Cross shareholdings at China’s state-owned firms set to surge amid push for more SOE reforms

Success of plan hinges on introduction of more private firms as strategic shareholders in key business units

PUBLISHED : Sunday, 17 July, 2016, 2:33pm
UPDATED : Sunday, 17 July, 2016, 10:47pm

China’s state-owned enterprises (SOEs) are expected to see more cross shareholdings via share transfers as Beijing looks to diversify the shareholding patterns of SOEs to improve governance and efficiency.

Analysts, however, said that the ultimate success of SOE reforms hinges on greater private ownership.

Since December 2015, there have been at least 10 such share transfers among major SOEs directly under the supervision of the central government in the name of SOE reform, besides one case involving SOEs owned by the Shanghai government.

“I believe there will be more cross-shareholdings among SOEs as it could enhance strategic cooperation, corporate governance and efficiency gains,” Hu Xingdou, an economic professor at Beijing University of Technology told the Post.

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“But ultimately, SOE reforms cannot succeed without major stake divestments to private entities and a major reduction in the number of SOEs,” he said, adding the small stakes transferred to other firms would give the latter only limited influence on the SOEs’ decision making and governance.

“From the history of Western Europe to Scandinavia to Eastern Europe, we have seen that state enterprises eventually need to gradually disappear via privatisation ... otherwise, one cannot resolve the problem arising from corporate control by insiders at the expense of the nation.”

Beijing has also encouraged SOEs to introduce more private firms as strategic shareholders in their key business units, but so far stakes involved tend to be too small for the latter to have much influence on their governance.

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One of the latest cases of share transfer among SOEs involves the movement of a 27.6 per cent stake in Shanghai-listed chemicals major Shanghai Huayi from parent Shanghai Huayi (Group) to another firm also owned by the municipal government, aviation equipment-to-pharmaceutical conglomerate Guosheng Group. This will see Shanghai Huayi (Group)’s stake fall to 44.53 per cent, while that of Guosheng will rise to 29 per cent.

In all of the other 10 cases involving central government-supervised SOEs, the listed units’ stakes transferred were less than 5 per cent, and many were between transportation firms and those that need bulky materials such as coal and iron ore.

They include the shifting by China Shipping (Group) of a 3.3 per cent stake in its listed unit China Shipping Container Lines to energy and logistics firm State Development & Investment Corp (SDIC).

This was followed four months later by SDIC’s reassignment of a 4.9 per cent stake in listed coal miner SDIC Xinji Energy and 2.16 per cent in listed SDIC Power Holdings to China Shipping (Group).

The listed firms involved said the deals were aimed at “strengthening up and downstream corporate synergies.”

Another example is the swapping of minor stakes in their respective listed units between China Ocean Shipping (Group) and Wuhan Iron and Steel (Group) between December and February.

Last month, oil and gas giant PetroChina said its parent China National Petroleum Corp (CNPC) would transfer for free shares equivalent to a 0.34 per cent stake, out of its 86.35 per cent holding in PetroChina, to Baosteel Group, the country’s second-largest steelmaker and a supplier to PetroChina.

The transfer is pending approval by State-owned Assets Supervision and Administration Commission (Sasac).

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Calling the share transfer a “gift” that “merely moves assets from one trouser pocket to the other,” Jefferies Securities head of Asia oil and gas research Laban Yu wrote in a note: “We believe Sasac was intimately involved if not formally in charge ... we do not believe CNPC would willingly hand over 0.34 per cent of PetroChina for a nebulous consideration of enhanced strategic cooperation,” he wrote.

“We suspect the deal has undeclared considerations,” he said. “We believe this unusual transaction is somehow related to the divesture of PetroChina’s pipeline assets.”

He said it is possible that the “gift” to Baosteel is a “sweetener” or a funding source for Baosteel to raise its stake in PetroChina’s pipeline company later, possibly aimed at enhancing the latter’s governance.

Baosteel was an investor in PetroChina’s third west-to-east gas pipeline, and currently owns 3.52 per cent of PetroChina’s restructured pipelines company that involved the consolidation of three domestic gas pipeline units into one. PetroChina did not respond to queries when asked about the development.