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Mishi Saran

THE rumbles of reform echoing in Beijing's corridors of power eventually will filter through to mainland companies listed in Hong Kong, but the process could take a while, according to analysts.

 'We can't expect a strong increase in H-share [prices] as the restructuring will take several years and the benefits will be seen at the earliest in 1999,' said Gary Chiu, investment analyst at Amsteel Securities.

 Part of the problem is that nobody quite knows what form the changes will take now that the basic guidelines are out in the open.

 Premier-designate Zhu Rongji will ensure that certain government ministries are done way with and swollen state enterprises chiselled down to size.

 Theoretically, it sounds good.

 Certainly, hundreds of cadres are about to lose their jobs and state-run juggernauts will wave thousands of employees farewell.

 But how exactly the changes will affect H-share companies remains somewhat foggy.

 'Obviously what they've announced is quite broad and at the moment, it's hard to determine which companies are going to benefit,' Phillip Chan, research director at Shenyin Wanguo Securities, said.

 Take, for example, China's petrochemical sector.

 Six out of a total of 40 H-share companies in Hong Kong are linked to the petroleum industry.

 Under ambitious plans, Beijing's state-owned monoliths China National Petroleum Corp (CNPC) and China Petrochemical Corp (Sinopec) and the Ministry of Chemical Industry were to be merged and then redivided, observers said.

 'The restructuring particularly of CNPC and Sinopec is redividing the pie between north and south,' said Gilbert Chu, executive director at Sun Hung Kai Securities.

 Previously, CNPC managed crude oil resource development while Sinopec oversaw the mainland's refining business.

 Now the two will be vertically integrated - a fancy term to indicate that their functions will merge so that the same body looks after both crude oil and refining, analysts said.

 This aims to provide better access to the raw material - crude oil - to refineries.

 It should stop any duplication of effort and thus streamline domestic oil production into a more efficient creature.

 Two creatures, rather, as the giant firm will be geographically split into two bodies in north and south China.

 'It should reduce the excess supply of petrochemicals in the country,' said Amsteel's Mr Chiu.

 For H-share companies such as Tianjin Bohai, Beijing Yanhau and Jilin Chemicals, who would possibly fall under the northern umbrella, the implications of the new structure are not yet evident.

 Certainly H-share stocks have edged up over the past few weeks in the build-up to China's agenda-setting congress, said Mr Chan. 'Now you're getting profit-taking. Institutions like the fact that the whole government structure is being shaken up, it will lead to less favouritism.'  But the benefits will take time to trickle down and will be the result of trial and error, Mr Chan said.

 Indeed, many feel that H-share firms, generally seen as better run and more internationally competitive than other mainland companies, have more important things to worry about than the arcane proceedings in Beijing.

 'I'm optimistic about the restructuring, but the competition from neighbouring countries will gradually affect the value of China's exports,' said Patrick Yiu, analyst at Dharmala Securities.

 'With Southeast Asian currencies depreciating, those exports are much cheaper. As a result, some Chinese steel and petrochemical companies will see declining exports and that will lower their export earning, ' Mr Yiu said.

 Sun Hung Kai's Mr Chu agreed, noting that top-level restructuring may not provide the urgently needed cure for oversupply and over-capacity in the petrochemical industry. 'They're also competing with cheaper imports into the Chinese market. It's not a pretty picture,' he said.

 China's vow to defend its currency also means that H-share companies could see fewer hopes for foreign investment as bags of capital drift away from China towards countries such as Thailand, analysts said.

 'We need to see if the yuan depreciates or not to analyse H-share prospects. If the currency is not devalued, the prospects for H shares are not very good,' Mr Yiu said.

 As far as domestic reforms go, there is one, certain looming cloud on the horizon.

 Mr Zhu's impending clampdown on tax collection to boost government revenue will probably mean that the partial holiday is over for H shares.

 'The [end of the] taxation advantage offered to H-share companies will have a negative effect on them,' said Mr Chu.

 Previously, H-share companies could pocket half the taxes, as regional governments often waived fees in a bid to encourage investment.

 H-share companies will now have to cough up the full 33 per cent in taxes to the Chinese Government. That amount is split roughly equally between provincial government and central Government coffers.

 At any rate, analysts do not forecast a brilliant year for H-share companies' earnings, with estimates ranging from a flat to negative outlook.



Beijing reform efforts seen gradually giving H-share firms a boost