12 December 2018

Shanghai SOE overhaul points to new directions

In another major reform initiative, Shanghai has unveiled plans to overhaul its state-owned enterprises. Although drawing less attention than the launch of its pilot free trade zone, the city’s latest move nonetheless represents a paradigm shift that is likely to serve as a template in the reform of SOEs nationwide.

Municipal authorities promulgated last December a 20-point policy package that includes wide-ranging reforms from the introduction of private shareholders to a share incentive mechanism, Shanghai’s official mouthpiece Jiefang Daily reports.

Observers believe that China’s next round of SOE reform is likely to tread the Shanghai path if only for the prominence of the city’s SOEs. Their combined asset value accounts for slightly less than one-ninth of all such local government-owned enterprises, while their net income represents more than one-fourth of the total local SOE earnings in 2012, according to the Shanghai State-owned Assets Supervision and Administration Commission (Shanghai SASAC). 

The latest figures also show that the city depends on SOEs for a fifth of its gross domestic product.

The first issue put forward is the rebalancing of government capital in these state behemoths. And this early, the market has seen moves that reflect this policy shift to diversify share ownership.

Greenland Group, the nation’s second-largest realty developer in terms of sales volume last year, sold more than two billion shares worth 11.73 billion yuan (US$1.94 billion) at the Shanghai United Assets and Equity Exchange last December to enlarge its share capital. Private investors from Ningbo, Shenzhen and Zhuhai subscribed to the bulk of the shares on sale, reducing the stake owned by Shanghai State-owned Assets Operation Co. Ltd. by almost 13 percentage points to 47.7 percent.

Also, under the new package, major Shanghai SOEs — among which 59 are listed companies — would be merged into several larger conglomerates that are dedicated to specific sectors.

Citing a source close to the city’s SASAC, the Economy & Nation Weekly has reported that lenders and financial institutions like Shanghai Pudong Development Bank (60000.CN), Bank of Shanghai, Shanghai Trust, and Shanghai Securities, would come under the umbrella of Shanghai International Group while Guosheng Group, an industrial investment entity wholly owned by Shanghai SASAC, will swallow Shanghai Industrial Investment Group, Shanghai International Port Group (600018.CN), Shanghai Construction Group (600170.CN), Bright Dairy & Food (600597.CN) as well as retailers like Lianhua Supermarket Holdings (00980.HK) and Friendship Group (600827.CN, 900923.CN).

The source revealed that the ultimate goal is to cluster 80 percent of the city’s SOEs in advanced manufacturing and high-tech industries as well as other high-value-added tertiary sectors, and no less than 30 percent of these SOEs’ net earnings will have to be turned over to the municipal government by 2020, a time when revenues from land sales are forecast to shrink substantially.

On the other hand, public utilities and transport operators like Shanghai Shentong Metro (600834.CN) and Shanghai Jiao Yun Group (600676.CN) will be granted more generous government subsidies.

The government-led mergers are in line with the new administration’s recent edict that the city’s SOE watchdog will only appoint the chief executive officer and party secretary of a specific company and leave other important posts open for application by professional managers.

The move means the official ranks of many senior SOE executives — many of them are on par with government bureau directors within the administrative system — would be shelved. To fend off any opposition, the policy package also includes a share incentive mechanism.

Shanghai Maling Aquarius Co. Ltd. (600073.CN), a big food producer, became the first SOE to implement the new incentive policy. Last December the firm issued 7.25 million shares to its senior executives and technicians, although part of the reward from the stock value increment cannot be redeemed until they retire or leave the company. Media reports say Shanghai Pharmaceuticals Holdings (02607.HK, 601607.CN) will soon follow suit.

– Contact the writer at [email protected]



EJ Insight writer

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