December 28, 2017 / 3:44 AM / 4 months ago

Breakingviews - China will pull private capital into state orbit

By Christopher Beddor

China World Trade Center Tower III (L) and China Zun Tower under construction are pictured behind a Chinese flag in Beijing's central business area, China December 14, 2017. REUTERS/Jason Lee

WASHINGTON (Reuters Breakingviews) - China’s “mixed-ownership” policy push will put more private capital into lumbering state-owned enterprises in 2018. Beijing wants cash and expertise from the private sector to upgrade SOEs, many of them heavily in debt. The private companies concerned will take comfort that cooperation could reduce political risk. But for the broader reform agenda, half-measures will likely be worse than none at all.

This phase of ersatz liberalisation hit a new peak in 2017 with rickety telecoms giant China Unicom, which announced in August it would divest 35 percent of its Shanghai-listed unit to Alibaba, Tencent, Didi Chuxing and others for $11.7 billion. The next round will likely include China Petroleum Electric Energy, a new unit of state oil champion China National Petroleum Corp. There are dozens more in official crosshairs, and signs of private interest. Private equity firm Hopu, for example, is raising a $2.5 billion fund to invest in SOE reform.

Yet little real control will change hands. Unicom, for instance, will see its stake in the Shanghai subsidiary fall to 37 percent from 63 percent, but the government’s net ownership will stay around 53 percent thanks to stakes held by other official entities. The presence of entrenched Communist Party committees, regulatory meddling, and divergent business interests among the private companies will further stifle any efficiency initiatives. From a certain angle, this programme looks more like a hidden tax on uppity private firms sitting on big cash piles.

This initiative is running alongside others that will strengthen the party’s influence within both state and private commercial enterprises – including reported plans to take equity positions and board seats in the country’s biggest tech firms. That’s hardly a shareholder value proposition, but there’s a big upside for investors in these companies, particularly those who find themselves frequently on the receiving end of the regulatory stick – like Tencent. The targets are too important to fail, capping the downside. In addition, stakes may buy seats at the industrial policy insider’s table, where executives can curry favour.

Unfortunately there’s little else positive to say. Cross-shareholdings will make clubby industries even more incestuous. This could also align some powerful private companies alongside government monopolies. Beijing’s tighter embrace might benefit private interests; the private sector, not so much.

Breakingviews

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