China Launching Agency To Reform State Firms

HONG KONG (Reuters) – Beijing is close to launching an agency to restructure and consolidate Chinese state-owned enterprises that need government help to improve their business and balance sheets, two sources with direct knowledge of the plan said on Wednesday.

The State-owned Assets Supervision and Administration Commission (SASAC), China’s powerful watchdog in charge of all major state-owned enterprises, is working with the finance ministry to finalise the plan, the sources told Reuters.

A draft proposal to establish the new firm, which is expected to have at least 50 billion yuan ($7.3 billion) of initial registered capital and to be directly led by SASAC, was recently submitted to the State Council, China’s cabinet, for approval, said the sources.

No official date for the launch has been set and the management structure of the new firm is subject to the cabinet’s approval, said the sources.

The idea to set up the new agency to restructure and consolidate state-owned enterprises emerged in Chinese newspapers earlier this year and soon gained attention from foreign dealmakers who have been frustrated in efforts to buy Chinese state firms.

The new firm, dubbed by Chinese media “CIC 2.0” in reference to the country’s $200 billion sovereign wealth fund, China Investment Corp (CIC), will not invest abroad but focus purely on domestic industry consolidation, said the sources, who declined to be identified due to the sensitive nature of the matter.

In the future, the new firm led by SASAC will act as a manager of certain state companies after restructuring work while SASAC itself will focus on regulatory and supervision matters, the sources said.

A SASAC official declined to comment, while the finance ministry spokesman could not be immediately reached for comment.

NON-FINANCIAL HUIJIN

In late 2003, Beijing created Central Huijin, an investment agency controlled by the central bank to bail out and reform China’s major financial institutions.

At the end of 2003, Central Huijin injected a combined $45 billion capital into Bank of China (601988.SS) (3988.HK) and China Construction Bank (601939.SS) (0939.HK), two of the country’s four biggest state lenders, which officially kicked off China’s banking industry reform.

“The idea of the new agency to be led by SASAC is similar to Central Huijin though Central Huijin is only responsible for restructuring of financial firms while the new SASAC agency will be responsible for non-financial firms,” said one of the sources.

“China’s banking reform is a success and now the government wants to copy the success to other sectors,” he added.

But to foreign investors, in particular these global buyout funds, which regard China as a key market for big deals, the creation of the new SASAC agency means more challenges.

Last year, U.S. buyout giant Carlyle Group [CYL.UL] finally walked away from three years of negotiations to buy Xugong, China’s top construction equipment maker, after running into bureaucratic obstacles. [ID:nSHA323138]

In the future, the government may assign the SASAC agency to restructure important firms like Xugong without giving foreign funds any opportunity to participate in the bidding process, some China-focused foreign dealmakers noted.

The new agency can also team up with Chinese private equity funds, for example, CITIC Capital, a firm backed by China’s top largest financial conglomerate CITIC Group, to jointly restructure state firms if necessary, said the sources.

Currently, China has 138 centrally controlled state-owned enterprises and SASAC has said that it eventually aims to cut the number of such major state firms to between 80 and 100 through domestic industry consolidations. 

SASAC is expected to transfer shares that it currently owns in certain state firms to the new agency once it is launched and the agency is also expected to invest more in these firms to boost their capital bases if needed, the sources said. ($1=6.83 yuan)

By George Chen
(Editing by Jacqueline Wong)