State-owned Enterprises

Bruised not burnt: Chinese state companies eye overseas markets once again

Head of state assets watchdog insists market competition will be key to strengthening firms’ presence in international and domestic markets

PUBLISHED : Saturday, 21 October, 2017, 6:19pm
UPDATED : Saturday, 21 October, 2017, 11:15pm

Beijing is seeking to amplify the role of state firms in domestic and international markets, the head of the Chinese state’s assets watchdog has said.

Xiao Yaqing insisted that market competition would be key, despite lingering questions about the competitiveness of companies overseen by the Communist Party leadership.

After President Xi Jinping included the goal of building world-class enterprises in his keynote speech to the Communist Party congress, the state-owned Assets Supervision and Administration Commission is attempting to build more national champions, actively participate in international competition and improve corporate governance.

“State-owned enterprises (SOEs) must serve a leading role,” Xiao, the director of the commission, told the South China Morning Post on Friday.

“The strength must be gained through market competition. We don’t simply emphasise the company size … but management improvements, including a flexible, effective and internally checked corporate governance, and a fast response to market demands,” he said.

Watch out: China’s big ball of money may be headed into the stock market

The state assets watchdog was created by the State Council in 2003 and now oversees 98 central government-owned enterprises with a total 54 trillion yuan (US$8 trillion) in assets.

State firms have long been viewed as a backbone of the national economy, as they concentrate on upstream and monopoly sectors, such as crude oil and telecom.

As part of its latest endeavour to create national champions, China has merged many state firms in the same industries.

For example Baosteel Group and Wuhan Iron and Steel Group merged earlier this year to create the

world’s second largest producer, while similar mergers have occurred in train manufacturing and other sectors.

Although many Chinese firms are among the world’s top 500 companies in terms of sales revenue, their profitability is often far behind that of their international competitors and they rely on their government-granted dominance in the domestic market.

Xiao highlighted the prospect of cooperation with private and foreign companies in tapping international markets.

“We also committed to opening up and cooperation … we will join hands with others in terms of products, projects and even equity,” he said.

However, previous attempts to diversify abroad have resulted in huge losses for some state players. Following the global financial crisis in 2008, Sinosteel Group fell into financial difficulties owing to its purchase of Australian mining assets.

Xiao said that such investments were necessary and functioned “well overall ” to ensure the supply of much needed energy and materials as China’s self-sufficiency ratio remains very low.

“There are lots of reasons [for the loss of outbound investment], such as unfamiliarity with the market, hasty feasibility research, corruption, management and sudden market changes overseas,” he said, pledging to enhance supervision to close the loopholes.

Beijing’s rescue fund to shift investments to private companies now that it’s saved state giants

However, Beijing will also have to ease overseas suspicions about the role of the Communist Party in running state firms – something that has been written into Chinese company law and was also stressed in Xi’s latest speech.

“The Communist Party represents the interest of all the people … Its leadership will do nothing but good for small shareholders,” Xiao explained.

But the party’s influence is apparent in many Chinese “red-chip” firms, which are listed in Hong Kong or New York but have a party chief on board.

This may continue to cause problems overseas, especially in the United States where President Donald Trump has expressed concern about the national security implications of the party’s role.

Dozens of Chinese acquisitions deals are waiting to be approved by the US Committee on Foreign Investment and one deal has already been vetoed by the president.

A quarter of Chinese SOE executives investigated for corruption work in energy sector

Meanwhile, China’s state assets watchdog has to seek a delicate balance between a market-oriented restructuring of its troubled SOEs and social stability.

“The survival of the fittest is a main theme of market competition. The corporate restructuring process is driven by the market and conducted according to laws,” Xiao said.

SOEs are widely believed to account for 70 per cent of China’s corporate debt. The central government owned enterprises have reported an overall 66 per cent debt ratio, according to government figures.

Xiao also warned that central SOEs need to consider the interests of all the sides and build consensus among workers, shareholders and creditors.

“The process will be fairly complicated,” he said.