Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Does the bigger-is-better mantra behind China's push to reform its state-owned enterprises work?

According to strategists at HSBC, President Xi Jinping's "unwavering resolve" to shake up the nation's behemoths is a top priority and a make-or-break task. Cofco, China's biggest food company, may be a good test case.

Last week, authorities approved a merger with Chinatex, the country's largest cotton trader and one of its top importers of soybeans. Combining the two would, according to Moody's, create a giant to rival the ABCDs of global agricultural commodities traders. Chinatex manages at least 30 trading companies as well as some 40 plants locally and overseas, while Cofco has operations in more than 140 countries.

Details were scant but Cofco's history of dealmaking -- and the unhappy experience of shareholders in several of its subsidiary companies -- may give overhaul advocates pause.

Sprawling Empire
Cofco isn't listed but has publicly traded units involved in everything from dairy to food packaging
Source: Bloomberg, Credit Suisse

Consider Nidera, the Dutch grain-trading firm that Cofco took control of two years ago. Last month, it said it lost nearly $200 million over three years due to severe irregularities by a single trader in biofuels. Earlier this month, it said it had to take additional loans from shareholders to avoid breaching credit covenants.

Then there's Cofco's acquisition of Noble Group's agriculture arm. It bought 51 percent of the unit, now called Cofco Agri, in April 2014 for $1.5 billion, then forked out at least $750 million cash for the rest in December amid a steep drop in valuations.

Shareholders in parts of Cofco's sprawling empire also know what it's like to get a bum deal. Even though it has Danone as a strategic investor, China Mengniu Dairy's Hong Kong-traded stock has fallen 30 percent over the past 12 months as the milk producer grapples with slower sales. China Agri-Industries is down 25 percent.

Some of Cofco's units have underperformed the Hong Kong Hang Seng Index over the past year
Source: Bloomberg

Shares in Hangzhou-based food packaging products maker CPMC, meanwhile, have declined 38 percent since November, after it was announced ORG Packaging, a Chinese supplier to energy drink Red Bull, signed an agreement to take an equity stake. China Foods, another Cofco unit that's been restructuring amid losses in its winery division, transferred its confectionery business back to Cofco in January. The deal sparked a small share-price rally that by June was all but extinguished.

The price paid on inter-company transactions also shows how things aren't always clear cut at state-owned enterprises. The HK$611 million ($78.8 million) Cofco paid China Foods for its candy arm was higher than the unit's actual book value of HK$439 million, analysts at Daiwa said.

Ultimately, it would seem the key priority for state-owned enterprises, even the ones being reformed, is still following government policy rather than pursuing profitability. If the experience of Cofco and its units is anything to go by, Beijing's efforts to champion efficiency and market savvy have a long way to go before winning over investors.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Archer-Daniels-Midland, Bunge, Cargill and Louis Dreyfus.

To contact the author of this story:
Nisha Gopalan in Hong Kong at

To contact the editor responsible for this story:
Katrina Nicholas at