Tuesday, January 20, 2009

More on SASAC's "Not For Sale" Sign

Having fielded a handful of emails on this topic (covered in a previous post), and having discussed it with a Chinese friend who is knowledgeable on the topic, I think a few more details are in order.

Again, the central topic is that SASAC, the "owner" of the Central Government's enterprises, is preparing to release a list of SOE subsidiaries in which it intends to consolidate its ownership indefinitely. These subsidiaries are all two to three levels removed from the SOEs that are directly owned by SASAC, and they are all in what are considered to be the country's seven most important industries:
military, electricity generation and transmission, petroleum and petrochemical, telecommunications, coal, civil aviation and shipping.

The rough process by which these subsidiaries would make it onto the list is, first of all, to be owned by one of approximately 40 "mother enterprises" in these seven industries that are directly owned by the Central Government. Then, each of these subsidiaries whose assets and/or profits constitute more than 60 percent of the mother enterprise's assets and/or profits will be singled out for further scrutiny.

In other words, some of these "mother enterprises" are in fact no more than holding companies or shell companies whose sole purpose is to own one or more subsidiaries where the actual operations take place. The purpose behind SASAC's move is to strengthen its hold over, not just the holding companies, but also the subsidiaries where the money is made (or lost).

So what will SASAC do with these subsidiaries? There are a number of realistic possibilities:
  • They could be merged into the mother enterprises.
  • Those that have already been listed may be de-listed. (In other words, the State may choose to become a 100% shareholder.)
  • The state may simply to decide to increase its ownership percentage in these subs.
  • Also, even subsidiaries that constitute less than the 60 percent threshold may be merged with other subsidiaries to create a larger entity that would then be absorbed by the "mother enterprise".
What will SASAC do with the subsidiaries it does not want?
  • As alluded to above, some may be merged into the subsidiaries that the State does want.
  • Or, according to one SASAC insider, subs without prospects will be sold: "没有前途的企业则退股".
So does this mean that private firms are not welcome in those seven key industries?
  • Strangely enough, no. But it does mean that private firms in those industries will begin to find themselves completely overwhelmed by SOEs that are expected by the state to dominate the industry. Only those small firms that are willing to confine themselves to a niche will continue to exist outside of state control.
The article to which I refer also mentions a further set of "pillar" industries in which the State, while not intending to exercise direct control, will still attempt to strengthen its controlling position. These are machine tools, autos, electronic information, construction, steel, and non-ferrous metals.

According to a knowledgeable friend, even private firms in these "second-tier" industries will continually find themselves at a disadvantage vis-a-vis their state-owned counterparts.

A few takeaways here:
  • First, the 40 central state-owned firms (and their subsidiaries) that fall among the seven key industries account for 79 percent of SASAC's profits, so this is not an insignificant chunk of assets over which the State is increasing its control. This is a clear continuation of the "zhua da, fang xiao" policy begun in 1995.
  • Second, I don't think this bodes well for the shareholders of listed firms in the seven key industries, and maybe not in the six pillar industries either.
  • Third, (and this is good news, I think) it still leaves a lot of ground from which the state has all but announced that it intends to withdraw.