State Asset Sales: Removing The 'SOE' Stigma

by: Doug Young

Everyone is getting quite excited these last 2 days about word that Beijing will soon launch a major new sell-down of its stake in many of China's largest state-owned enterprises (SOEs), in a bid to breath new life into these bureaucratic behemoths. The news certainly looks like a positive sign all around, providing an exciting new opportunity for investors who would prefer to own major companies that behave more commercially rather than the current group that take their orders from Beijing.

Equally important, the shift could help many of these state-run giants to shed their "SOE stigma", which often carries connotations of state-control, bureaucracy and political agendas. Such a shift could fuel a new wave of outbound M&A by some of these giants, whose major global purchases often raise suspicions among host governments who currently view such SOEs as tools used by Beijing to execute its political goals.

All the hype is coming from a relatively small deal, accompanied by lots of bigger talk on the sidelines of this year's National People's Congress, the big annual legislative meeting in Beijing where new policy directions are often announced and detailed. The deal centers on a unit of Sinopec (HKEx: 386; Shanghai: 6000028; NYSE: SNP), one of China's 3 major energy companies. Sinopec, along with peers PetroChina (HKEx: 857; Shanghai: 601857; NYSE: PTR) and CNOOC (HKEx: 883; NYSE: CEO), form a monopoly seen in many big Chinese sectors like energy, banking and telecoms, where a handful of 3-5 major SOEs typically control a state-sanctioned monopoly on the market.

Under a new plan announced late last month, Sinopec has said it will sell off 30 percent of its marketing arm, which owns more than 30,000 gas stations (English article). Reports say the move is part of a major shift that will see Beijing let private investors buy more SOEs and their assets, in an attempt to bring more private money into these important sectors. In one newly published interview, Sinopec Chairman Fu Chengyu says the sale of a stake in his company's marketing arm is just the beginning of a major new privatization initiative that will be detailed in the weeks ahead.

There's not much detail in the reports, but many observers are expecting a new push that will allow massive new private investment in many of the sectors that were previously closed to most non-government owners. We've already gotten a taste of that in the telecoms sector, where the regulator is in the process of letting a new field of privately funded telecoms services providers compete with the 3 big state-run telcos that have had a monopoly on the market for years (previous post).

We'll have to wait for more details, but I expect this new liberalization will include a combination of elements designed to invigorate sectors like banking, telecoms and energy. We could see Beijing sell down more of its stakes in big companies like Sinopec and perhaps even sell off some of those companies' units to private buyers. At the same time, we could also see more state-controlled sectors opened to new privately funded competitors, which is what we're already starting to see in telecoms and banking.

The most obvious effect of this influx of private capital - if it really happens - would be a major injection of commercialism into the market, since privately controlled companies are usually most focused on profits. The creation of such commercially-focused major companies could also ease foreign government concerns that major Chinese firms are often just arms of Beijing. Those kinds of concerns have led to trade tensions between China and many of its biggest trading partners, who often fear that big Chinese acquisitions in their markets may be motivated by politics rather than purely commercial factors.

We won't know what the future will hold until we see a few more details, including which industries will be open and how private investors will be allowed to participate. But at least initially, this new policy shift looks like it could inject some much needed excitement and commercialism into some of China's biggest and most protected sectors, bringing new innovation into the market and providing exciting opportunities for investors.

Bottom line: A plan to bring more private money into China's state-run sectors could usher in an era of innovation and fuel a new wave of outbound M&A in the next 5-10 years.