Helping China reform its state-run giants is troublesome and there are more profits to be made backing privately run enterprises, investors and bankers say.
“Five years ago I was hopeful that there would SOE reforms … So far we have not seen much movement,” said Weijian Shan, chief executive of private equity firm PAG Group.
China is courting private capital to help make its state-owned enterprises (SOEs) more efficient. However reforms have been slow given propping up GDP growth and social stability remain the top priorities.
Add to that concerns about investor rights at these behemoths that answer to Beijing and limited opportunties to apply leverage; it all means actual deals are thin on the ground.
“The reality is at the deal level it is difficult. Very few foreign investors in China will use straight cash, they prefer structured deals; for such sophisticated deal structures, maybe it is a bit to early for China,” said Wei Sun Christianson, co-CEO of Asia-Pacific and CEO of China at Morgan Stanley.
Instead, investors such as PAG are focusing on China’s burgeoning privately run companies; it has backed enterprises ranging from a kindergarten to China’s largest producer of industrial gases, Yingde Gases. Shan said last week PAG was about to sign a deal to invest in a Chinese match-making site.
“Ten years ago you would be hard pressed to put a hundred million dollars into a deal in China, today you can easily put a couple of billion dollars into a [private] deal,” said Shan speaking at the Milken Institute 2017 Asia Summit.
His sentiment is echoed widely among private equity investors: SOE reform, also known as the hybrid economy, is failing to excite investors.
“There hasn’t been a large number of assets you can really approach but on the private side … we’ve certainly seen more opportunities,” said Kevin Lu, chairman of Asia at Partners Group, which has backed Chinese private entrepreneurs including owners of a baby-products retailer in Shanghai and a fast-food chain.
Much ado
China has been gradually shifting from a Soviet-style centrally planned economy in the 1970s to a more market-oriented one.
During the the current round of reforms, Beijing is placing more emphasis on mixed ownership, with big strategic private investors buying private placements of shares rather than the more diffuse ownership sought during the privatisation of China’s big SOEs between 2003 and 2010, where discreetly owned stakes were typically less than 5%.
Eastern Airline Group said in June it would reduce its stake in Eastern Airline Logistics to 45%.
Unicom followed in August saying it plans to raise $11.63 billion from Tencent, Baidu, JD.com, Alibaba and others, via the sale of a majority stake in its Shanghai-listed unit.
“The lines are getting blurred,” said Christianson. “In terms of ownership who is at 51%, who is at 49%, it is not going to be that clear."
However, the parent company remains fully in control of the state in both cases. For investors in SOEs’ subsidiaries, it is unclear how much say they will have on the company’s strategic direction as decisions are still largely made at the group level.
“People are worried, do I really have control as a shareholder?” said Christianson.
Some even suggest nothing much will change because control still resides with the state.
“When it comes to Unicom’s recent injection of private capital, in the grand scheme of things it has very little significance,” said Shan, who used to sit on the board of Unicom but stepped down about 10 years ago.
There is still hope for more serious change. With some pinning their hopes on another big push after the 19th national congress of the Chinese Communist Party, which begins on October 18
“[The Party Congress] will be a very important inflexion point,” said Christianson.
She noted that the key for private investors will come as the largest SOEs restructure following the most recent round of consolidation, which may result in the spin off of non core businesses.
The number of centrally governed SOEs has fallen to about 98 from 196 in 2003 after a round of M&A.
China's State-owned Assets Supervision and Administration Commission (SASAC) announced the merger of China’s top coal miner Shenhua Group and one of its largest power producers Guodian in August.
“SOEs, whether central or provincial, they do hold the best assets of China,” said Christianson.
