglomerate was busy talking to bankers about a public offering in Hong Kong as a mainland-incorporated H-share company like many other state-owned enterprises.
But then, in November, President Xi Jinping pushed the Communist Party plenum into agreeing on a report that made SOE reform one of the country’s top agenda items. Reform has once again become the password to breaking many deadlocks.
With sceptics both at home and abroad, what better way to quiet them than the listing of Citic Group – a widely if not generally well known Chinese corporation – as a company incorporated in Hong Kong, often hailed as the world’s freest market economy.
An initial public offering would have done the trick but it would have taken much longer than a backdoor listing via Citic Pacific. The reform pledge needs a showcase to maintain its momentum.
For that to happen, many rules have to be bent. Isn’t that – the spin goes – a good way to send a strong message about state leaders’ determination to push ahead with reform?
The first rule to be bent is the bar on SOEs listing as Hong Kong-incorporated red chips. The bar was introduced in the wake of the Asian financial crisis in the name of risk control.
From then onwards, each one has had to be listed as a mainland-incorporated H-share company, which subjected them to both Hong Kong securities laws and strenuous mainland rules. Even powerhouses like the oil giants and banks did not manage to gain exemptions.
To become a Hong Kong or overseas company is a dream for any mainland firm. It not only means they need far fewer regulatory approvals and less horse trading coupled with higher efficiency and the ability to do things that could not be done before.
Managers at Citic Bank and Citic Securities are already buzzing about the Citic Group share options they see in their future. Legal hurdles do not allow their mainland-incorporated employers to motivate them with options.
Controversial? “Well, the plenum report has pledged to revamp the staff reward and motivation system of the SOEs,” said one of the managers.
The second rule to be bent is the bar on foreign companies holding control of mainland financial and telecommunications assets. That would have made the plan to inject control of Citic Bank – the group’s crown jewel – into Citic Pacific impossible because the latter is incorporated in Hong Kong.
Citic knows this from experience. An earlier acquisition by its Hong Kong unit of a telecommunications asset had to be cancelled because of the ownership control issue. And nor did China Everbright manage to raise its stake in China Everbright Bank to a meaningful level, despite much lobbying.
Yet, in the name of reform, this won’t be too hard to justify. Let us not forget the banking sector is a key focus in the current reform drive. Didn’t the plenum report say ownership of banks should be diversified to bring in competition and innovation? Getting Citic Bank “foreign” ownership with Chinese socialist characteristics sounds good.
The third rule to be bent is that state assets cannot be sold below their net asset value. Citic Group’s core asset, Citic Bank, is now trading at only 0.8 times its net asset value.
With the right timing and right reason, Chang has made something impossible possible. The big question is whether all those efforts will make Citic Group a model for SOE reform.
After all, it is not the first time a state firm has operated as a red chip outside the straitjacket of the mainland law.
And nor is it the first time we’ve heard SOE chairmen like Chang praise Hong Kong’s established legal framework, high governance standards and international connectivity as making it the ideal place for an SOE’s development.
Red chips have been listing in Hong Kong since the 1980s – dozens of them – but how many success stories have we heard of, excluding the monopolies?
The reality is these lucky few face fewer regulatory hurdles, enjoy more flexibility and motivate their management with share options, but they continue to be tied down by party rulings and interference.
What magic will having a Hong Kong headquarters work for Citic Group if the core team working there – its chairman, director, president, deputy president and many others – continue to be selected and rewarded by the party, whose concerns extend beyond maximising profits?