China has urged its state-owned enterprises to improve their funding allocation for equity investment in a bid to increase the return on their investment and dilute risk, a directive apparently aimed at boosting sentiment in the weak stock market.
The State-owned Assets Supervision and Administration Commission (SASAC) said all state-owned firms under the direct control of the central government must boost the return on their investment while maintaining a certain level of cash.
Under the new policy, central SOEs are expected to deploy their cash reserves into the stock market for higher returns, rather than keeping them in bank deposits or investing in non-related businesses.
The new guidelines came amid the stock market’s sluggish performance in recent weeks. The Shanghai Composite index on Monday fell below the 2,000 level for the first time since July 2013.
Meanwhile, state firms are bloated with cash. China Mobile Ltd. (00941.HK), the nation’s largest mobile network operator, held 428 billion yuan (US$ ) in net cash as of June 30 last year, according to a regulatory filing. In view of its huge cash pile, the company has been under increasing shareholder pressure to pay more dividend.
In order to prevent the use of cash reserves in unprofitable endeavors, SASAC said state firms must define their core business and focus their investment on related fields. Those that have invested in areas far beyond their core business must consider pulling out their investment.
Many central SOEs have expanded out of their core business, building hotels and guesthouses, running restaurants and even going into the retail business for the simple reason of facilitating business trips and functions for their senior officers.
Under the new guidelines, however, investment in these non-core business areas should be avoided, unless such businesses are intended to establish a fully vertical integration model that can help the SOE control the whole supply chain, the regulator said.
In reforming the sprawling SOE sector, the government aims to change its role into a regulator rather than a player in the market. Under this policy, central SOEs are urged to change their corporate structure by adopting a mixed ownership model through partnership with peers, project financing and debt restructuring. This should help reduce the government’s stake in these business behemoths.
At the same time, SASAC wants to enhance business decision in state firms through a clearer delineation of management responsibilities.
It will push forward the establishment of a board of directors in all central SOEs to monitor senior officials’ business decisions, while introducing a better mechanism to assess their performance.
Central SOEs should also prepare and implement overseas investment plans in a steady manner as part of efforts to raise their competitiveness in the global market.
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