23 August 2019
CITIC Group's listing may lead to the transfer of its headquarters to Hong Kong. Photo: Bloomberg
CITIC Group's listing may lead to the transfer of its headquarters to Hong Kong. Photo: Bloomberg

Beijing eyes capital markets to pursue SOE reform

CITIC Pacific Ltd.’s (00267.HK) recent framework agreement to acquire the assets of its ultimate parent company CITIC Group Corp. is in fact meant to pave the way for a backdoor listing of the state-backed military group.

The Hong Kong Economic Journal’s EJ Tactics column examines the implications of the deal.

The strategic significance of the acquisition lies not in the deal itself, but in the reported plan to move the group’s headquarters to Hong Kong from Beijing after the transaction.

The Communist Party of China (CPC) has highlighted the importance of reforms in state-owned enterprises (SOEs) during the Third Plenary Session of the 18th CPC Central Committee. If CITIC Group indeed picked Hong Kong as its offshore headquarters, the move signals the central government’s intention to showcase Hong Kong’s special attributes including its global character, the rule of law and corporate governance, with a view to giving a big push to SOE reform.

The country’s top leadership, headed by President Xi Jinping , has been facing challenges on the road to reform ever since it took the helm last year.

Its efforts to eliminate industrial overcapacity and ease out loss-making SOEs, for instance, have exposed issues such as mounting local government debt, falling resource prices and rising unemployment.

However, Xi and Li are not expected to be deterred by these obstacles in pursuing their goals. It is highly likely that the new leadership is launching the SOE reform from the capital markets.

In a weekly meeting on March 25, the State Council identified six tasks on the reform front, namely forming a multi-layer equity system, developing a regulated bond market, cultivating a private equity market, promoting innovation in intermediary institutions, and further opening up the capital market to foreigners.

This indicates that the central government is formulating a strategic plan to rejuvenate the capital markets.

Simply put, funding source is a key issue in SOE reform. As it is impossible for Beijing to inject cash into all state-owned firms, it makes sense for the central leadership to bolster the stock markets while capturing funds to support the restructuring of SOEs.

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Freelance journalist

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