State-owned enterprises

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

PUBLISHED : Friday, 20 October, 2017, 8:33pm
UPDATED : Friday, 20 October, 2017, 10:37pm

The Chinese government’s 350 billion yuan (US$53 billion) restructuring fund, set up to keep the nation’s ailing state companies afloat, will broaden its investments to privately owned enterprises as it switches its attention towards earning a profit.

“The fund was created to help state enterprises cut their debt, introduce mixed ownership and modern corporate governance, and make state assets more liquid,” said Ma Zhengwu, chairman of the Chengtong Group, picked by the government to lead the China State-owned Enterprises Restructuring Fund. “Several projects are already in the pipeline. We are making arrangements to [invest in] some smart manufacturing firms, including both state-owned enterprises and private companies.”

The switch in focus underscores the success of President Xi Jinping’s so-called supply side economic reform, which uses a mix of asset swaps, mergers and management restructuring to cobble inefficient, debt-laden behemoths into globally competitive companies.

The fund, created in September 2016, appears to be paying dividends, as the aggregate profits of the country’s state-owned companies jumped 44.2 per cent in the first seven months of this year, according to the National Bureau of Statistics.

“More than 50 billion yuan worth of agreements have been signed, and more than 30 billion yuan have been spent,” Ma said in a media interview in Beijing during the Communist Party’s twice-a-decade meeting, which will select the its leadership ranks for the next five years.

State enterprises, the legacy holdovers from the country’s journey from socialist central planning towards a market economy, had been among the biggest policy challenges for Chinese policymakers, as they must balance market impulses with the need to protect jobs and ensure social stability.

Total liabilities among state enterprises ran as high as 166 per cent of the entire Chinese economy as of the second quarter, nearly double the level from a decade ago, according to state statistics.

Still, the second quarter was the watershed moment, as the corporate debt ratio fell by 1 percentage point, while the level of government debt also dropped, JPMorgan Chase said in a research note in September.

A major aspect of the fund’s investment had been private placements and the restructuring of debt among state enterprises, the biggest being the introduction of private capital and entrepreneurship in a mixed ownership of China Unicom, the country’s second-largest cellular phone operator.

The fund bought 12.9 billion yuan of Unicom’s shares to become its third-largest shareholder. All counted, the government lined up 14 big shareholders, including a Who’s Who roster of China’s technology companies including Alibaba Group Holding and Baidu, to subscribe to 78 billion yuan worth of shares in Unicom’s parent, China United Network Communications Group.

Other investors in the fund include the world’s largest wireless network operator, China Mobile, the country’s biggest oil distributor, Sinopec, and China Railway Rolling Stock Corp.

The Chinese government’s restructuring programme won’t stop with Unicom. The state has identified at least another six large companies, with businesses from air cargo and logistics to power production and shipping, to test the so-called mixed ownership reform.

The fund is also open to letting overseas investors take part in the restructuring of state companies, Ma said. Investing in the fund itself is the best way of capitalising and riding on the successful turnaround of the state sector, even if this model could potentially be in conflict with the high standards of investment selection among overseas investors, he said.

With additional reporting by Sidney Leng.