Money Matters

It’s a step forward, three steps back for Unicom’s mixed ownership trial

Whoever ends up with a stake in China United Network will be operating in a tailor made straightjacket.

PUBLISHED : Wednesday, 12 April, 2017, 8:02am
UPDATED : Wednesday, 12 April, 2017, 8:02am

Let’s just ignore the guessing game of who might be investing in China’s second-largest telecommunications group, in the so-called “mixed ownership” reform of the country’s state-owned enterprises. It’s not going to make an iota of difference.

The line was already drawn, as soon as Beijing announced that the share sale will be done by the A-share holding company, instead of the Hong Kong listed unit.

Whoever the new private shareholder is -- Alibaba, Baidu or Tencent -- it will be operating in a tailor made straightjacket.

This has to do with the peculiar shareholding structure of China Unicom Hong Kong Ltd., unseen in any other state enterprises owned by the country’s central government.

The story dates back to 2002, when Unicom was already listed in Hong Kong. Beijing wanted to list it on the Shanghai exchange to raise more cash. This could not be done because Unicom was incorporated in Hong Kong, and the stock exchanges on the mainland didn’t allow offshore incorporated companies to be listed on them.

Therefore, a mainland incorporated firm had to be created for the sake of its A-share listing. That company contains nothing but an indirect holding of Unicom Hong Kong.

All the talk of mixed ownership is about this A-share holding company -- China United Network Communications Ltd. -- not Unicom that’s listed in Hong Kong, and is actually running the business.

Now imagine yourself as the new investor. You will supposedly be buying 20 per cent of the Shanghai-listed company.

It may sound substantial and influential. In reality, it’s not.

Firstly, your effective ownership in Unicom is only 5 per cent after counting in the extra layer of offshore company in between. Unsurprisingly, other state entities own stakes in Unicom too.

Secondly, your exercise of shareholder’s right in Unicom will very much depend on the state’s preference.

Say you are brave enough to push for a Unicom chief executive officer who isn’t actually appointed by the Communist Party. Besides the extreme unlikeliness of getting the idea supported by the government, you’ll also need to get enough votes across three layers of companies to get it done.

The first layer is Shanghai-listed China United Network. You have to convince the minority shareholders holding 30 per cent of China United to disagree with the state, with 50 per cent. Tough luck.

Thirdly, your right as a minority shareholder is supposed to be protected by a regulator who’s also a state organ. That isn’t very comforting, when the state is also the controlling shareholder.

How big of an influence can you exert on the phone operator? Very little.

It will be a different situation if you’re buying 20 per cent of Unicom. It’s a more direct and effective control, and it’s cheaper too.

The Shanghai-listed company’s shares were trading at 75 times estimated 2017 earnings, before they were halted on Friday. That’s almost double the price-earnings ratio of Unicom, at 40.9 times 2017 earnings.

Remember the old adage of “feeling the stones to cross the river.” That’s not quite the case here.

What Beijing is now proposing is a big step backward from what its telecommunication industry has been doing in the past 17 years.

All three but one of the country’s biggest phone companies have sold stakes to foreign investors since as early as 2000.

Spain’s Telefonica SA once owned 9.6 per cent of China Netcom, South Korea’s SK Telecom controlled 6..6 per cent of Unicom, while Vodafone of Britain owned 3.2 per cent of China Mobile. They had board seats as well.

All of these foreign holdings were at the level of the Hong Kong listed entity, not a weird company listed on a insulated stock market.

However, none of them had been able to turn the mainland phone operators into genuine market-driven businesses. They subsequently had to sell their stakes for financial reasons.

Instead of removing the blockages that have made the earlier efforts futile, Beijing is now telling the world that a straightjacket version with local players will do the trick.

It’s saying that the improvement will come with the establishment of a more active and strong Communist Party committee within state firms.

You must be kidding.

Whoever ends up with the stake, China Unicom Group is nothing but a banner carrier of President Xi Jinping’s reform of state firms, which is going nowhere after four years.

With less than a year to go before his first term ends, such a show case is very sorely needed.