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Mixed-Ownership Reform
China encourages the inflow of foreign capital in SOE restructuring
By Ni Yanshuo | ChinaAfrica February 2018

Chinese Premier Li Keqiang (center) on an inspection visit to the Dalian Bingshan Group in June 2017 

Peng Liang, an engineer with China Shenhua Group, the country's largest coal enterprise, became a worried man when he heard the news that his company was to merge with China Guodian Corp., another state-owned enterprise (SOE) specializing in electricity generation and investment, in August last year.

"I was not sure what would happen after the two giants in their respective fields merge," said Peng.

Peng soon found that his anxiety was unfounded. Everything went smoothly and for Peng, it was business as usual. Three months later, the new company, China Energy Investment Group Co. Ltd. with assets of 1.8 trillion yuan ($277.3 billion) and 330,000 staff members, was officially established.

"The merging of the two groups will definitely help realize integrated development of coal and power sectors so as to increase the new enterprise's overall profit-winning capacity and create a more reasonable industrial development mode," said Xiao Yaqing, Chairman of State-Owned Assets Supervision and Administration Commission (SASAC) of the State Council. "It is a good example of SOE reform in China."

The reform has seen achievements. When U.S. President Donald Trump visited China in November 2017, China Energy Investment Group signed a memorandum of understanding with the government of West Virginia State to invest $83.7 billion in all aspects of the shale gas industrial chain in the coming 20 years. This is the largest investment project in the energy field between China and the United States, as well as being the first project of the new SOE.

Since China adopted its reform and opening up policy in late 1978, reform on the country's SOEs has been ongoing, and the process has seen more rapid development in recent years. During the past five years from 2012-17, SASAC has restructured 34 SOEs under the supervision and administration of the Central Government, making great progress in SOE reform, especially in terms of ownership.

Opening doors 

As the acronym suggests, SOE means enterprises that are totally owned or controlled by the state. But the latest round of reform is trying to broaden this ownership. With the deepening of SOE reform, experts believe that foreign capital will become integral to the process. China Tea was a company wholly owned by China COFCO, China's largest SOE specializing in food processing, manufacturing and trade. In November 2016, it became one of the first nine central SOEs selected by the SASAC to conduct a pilot project of mixed-ownership and employee stock-option reform. During the process, the company introduced investments from multiple sectors.

After the reform was completed in August 2017, the stock share of COFCO reduced from 100 percent to 40 percent with employees holding 15 percent of the stock, and the rest held by various investment companies, including 3 percent from Mitsui & Co. based in Japan. Accordingly, a board of directors with principals representing various investors was established.

"Thanks to the mixed-ownership reform, I now can see a different SOE in terms of competitiveness and employees' sense of responsibility. We have solved problems like redundant organs and low efficiency that had lingered on for decades," said Zhao Shuanglian, Chairman of COFCO.

The reform also led to improvement in the company's market performance. In the first six months of 2017, China Tea saw its turnover increase by 28.1 percent year on year, much higher than the average 2.36-percent growth of other companies in the industry in 2016. Its profit also increased by 40.8 percent year on year during the same period.

"China Tea can also provide valuable experience for other SOEs in their reforms," said Zhao.

Foreign capital encouraged 

Besides China Tea, other SOEs also introduced foreign capital into their reforms, such as China Petrochemical Corp., China's largest oil refining and petrochemical enterprise, and CITIC Group, a Chinese state-owned investment company.

"Encouraging foreign capital to participate in China's SOE mixed-ownership reform, on the one hand, will become the major trend of how China utilizes foreign capital, as China has great potential for attracting foreign investment; on the other hand, foreign capital can also help optimize the structure and operation of Chinese SOEs and inject new impetus into them," said Xiao.

Actually, as China has opened up wider to the outside world in recent years, it has become easier for foreign capital to enter a growing number of sectors in China. For instance, in July 2017, the State Council removed 27 items from the negative list of foreign investment in free trade zones. In addition, the State Council also issued a series of regulations to ensure that foreign investors compete with their Chinese counterparts in an equal and fair environment.

According to the Notice on the Measures of Promoting the Increase of Foreign Capital issued by the State Council in August 2017, China will further cut the limitation to foreign capital access, formulate preferential financial and tax policies, improve the comprehensive investment environment of national-level development zones, facilitate the entry and exit of talents, and optimize the operation and business environment in the future. The efforts will encourage more foreign capitals to enter the country.

"With breakthroughs made in China's SOE reform, the country now has the conditions [that facilitate] introducing foreign capitals to SOEs," said Li Jin, Chief Researcher with China Enterprise Research Institute, adding that the Government's next move will be further promoting mixed-ownership reform at local SOEs.

SOEs occupy a strategic position in China's national economy. "Foreign capital holding shares of SOEs can benefit both [sides]," said Bai Ming, Deputy Director of International Market Research Institute of Chinese Academy of International Trade and Economic Cooperation, Ministry of Commerce.

According to Bai, thr­ough mixed-ownership reform, foreign capital can have a larger market and earn bigger profits, especially in China where some SOEs occupy a monopoly position in certain sectors. It can also allow Chinese SOEs to enhance their influence on the international market through using advanced foreign technologies and overseas sales channels.

"More importantly, an increasing number of Chinese SOEs have started business overseas. Mixed-ownership cooperation can help them better explore international markets and be better localized," said Zhang Yansheng, Secretary General of Academic Committee of the National Development and Reform Commission (NDRC).

Future reform 

Starting from November 2016 and March 2017, NDRC and SASAC launched two rounds of pilot projects of SOE mixed-ownership reform, with nine SOEs in the first round and 10 in the second, covering areas such as electricity distribution and sales, power equipment, high-speed railways, airline logistics, telecommunications and finance.

According to Peng Huagang, Deputy Secretary General of SASAC of the State Council, a total of 31 SOEs will launch the third round of ownership reform early this year, including 10 SOEs under the Central Government and 21 SOEs under local governments.

"The first two rounds of SOE reform have made steady progress in promoting economic development, while the state-owned economy has set up a sound platform for further development of private economy," said Zhang Chunxiao, an official from SASAC, adding that the third round of reform will involve more areas, including SOEs that provide public service.

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