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Mix and Match
China encourages the inflow of foreign capital in a restructuring of SOEs
By Ni Yanshuo | NO. 8 FEBRUARY 8-9, 2018

A member of staff works at a new beverage plant, a joint venture of COFCO and the U.S. Coca-Cola Co. in Xianghe County, north China's Hebei Provicne, on April 27, 2017 (XINHUA)

Peng Liang, an engineer with China Shenhua Group, the country's largest coal enterprise, was 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 merging of the two giants in their respective fields," he said.

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, National 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 the integrated development of the coal and power sectors so as to increase the new enterprise's overall profit-making capacity and create a more reasonable industrial development mode," said Xiao Yaqing, Minister of the State-Owned Assets Supervision and Administration Commission of the State Council (SASAC). "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, the National Energy Investment Group signed a memorandum of understanding with the government of West Virginia in the United States to invest $83.7 billion at every level of the shale gas industrial chain over 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 company.

Since China adopted its reform and opening-up policy in late 1978, reform of the country's SOEs has been ongoing, and the process has seen more rapid development in recent years. From 2012 to 2017, SASAC has restructured 34 centrally administered SOEs, making great progress in SOE reform, especially in terms of ownership.

As the acronym suggests, SOE refers to 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 private and foreign capital will become integral to the process.

Opening doors

China Tea was a company wholly owned by COFCO, the country's largest SOE specializing in food processing, manufacturing and trade. In November 2016, it became one of the first nine centrally administered SOEs selected by the SASAC to conduct a pilot project of mixed-ownership and employee stock-option reform. During the restructuring process until August 2017, the company introduced investments from multiple sources.

Currently, COFCO and its employees own 40 percent and 15 percent of China Tea, respectively, with the rest of the stocks held by several investment companies, including 3 percent by 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, COFCO Chairman.

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 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 40.8 percent year on year during the same period.

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

Besides China Tea, several other SOEs have also introduced foreign capital into their reforms, such as China Petrochemical Corp., China's largest oil refining and petrochemical enterprise, and CITIC Group, an investment company.

"Encouraging foreign capital to participate in China's SOE mixed-ownership reform will on the one hand become a major trend for 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.

As China has opened wider to the outside world, it has become easier for foreign capital to enter a growing number of sectors in the country. For instance, in July 2017, the State Council removed 27 restrictive measures from the negative list of sectors off-limits to foreign investors for pilot free trade zones. In addition, the Chinese Government has 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 restrictions to foreign capital access, formulate preferential financial and taxation policies, improve the comprehensive investment environment of national-level development zones, facilitate the entry and exit of talented people, and optimize the operation and business environment in the future. The efforts are believed to encourage more foreign capital to enter the country.

"With breakthroughs made in China's SOE reform, the country now has the conditions that facilitate foreign capital into 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 in local SOEs.

Future reform

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 the International Market Research Institute under the Chinese Academy of International Trade and Economic Cooperation, a think tank affiliated with the Ministry of Commerce.

According to Bai, through mixed-ownership reform foreign capital can have a larger market and earn more profit, 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 the use of advanced foreign technologies and overseas sales channels.

"More importantly, an increasing number of Chinese SOEs have started business operations overseas. Mixed-ownership cooperation can help them better explore international markets and be better localized," said Zhang Yansheng, chief economist of the Beijing-based China Center for International Economic Exchanges.

Starting from November 2016 and March 2017, the National Development and Reform Commission and the SASAC launched two rounds of pilot projects for 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 the SASAC, a third round of ownership reform involving a total of 31 SOEs will start later this year, including 10 centrally administered SOEs and 21 local companies.

"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 the private economy," said Zhang Chunxiao, an official with the SASAC, adding that the third round of reform will cover more areas, including public services.

Copyedited by Francisco Little

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