China’s state enterprises to have mixed foreign ownership

The Chinese government has a great offer for foreign investors, a chance to invest and get part ownership in some state-owned enterprises (SOEs). One catch though, foreign investors shouldn’t expect to have any say in how the businesses are run. Not that they have much say in the US either.

The productivity gap between state-owned and private companies has widened since the financial crisis in 2008. The average return on assets for state entities comes in at 4.6% compared with 9.1% for private companies, said Gavekal Dragonomics, an economic research company in Beijing.

The government is considering letting 50% of all SOEs, on both the central or local level, to be allowed to have mixed ownership: part government, part private, reported China Daily. This has been in the works since March, when in his annual Government Work Report, Premier Li Keqiang listed mixed ownership as one of the seven tasks to accelerate SOE reform.

Sources of non-state capital include domestic private investors, foreign investors, and SOE employees, said Zhou Fangsheng, deputy director of the China Enterprise Reform and Development Society, a body under the state Council’s State-owned Assets Supervision and Administration Commission, according to China Daily. The commission covers 113 non-financial central SOEs and 98,554 local government-owned companies.

Central enterprises controlled about 53% of all SOE assets by the end of last year, totaling 91 trillion yuan ($14.63 trillion), according to the Ministry of Finance.

“It’s possible that foreign capital could become the largest shareholder of an SOE through the mixed-ownership reform, but don’t expect it to become a majority shareholder,” said Zhou in China Daily. “Allowing state capital, non-state capital and employees to each hold one-third of the shares is a suitable proportion for the next step in mixed-ownership reform.” Domestic capital would be given preference over foreign capital.

Even as SOEs have been criticized for poor results over the past decade, SOE reform has gone nowhere. Local governments realized they needed to take the lead. In an effort to lower their liabilities and find new capital, more than 20 provinces and municipalities have begun to promote mixed ownership.

“As the economy slows further and financial pressure on local governments increases, privatization should become more acceptable.” Andrew Batson, Gavekal Dragonomics’s China research director told China Daily.

When the government realized that private companies are twice as profitable as ones run by the state, it concluded this was because they have foreign investors. So, if we bring in foreign investors, the SOEs will do better. Asia Unhedged is going to assume private companies are doing better because they aren’t run by bureaucratic functionaries following orders from high-level party leaders with limited market experience.

It was actually quite refreshing to see China Daily report that some private business leaders are concerned that they won’t have much say in the running of mixed-ownership firms.

“The prospects for a mixed-ownership economy will ultimately depend on the state’s willingness to cede control — not just ownership — of some of the nation’s largest enterprises to private interests,” the Paulson Institute, a think tank on China-United States relations, said in a memorandum. It warned that improvements in performance would not automatically follow private investment in China’s state-controlled companies.



Categories: Asia Unhedged, China

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