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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.

China will never give up complete control of its prized state-owned enterprises, so investors buying them in the hope of a massive operational shakeup are bound to be disappointed. But, as the case of China Unicom shows, that doesn't mean mixed ownership is a flawed bet.

On Wednesday, China Unicom (Hong Kong) Ltd. said the shareholding structure of China United Network Communications Ltd., its Shanghai-listed affiliate, may change as a result of a government push to draw private capital into state firms. Both publicly traded companies are units of unlisted China United Network Communications Group Co.

China Unicom, the nation's second-largest mobile-phone carrier, is one of six SOEs that were picked in September for a mixed-ownership pilot program. The other five are China Southern Power Grid Co., Harbin Electric Corp., China Nuclear Engineering Group Corp., China Eastern Air Holding Co. and China State Shipbuilding Corp.

Investors who piled into the Shanghai-traded shares of China Unicom have done very well since then, chalking up gains of almost 80 percent. The firm's Hong Kong-listed stock has increased 15 percent. If, as speculated, internet companies like Baidu Inc., Alibaba Group Holding Ltd. and Tencent Holdings Ltd. get involved in the government's reform plan for China Unicom, both sets of shares should see further upside. An injection of private funds would also give China Unicom the ability to roll out 5G and better compete with rivals. 

Good Call
Unicom Group's Shanghai- and Hong Kong-listed shares have outperformed since the SOE reform plans were announced in late September
Source: Bloomberg

The Hong Kong-traded shares of most of the other five SOEs have fared reasonably well too, despite reform-plan details being sketchy. For all the talk of trimming fat, China's SOEs remain a lot less efficient than private firms.

Since President Xi Jinping came to power, much of the focus has centered on bringing Citic Group's assets into a Hong Kong-listed structure, and creating even larger national champions. CRRC Corp., the country's only maker of high-speed trains, was formed from the merger of two locomotive manufacturers in 2015, while Cosco Shipping Group is an amalgamation of smaller companies.

Reform Punt
The Hong Kong-traded shares of most of the Chinese state firms in line for partial privatization have outperformed
Source: Bloomberg

The real test will be to what degree private investors are allowed to shake things up. Will they, as Jefferies Hong Kong Ltd. analysts asked in a recent note, be able to hire and fire, or conduct performance-based evaluations, for example?

In the case of China Unicom, it's the Shanghai-listed company that's more likely to be the subject of any restructuring and capital injections. With the stock suspended as details are ironed out, investors would be wise to turn their attention to the Hong Kong-listed shares, which are trading at a steep discount. Getting in now could yield rewards worth talking about later.

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

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net