Calling Chinese entrepreneurs: forget overseas shopping, serve the party, spend at home
China’s latest SOE reform and restriction for overseas investment illustrates the party’s dictates of the private economy
China’s latest mixed-ownership reform of its state-owned enterprises (SOEs) isn’t to promote privatisation of the state-owned economy.
It is the opposite.
The current drive aims to reinforce state control over the biggest companies not only by bringing private capital into the fold, but also to indoctrinate private entrepreneurs with the Communist Party’s dictated way of investments, analysts said.
“Private sector firms have been given clear “rules of the road” about how to deploy their capital – less leveraged investments in speculative overseas assets; more equity support for domestic SOEs,” said Arthur Kroeber, co-founder of the China-focused research service Dragonomics in Beijing.
Look no further than in the recent case of state-owned China United Network Communications Group (CUNC), whose restructuring is backed by investments from the country’s most high-flying tech entrepreneurs including Jack Ma and Pony Ma. Announcement of the plan has pushed shares of its Hong Kong listed entity, China Unicom to a two-year high.
At another level of the state’s growing influence on how and where private investments should flow, former Chinese top billionaire and property tycoon Wang Jianlin has almost given up his overseas expansion ambition, shifting his focus to poverty alleviation and business development in the home market.
Wang’s Wanda Group on Tuesday scrapped a deal worth £470 million (US$606 million) to take up a land plot in London.
It was yet another withdrawal from the overseas market by Wanda, after Beijing tightened curbs on overseas investment and ordered Chinese banks to suspend funding to Wanda’s overseas projects.
Last week, Wang met the party head of the poverty-stricken northwestern Chinese province Gansu, and pledged that he would invest in a tourism project in the provincial capital of Lanzhou and “actively participate in poverty alleviation work”, Gansu Daily reported on Friday.
“It is important to be clear we are not talking about the resurgence of a large-scale privatisation agenda here (regarding the latest SOE reform)...the ultimate policy direction is clearly stated in the Third Plenum decision – state enterprises are guaranteed a “dominant” role in the economy,” Kroeber said.
The CUNC restructuring plan, seemingly far-reaching with a stellar line-up of investors such as Alibaba and Tencent, and a mammoth 78 billion yuan involved, was hardly a break from the past, as state capital has the dominant say in terms of stake and board seats, said Iris Pang, ING’s Greater China economist.
After the restructuring, the private consortium will hold a 35 per cent stake of CUNC, and will be allotted three seats on the board, while CUNC, Unicom’s parent company will have two seats, the government will have three seats, and the state consortium will have one seat.
“The proportion of non-state is high (35 per cent), but the largest shareholder is still the state, as a more than 53 per cent stake is held by a wholly state-owned parent company, China Life insurance, and a state fund backed by the State-owned Assets Supervision and Administration Commission (SASAC) together,” Pang said.
So much so that a combined CUNC with China Life and the SASAC-backed fund will be a formidable alliance to counter balance the private shareholders.
“I think this kind of cooperation of the state capital will set a role model for coming SOE reforms,” she said.
Still, some analysts credited the CUNC example as a breakthrough from previous half-hearted reforms.
“The Unicom case, in my view, clearly represents a few departures from the previous cases,” said Aidan Yao, Hong Kong-based senior emerging Asia economist at AXA Investment Managers, who compared it with the restructuring of Sinopec.
In 2014, China’s second largest oil and gas group said it would sell a US$17.5 billion stake in its non-core retail business to 25 strategic investors, with each one holding a stake of less than 2.8 per cent.
In the CUNC plan however, the reform centres on the core business of Unicom.
“Secondly, the stake held by the private consortium and Unicom employees will be higher than the parent company, which theoretically renders absolute control of the company, while on the other hand, Sinopec still held a 70 per cent majority in the retail business,” said Yao.
“Thirdly, the board composition will reflect the equity-sale, as the private consortium will nominate three representatives, matching the three members representing the sovereign stake,” he said.
Only time will tell if the changes will improve China Unicom’s fundamentals and enable it to become more market-oriented, Yao said, adding that being market-oriented does not guarantee commercial success.
One sure factor is, private entrepreneurs are directing their investments into sectors that the party deems important, over acquiring assets abroad.
As such, it was announced on Monday that a group of state and private companies will invest a total of
6.9 billion yuan (US$1.04 billion) in COFCO Capital, a subsidiary of state-run agribusiness COFCO Group.
“The government is quite serious about a “deleveraging” agenda which involves SOEs reducing their debt/equity ratios, not by reducing debt, but by increasing equity. And here is quite a lot of capital in the private sector that can be put to use in repairing SOE balance sheets,” Kroeber said.
Last Friday, China’s state council issued a list which formally set the boundary for Chinese outbound investments, eight months after the authorities verbally discouraged overseas investment in properties, entertainment and sports clubs and two months after Beijing ordered banks to check loans to China’s top private overseas acquirers including Wanda, Fosun, Anbang, and HNA.
According to EY, the value of China’s outbound merger and acquisition (M&A) deals in real estate, hospitality and construction tumbled to US$400 million in the first six months, which equated to just six per cent of the US$6.2 billion in outbound M&As during the same period last year.