• Sat
  • Aug 30, 2014
  • Updated: 10:24pm
BusinessChina Business
REGULATION

Shanghai to spur reforms at state enterprises

Incentives for overseas push will result in new assets treated as profits, but some see risks

PUBLISHED : Monday, 31 March, 2014, 5:27am
UPDATED : Monday, 31 March, 2014, 7:55am

Shanghai has rolled out new incentives to show is resolve to deepen economic reforms and further encourage the city's state-owned enterprises to venture abroad.

But these efforts might expose the industrial giants to risks amid a clutch of reckless overseas acquisitions and the establishment of new production facilities abroad.

Shanghai is striving to lead the reform push for state-owned businesses under the directives of the mainland leadership.

City officials pledged to create five to eight corporate juggernauts that could compete against global conglomerates after a new round of reforms for state-owned businesses.

"An overseas investment should focus on the profitability of the new projects," said Tan Yaling, director of the China Forex Investment Research Institute. "If the motivations are not pure, the investments will be at huge risks."

They envision that purchases of quality foreign assets and expansion of production outside the mainland could offer a fast track for local conglomerates, most of which are either cash-rich or can easily obtain large loans to support their campaigns.

The city's state-owned assets watchdog recently issued new rules under which the amount of outbound investments would be considered "profits" of state-owned firms. The "profits" are not the real earnings that the state companies rake in through business operations. Instead, investing abroad could benefit the top officials of companies in securing further promotions and earning bigger year-end bonuses. This is because the "profits" would help window-dress annual appraisals conducted by the local government. The rules have not yet taken effect.

They could result in SOE chiefs desperately snapping up overseas assets or making fresh investments regardless of the feasibility of the projects to inflate the profits and aid their performance reviews.

Tan said officials with state-owned companies did not appear to understand the foreign market rules and the business environment overseas.

"You work hard to chase lucrative projects outside and find good investment targets, only to find they fail to interest the big bosses," said an official in charge of overseas investments for a Shanghai state-owned equipment maker.

Shanghai used to be the mainland's economic locomotive, with dozens of its state-owned manufacturers playing a leading role in the domestic market. Many of the local corporate giants have been eclipsed by privately owned companies in the past two decades.

In 2011, Bright Food Group, the mainland's second-largest food company, spearheaded the move to acquire foreign assets, buying control of Australia's Manassen Foods for 2.1 billion yuan (HK$2.6 billion).

Greenland Holding Group, the city's largest property developer, aggressively moved into markets, such as the US and South Korea, driven by its ambition of becoming an international property giant.

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