CITIC goes slowly on reform with $5.1 bln placing

May 15, 2014

By Una Galani 

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

CITIC Pacific is going slow on reform with its $5.1 billion placing. The Chinese group’s Hong Kong subsidiary will sell new shares to 15 investors as part of a union with its state-owned conglomerate parent. The placing allows CITIC Pacific to keep its stock market listing. Yet most of the money is coming from buyers also backed by the Chinese government. A deeper overhaul of state firms looks a way off.

CITIC Pacific’s mainland parent plans to swap assets worth $37 billion – ranging from finance to a football club – for shares in the Hong Kong-listed group. This would leave existing independent shareholders in CITIC Pacific with just 6.2 percent of the enlarged share capital – well below the minimum 15 percent required by Hong Kong rules. The placing lifts the free float to 18 percent.

Yet it’s questionable just how independent the new shareholders are. State-owned entities including China’s National Social Security Fund, the SAFE foreign exchange fund, and the country’s top commercial banks have directly and through subsidiaries agreed to buy more than 80 percent of the new shares. Strip out Chinese government cash and the enlarged group’s free float shrinks to less than 9 percent.

CITIC Pacific’s roster of new non-Chinese investors is also less than perfect. Qatar Holding, Japanese insurer Tokio Marine, and Mizuho Bank are all looking for strategic cooperation with the group, so their interests may not be aligned with those of other external shareholders.

Independent investors in CITIC Pacific were always in the minority. But the placing makes it even harder for them to hold the company to account. Existing public shareholders still need to approve the merger and the placing at a vote scheduled for June 3. Given the importance of CITIC Pacific’s relationship with its parent, however, they are unlikely to oppose it.

The Chinese group may still bring in more outside investors to help fund its tie-up. It has also previously indicated that its ownership of the listed company will decrease over time. Yet there’s no commitment on when or how this will happen. Its efforts show that even where there is a will to reform China’s state-owned enterprises the pace will be glacial.

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