China said to plan overhaul of US$3t industrial machine

[BEIJING] China is preparing to overhaul its bloated and inefficient state-run companies to bolster an economy forecast to grow at the slowest pace in more than two decades, according to people familiar with the matter.

The proposal would include consolidation and reduce the government's role in state-owned enterprises by stripping ownership stakes from the agency that regulates them, the people said. The plan, which could be released as soon as this month, calls for bundling the companies by industry and handing their control to state asset-management firms, the people said, asking not to be identified because the talks were private.

The shake-up is poised to affect thousands of companies, including some of the world's largest, such as China National Petroleum Corp and China Mobile Communications Corp. The country's state companies are perceived to be so rife with corruption and poorly run that Sanford C Bernstein & Co estimates that they trade at discounts totalling US$2 trillion.

"State-enterprise reform is a make-or-break issue for the Chinese economy," said Zhao Yang, chief China economist at Nomura Holdings Inc. "This is but the first step of many others that will need to be taken."

The proposal follows a road map laid out by the Communist Party in 2013 to make state-run enterprises more efficient and separate their government overseers from their day-to-day managers. The plan may be released soon after the conclusion of the National People's Congress session in Beijing, according to the people.

The changes would reduce the State-owned Assets Supervision and Administration Commission, which now holds government stakes in some of the biggest state companies, to the role of regulator, the people said. Similar changes could later be expanded to the provincial and local levels.

"It's a step towards the right direction, as a capital holding company would make it easier to allow the market to play a more decisive role," said Shi Yan, an analyst at UOB-Kay Hian Ltd. in Shanghai. "Anytime you have a regulator surrender some functions to the market, it's a win for the market." Sasac's public affairs office didn't immediately respond to a faxed request for comment.

Premier Li Keqiang set expansion target for the world's second-largest economy at about 7 per cent this year, which would be the slowest pace since 1990. Chinese policy makers are trying to reduce the role of debt-fueled investment and move toward greater consumption and services.

State-owned companies account for roughly a third of economy and more than a quarter of them are loss-making, Barclays Plc analysts wrote in August.

"Putting SOEs under the supervision of asset-management companies that will focus on improving the efficiency of investment would be a major step towards putting China on a more sustainable growth path," said Arthur Kroeber, the Beijing- based research chief for Gavekal Dragonomics.

The government is pushing Chinese companies in key industries, including communications and power generation, to expand overseas, a plan outlined by Li March 5 in his report to the annual legislative session. The ongoing merger of the state's two biggest train-equipment makers and the technology ministry's "Made in China 2025" plan to remake the manufacturing industry are part of the broader plan.

The overhaul comes as state-run companies increasingly find themselves the target of President Xi Jinping's nationwide corruption crackdown, leading to the downfall of more than 70 executives last year, according to Xinhua. The changes would affect some of the same 26 major firms named as inspection targets last month by Wang Qishan, China's anti-graft chief.

Sasac's former chairman, Jiang Jiemin, was removed from his post in September 2013 and later expelled from the Party in connection with a broader investigation into China National Petroleum, where he had previously been chairman.

Asset Managers The 123 Chinese state enterprises listed in Hong Kong have a total market value of US$3 trillion and, if not for the stigma of being state owned, they would be worth US$2 trillion more, according to Berstein.

The switch to asset managers mirrors a structure already being used in the financial sector, where China Investment Corp manages the state's share of its largest banks through Central Huijin Investment Ltd.

The asset managers would be empowered to restructure enterprises in their industries with the goal of making them more competitive and reducing overlap, the people said.

Hong Hao, chief China strategist at Bocom International Holdings Co, said the plan appeared to be an administrative reshuffle. He cited the government's use of asset-management companies in the 1990s to offload bad debt from state-run banks.

"Now the underlying interest is still aligned with the state, as a result, it is difficult to see how competition can benefit," Mr Hong said by phone in Hong Kong. "The SOE ownership hasn't changed fundamentally."

BLOOMBERG