|Reform Holds Hope for Foreign Investors in China|
SOEs account for 43 percent of China's total industrial and business profit. However, that impressive performance does not come cheaply. The SOEs enjoy a lot of favorable treatment, including direct subsidies, concessionary financing, state-backed guarantees, preferential regulatory treatment, and exemptions from antitrust enforcement and bankruptcy rules. In addition, they are the beneficiaries of more than 80 percent of bank loans and have a relatively easy path to being listed on the stock exchange, even as questions about their efficiency swirl around them.
The average return on assets of the 334 central SOEs listed on the Chinese stock market is a meager 2.2 percent, compared with privately listed companies' 5.2 percent and foreign companies' 6 percent. Yet these 334 central SOEs, in a field of 2,780 companies, control more than 80 percent of all the total assets.
SOEs have increasingly found the going tough in trying to pull in revenue and turn a profit in recent years. Their revenue totaled 48.06 trillion yuan ($7.5 trillion) last year, 4 percent higher than the year before, and their total profit was 2.48 trillion yuan, 3.4 percent higher than the year before. Both those figures are far lower than the growth in GDP.
The new guidelines say reform is aimed at introducing mixed ownership by bringing in private investment. Reform also sets out to improve the competence of SOEs and turn them into fully independent market entities. These measures may finally give more room for other kinds of enterprises to grow.
China has essentially liberalized foreign direct investment, providing channels such as QFII (qualified foreign institutional investor) and RQFII (renminbi qualified foreign institutional investor) schemes, and is constantly simplifying investment procedures, giving foreign companies national treatment. Foreign companies and private companies can share in these opportunities, too.
Since reform encourages private capital, including foreign investment, in state-owned enterprises, the non-state firms including foreign companies are encouraged to join the process by various means, including buying stakes and convertible bonds or through share rights swaps with SOEs.
Because reform divides the SOEs into two categories, for-profit entities and those dedicated to public welfare - the former to be market-based and sticking to commercial operations - the foreign companies may have more opportunities in the for-profit entities. But they can also take advantage of the latter categories in that reform encourages non-state firms to provide public goods and services through public-private partnerships and in other ways.
Since reform will change the way SOEs are managed, with roles more like those of fund managers, boards of directors will have greater decision-making powers, and government agencies will be forbidden from intervening. Thus it will be safer for foreign investors acting as financial investors or strategic investors to play special roles in improving corporate governance.
The new guidelines can be expected to provide opportunities for foreign companies and for them to have a special role in helping China through its economic transition.
The opinions expressed do not constitute investment advice and specialist advice should be sought about your specific circumstances.
Published on our website on Oct.09, 2015