Date
21 September 2017
China United Network Communications will issue 9.037 billion new shares to nine strategic investors to raise 61.73 billion yuan. Photo: Caixin
China United Network Communications will issue 9.037 billion new shares to nine strategic investors to raise 61.73 billion yuan. Photo: Caixin

Can mixed-ownership truly transform state-owned behemoths?

In a landmark initiative recently, China United Network Communications (600050.CN), the parent of China Unicom (Hong Kong) Ltd. (762.HK), implemented mixed-ownership reform and introduced four internet giants, namely Baidu, Alibaba, Tencent and JD, as its new shareholders.

The introduction of the four new shareholders, which are collectively referred to as BATJ, led to a boost in Unicom’s share price.

Investors were betting that the internet giants can help transform the state-owned telecom operator into becoming much more competitive.

Now, we come to this question: Can the sought-after change happen any time soon?

Well, not in my opinion. Introducing new investors is the easy part, but implementing real reforms is much harder.

China United Network Communications will issue 9.037 billion new shares to nine strategic investors to raise 61.725 billion yuan. That would represent 35.19 percent of the enlarged share capital, compared with the 36.67 percent stake held by Unicom group.

There were expectations that the new investors could have great influence, given their combined stake of over 35 percent.

However, we should bear in mind that individually, each of them will only hold small stakes.

Tencent, Baidu, JD and Alibaba will own 5.18 percent, 3.3 percent, 2.36 percent and 2.04 percent respectively.

Given such small stakes, BATJ is unlikely to seriously think about introducing some of its core products or technologies into the still state-dominated telecoms firm.

Also, none of the powerful tech titans will have a real say in Unicom’s operations. They are all effectively small investors.

Three years ago, Sinopec group, the state-owned oil giant, sold stakes in its sales company to 25 private investors led by Tencent, Fosun, Haier and others, and raised over 107 billion yuan.

Market players had hoped that Sinopec would be able to overhaul its 30,000 plus gas stations across the nation by introducing Tencent’s app and Fosun’s logistics capability and turn them into a network of modern retail outlets.

However, little progress has been achieved so far, given that most private investors are small shareholders without big say.

Chinese leaders want private investors to step in to boost the efficiency of state-run companies, but the current approach does not seem to work.

Authorities should find targeted SOEs just a few major partners and allow investors to have a truly influential stake, in order to allow private capital to make a real difference. But government leaders are unwilling to take the political risk.

Interestingly, the most effective mixed-ownership reform cases actually take the opposite approach — state companies buying into private firms.

For example, Shenzhen Metro has become the biggest shareholder of Vanke, and China Communications Construction Group bought a controlling stake in Greentown China Holdings.

This article appeared in the Hong Kong Economic Journal on Aug 23

Translation by Julie Zhu

[Chinese version 中文版]

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RC

Hong Kong Economic Journal columnist

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