China’s state firm shakeup gets it only half right

April 24, 2014

By John Foley 

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Private shareholders could bring discipline to China’s 150,000 or so state owned enterprises. There’s no question the companies, which generate a return on assets about half that of private sector rivals, need the help. Recent shake-ups at CITIC Group and Sinopec have set the ball rolling. But for real efficiency, SOEs need to pay market rates for debt as well as equity.

Reformist buzzwords like “social capital” and “mixed ownership” have become ubiquitous. Cities from Harbin to Zhuhai are pledging to sell stakes in projects and companies to private investors. China’s government said on April 23 it would open 80 infrastructure projects to private investment. The sensible idea is that private capital brings more efficiency, and better returns.

Some changes, like giant conglomerate CITIC’s plan to reverse into its Hong Kong-listed subsidiary, look helpful. While the government will remain in charge, minority shareholders can enforce checks and balances. Public shareholders can’t sack underperforming bosses, but they can veto certain related-party deals and kick up a fuss if returns lag.

In other cases, it’s hard to see how bringing in new equity will force change. Sinopec’s sale of a stake in its giant petrol station business probably won’t affect the governance of the parent company. Meanwhile, the state retains an inexplicable stranglehold on businesses that hardly seem strategic, like the country’s salt monopoly.

The real problem, however, isn’t just that SOEs are state owned but that their capital comes too cheaply. The country’s four biggest banks, which dominate SOE lending, charged an average of less than 6 percent for loans in 2013. Yet small, private companies are prepared to pay upwards of 15 percent.

That’s harder to fix. Banks themselves enjoy too-cheap financing, in the form of deposits capped at 3 percent, which means they also lack discipline. Governance is the other problem: Communist party hierarchy means that bank bosses are in thrall to SOE officials.

China’s large banks, which are mostly listed and have foreign investors, are themselves evidence of the limits of bringing in private shareholders. If China wants efficiency, what matters isn’t just who owns its hulking companies, but also who funds them, and at what price.

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