Beijing banks on bumper fund to slash fat from bloated state firms

China aims to use market forces to cut excess capacity but analyst doubts the plan’s chances of success

PUBLISHED : Monday, 26 September, 2016, 11:07pm
UPDATED : Monday, 26 September, 2016, 11:07pm

Beijing has set up a multibillion-yuan fund that it hopes will become the biggest of its kind in the country to finance a massive overhaul of its bloated state-owned sector.

Ten of the country’s largest state industrial conglomerates will contribute 131 billion yuan (HK$152 billion) in initial capital to the China State-owned Enterprises Restructuring Fund, which aims to attract 350 billion yuan in total, according to the fund’s manager China Chengtong Holdings Group.

The money will finance mergers and acquisitions and capacity cuts. It is also be backed by the State-owned Assets Supervision and Administration Commission, the sector’s watchdog.

It is the second Sasac fund created in about a month to shake up SOE ownership, following the establishment of a 200 billion ­yuan venture capital fund in ­August.

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The two funds are Beijing’s newest tools in its drive to streamline the state sector. Rather than be an active shareholder in dozens of boardrooms, Sasac is trying to withdraw from the day-to-day operations of state businesses and focus on returns as a passive major shareholder.

Chengtong said the restructuring fund would take a “market-first approach” under Sasac’s “guidance”, investing in key areas of national interest such as defence and strategic resources.

Its initial focus will be financing consolidation in six industries, including telecommunications, electricity, and cars. It will also eradicate zombie firms in steel, coal and cement, and make overseas acquisitions to ­lift the companies’ global competitiveness.

The mainland’s economy is growing at its slowest rate in a quarter of a century and economists say conditions will not improve without changes to the huge, inefficient state sector.

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The authorities are keen to use more market-friendly methods instead of direct administrative orders to bring about the revival.

But Guotai Junan Securities chief economist Lin Caiyi had doubts about how well the fund would work.

Loss-making SOEs and excess capacity should be eliminated by the market
Guotai Junan Securities chief economist Lin Caiyi

“It’s still dominated by administrative powers under the cloak of the market approach … so I would say it will only work well in areas such as defence and the military, which ban capital [from the broader community],” Lin said.

“Loss-making SOEs and excess capacity should be eliminated by the market.”

Chengtong, whose main business includes asset management and logistics, was designated by the commission to manage state assets earlier this year, and put in 30 billion yuan to the fund’s registered capital.The other nine firms providing initial capital include the biggest contributor, Postal Savings Bank of China, which put in 50 billion yuan. China Mobile, China Communications Construction and China Petroleum and Chemical Corp contributed 5 billion yuan each.