Monday, January 5, 2009

Privatization of Central SASAC Assets

I saw a story in today's South China Morning Post saying that Jiangsu Shagang, China's largest private steelmaker (and second largest overall, I think ... behind Baogang) is looking for an outside investor or possibly an overseas listing. (I won't bother posting a link to SCMP stories since they disappear after about a week.)

Anyway, this reminded me of a conversation I had last month with a journalist friend of mine who is based in Bejing. We were discussing the apparent trend away from privatization, and the consolidation of state ownership over China's most important industries. We pretty much agreed that Li Rongrong, head of SASAC, rather than gradually privatizing SASAC assets, appears to be moving full steam ahead with plans for long-term state ownership.

Not long after this conversation, I came across this article in the 21st Century Business Herald that seemed at first to refute what my friend and I had discussed.

According to the story, the aforementioned Jiangsu Shagang (hereafter "Shagang") are apparently buying the shares of Zhangtong Gongsi, a listed firm (currently "ST" status*) whose controlling stockholder is Gaoxin Investment Group (中国高新投资集团公司), a Central SASAC wholly-owned enterprise (中国高新为国务院国有资产监督管理委员会下属的国有独资企业). (Those interested may search for that Chinese phrase in the pdf file on this page to see the explanation of controlling ownership.)

There are a couple of interesting observations here. First, Shagang, because it is private, has been struggling to raise capital until now, but by buying Zhangtong (its "ST" status notwithstanding) it now gets a back-door listing. In other words, rather than going through the major bureaucratic hassle of filing for its own listing (and risk getting shot down), Shagang gets a listing simply by buying another listed company and injecting its assets. Frankly, I'm surprised that the authorities are allowing a private firm to get listed at this time, especially through a back-door listing.

Second, and on the other hand, I guess I'm not surprised that an ST company owned by a Central SASAC firm is being cut loose since Li Rongrong has made it clear numerous times before that SASAC only intends to keep firms that are among the top three in their respective industries. The general managers of these SASAC firms are probably under pressure to dump under-performing assets -- even if that means giving them to the private sector. On yet another hand, this may, in a roundabout way, support the trend away from privatization my journalist friend and I had discussed, in that only the junk assets are being privatized, which ultimately results in a stronger public sector and a weaker private sector.

*Note: "ST" stands for "special treatment". It is appended to the ticker symbols for all Chinese firms that have lost money for two or more years in a row, and/or that have negative equity. It's sort of a warning to unsophisticated investors that this company may not be a good investment.