China’s Zombie Company Problem Is Unlikely To Be Solved By A Private Solution

With bankers and investors expecting possible spin-offs and asset sales to follow a key Communist Party Congress in October, China’s latest push to revive its bloated state-owned sector is set to pick up pace this year.

But according to the media quoting people familiar with China’s plans, even as Beijing has been promoting it as crucial for reforming state-owned enterprises (SOEs), the effort is likely to only involve a limited role for private money.

Sources reportedly said that to bail out the largest of the struggling companies, Beijing would likely lean on cash-rich SOEs like China Life Insurance and Citic Group Corporation.

Last month, China Unicom was helped to raise $12 billion by China Life.

Questions about the depth of any overhaul of the SOEs would be raised by a limited role for private capital. In order to manage its corporate debt burden and to meet ambitious economic growth targets, China hopes to speed up the reforms.

“The current model allows winners, companies doing better, to partially own those doing worse,” said Alicia Garcia-Herrero, chief Asia Pacific economist at Natixis. “In other words, this is a reshuffling of profit, loss among SOEs to a large extent.”

According to sources familiar with the matter, talks with China Three Gorges New Energy, a unit of the country’s top hydropower developer, are being conducted by China Life.

For the so-called mixed ownership, the injection of private capital into state enterprises, it could also be critical to others in line, they said. China Nuclear Engineering & Construction Corporation, China State Shipbuilding Corp and China Southern Power Grid are among those companies.

There were no comments from China Life and Citic Group.

From banking to insurance, energy, and telecoms, China’s state-run companies dominate the country’s key industries. In part thanks to easier financing, in investing both locally and overseas, they retain an edge over their private rivals.

But they also account for the biggest proportion of the bad loans on the books of the country’s banks and produce lower returns than their private counterparts.

Hopes for the mixed ownership effort, as outlined in a 2015 government plan were sparked by the fund raising by Unicom, a state-owned telecoms group.

And welcomed by the markets widely was the partial privatization of Unicom in August, involving 14 investors, including the tech giants Alibaba and Tencent.

But China Life ended up with a 10.6 percent stake in the company, nearly a third of the total sold as Beijing balanced the need for cash with the need for control. Three of 15 board seats were given to new investors, including China Life.

“For the SOE reforms to really take off, the ownership of these companies should be truly diversified both in terms of equity holding as well as governance,” said a Beijing-based lawyer who works with the National Development and Reform Commission, China’s top economic planning body, and private companies.

“That will be difficult to achieve: there is no incentive for private enterprises to invest in most of these state-owned firms,” said the lawyer, who declined to be named due to the sensitivity of the issue. “So it will be basically a case of using one SOE’s cash balance to try and revive another.”

There were no comments from the NDRC and SASAC.

(Adapted from Reuters)

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Categories: Economy & Finance, Strategy, Uncategorized

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