Wednesday, March 4, 2009

The Boss' Dream: Bigger Empire, Fewer Direct Reports

An anonymous SASAC official has revealed to the 21st Century Business Herald that SASAC is preparing to establish a new state assets investment company along the same lines as their existing Zhongguo Chengtong Investment Group.

Early indications are that this new, as yet unnamed, investment company would buy and manage a handful of the current 141 state-owned enterprises under central SASAC. A SASAC official has indicated that this new company would most likely take over some of the smaller central SOEs, thereby decreasing the number of SOEs that are directly owned by SASAC.

The new investment company would be funded by more than 30 billion RMB that is expected to come partially from the capital budget, and partially from among the assets of the SOEs that it buys.

Based on this revelation, we can only assume that the small SOEs that would be bought by this new company must be sitting on valuable assets that are not essential to their operations. That being the case, this new company would be pulling a "Carl Icahn" (and doing the Chinese people a favor) by squeezing inefficiently allocated capital out of these SOEs -- presumably to be redeployed toward more efficient purposes (although that assumption may be a bit of a stretch).

What else might this accomplish for SASAC?

They would essentially be doing what any good manager would want to do: reduce the number of direct reports. When SASAC was established in 2003, it directly owned 196 SOEs (along with their thousands of subsidiaries). That number has now dwindled to 141 (along with their thousands of subsidiaries), but that doesn't necessarily mean that the overall size of SASAC's empire has decreased. Indeed it is now bigger than ever in terms of both assets and revenues.

The goal really isn't to have less revenue, or even less cost. (This is evident in the way that aggregate financial results of SOEs are reported. Notice that after every month-, quarter- and year-end, figures are compared to the same period in the previous year without any adjustment for changes in the number of organizations reporting to Central SASAC.) This is because very few of those organizations actually go away; they are merely subordinated to other organizations under SASAC.

This move to consolidate some of the smaller SOEs under a new investment company will not actually reduce the size of the organization; it will just make the boss' life easier. And if the new company's management are competent, it may increase SASAC's returns as well.