Beijing’s recent reforms on State-Owned Enterprises (SOEs) are likely to alter these companies’ investment activities overseas. In the short run, current partners of Chinese SOEs should be cautious of their counterparts’ situation. Risk management and political risk consulting firms should seize the upcoming business opportunities.
China is pushing forward a new round of industrial consolidation and ownership restructuring to reform SOEs from central and municipal levels. Beijing’s primary approach is to deepen its reform plan issued in January 2014 that initiated a pilot program to attract private investments and improve corporate governance.
This approach, called “introducing mixed ownerships”, aims to bring in the private sector’s know-how in improving transparency, promoting modern corporate management, and making better international investments. It is a portion of the Chinese government’s remedies to adjust “the distribution of the state-owned sector” and to increase the “efficiency and profitability in SOEs”.
The ball has already started rolling. In September 2014, Sinopec, the country’s largest oil refiner, sold 29.9% of its sales branch to 25 companies at a total value of US$ 17.4 billion.
Although only six companies are purely privately owned, their investment makes sense due to strong business incentives. Huiyuan, for example, paid 3 billion RMB for 0.84% ownership so that it could sell juice in Sinopec gas stations.
At the 2014 China Development Forum, the Boston Consulting Group partnered with the China Development Research Foundation to draw a roadmap for the mixed ownership restructuring. The idea is to introduce private ownership in “strategic industries” to break up administrative monopoly of the SOEs, and to completely eliminate the SOEs’ existence in “competitive industries”. The design aims to make better use of public funds by reallocating state-owned assets in “security industries” and “strategic industries”.
Industrial consolidation, among others
Another approach is the vertical integration of major SOEs’ businesses. On April 3, the China Securities Regulatory Commission and Ministry of Commerce approved a merger proposal between China CNR Corporation and CSR Corporation, the country’s major manufacturers of high-speed electric locomotives and other rolling stock.
The merger, if successful, will soften the cutthroat competitions between the two in the global market and boost their competitiveness against foreign competitors. Beijing also confirmed a similar merger deal between China Power Investment Corp and the State Nuclear Power Technology Corp, the country’s third and fourth largest nuclear companies, respectively.
Apart from the aforementioned two approaches, Beijing also introduced anti-corruption campaigns and corporate management restructure in the SOE reform.
Changing behaviors in outbound investments
The result of this massive reform is a fundamental change in Chinese outbound investments, which were largely led by the SOEs.
On March 17, the China National Offshore Oil Corporation (CNOOC) announced a plan to lay off 400 employees in its newly acquired subsidiary, Nexen Energy. Nexen Energy is a Canadian energy company acquired by CNOOC for US$ 15.1 billion in 2013. In order to remain profitable in a low-price global oil market, CNOOC has to adjust its spending and squeeze its margins.
In a more dramatic case, a contract signed in 2009 between Canadian oil company Athabasca and PetroChina International (Canada), an overseas subsidiary of the China National Petroleum Corporation (CNPC, the biggest Chinese oil SOE), might go sour due to the domestic anti-corruption campaign.
PetroChina International (Canada) made risky decisions to exploit the oil sand reserve in Mackay River and Dover based on little information and background screening, gambling with a C$ 3.9 billion investment. The president of PetroChina International (Canada) was removed from the position amid China’s anti-corruption campaign in July 2014.
How Should Investors and Companies Respond?
In the immediate future, companies or investors that are partnering with Chinese SOEs should watch out for the spillover effects of China’s SOE reforms.
Industrial consolidation, ownership restructuring, and anti-corruption campaigns will significantly alter Chinese SOEs’ business agendas, resulting in project suspension or capital loss. Companies should establish sound financial and operational arrangements to protect their business interests.
Nevertheless, if the Chinese industrial reform is successful, Chinese SOEs will become potential clients of multinational risk consulting firms. The private ownership introduced by the mixed ownership reform will effectively bring in a modern business decision-making process, and Chinese SOEs will welcome international risk analysis.
Traditional risk management companies and political risk consulting firms should closely monitor the situation and seize the business opportunities.
