Unicom Group, China’s second-largest mobile carrier, recently announced an $11.7 billion share sale that bolsters a government push to promote what it calls "mixed-ownership reforms" for its inefficient state-owned enterprises. Mixed ownership is China’s way of describing the sale of minority stakes in state-owned companies to private investors. The idea -- or at least the hope -- is to make these state-owned enterprises more efficient without surrendering state control.
1. Why do state-owned enterprises need reforming?
In addition to their huge scale, they’re known for inefficiency when compared with privately owned companies. China’s state enterprises recorded return on assets of 2.8 percent, versus 10.6 percent for private sector-firms in 2015, according to data compiled by the Peterson Institute for International Economics.
2. How many are there?
As of June, there were about 100 SOEs managed by the central government. Combined, they generated almost $7 trillion in sales last year. They also held around $20 trillion in total assets in 2016, accounting for about 40 percent of China’s industrial assets and nearly 20 percent of urban employment. The number of central SOEs has been in steady decline since the beginning of the millennium, due to the government’s efforts to streamline the sector. At the municipal level, there are tens of thousands of additional state-owned enterprises.
3. Where did the mixed-ownership idea come from?
The term was first used in the Communist Party’s plenary meeting in 1993, when China was embarking on the first wave of privatization of its companies. President Xi Jinping’s administration made private investment in state businesses a key part of its 2013 plan to expand economic freedom in China.
4. What’s happening with Unicom?
The mobile-phone operator -- China United Network Communications Group Co. -- was one of six SOEs picked by the nation’s economic planner last year for a pilot program in mixed ownership. Almost 78 billion yuan ($11.7 billion) of shares, representing a 35 percent stake, in the group’s Shanghai-listed unit will be sold to more than a dozen investors, including tech giants Alibaba Group Holding Ltd. and Tencent Holdings Ltd. Unicom Group will remain the biggest shareholder, with 37 percent, but it will give up the majority stake.
5. Who’s next?
China Southern Power Grid Co., Harbin Electric Corp., China Nuclear Engineering Group Corp., China Eastern Air Holding Co. and China State Shipbuilding Corp. are the five other companies selected for the pilot mixed-ownership program by China’s National Development and Reform Commission. China Eastern announced this year it would sell 45 percent of its cargo and logistics business to four private investors. Which one goes next, and when, hasn’t been announced.
6. Will mixed ownership be good for investors?
That’s an open question. Unicom investors have initially cheered the move, as shares of Unicom Group’s key units in Shanghai and Hong Kong rallied in reaction to the share sale. But the long-term benefits remain to be seen. The Paulson Institute, in a January 2016 paper, said China’s mixed-ownership changes will mean little without "measures to transform the role of the state from an active market participant to the designer and arbiter
of neutral, transparent rules for market activity."
7. Is the government also trying to make SOEs smaller?
Quite the opposite. Since 2015, there have been more than a dozen government-choreographed mergers and acquisitions that reshuffled more than $1 trillion in assets. These M&As created colossal enterprises in their respective industries, some of them commanding hundreds of billions of dollars in total assets and employing hundreds of thousands of people. Other deals related to SOE reform include the $6.3 billion sale of PetroChina Co.’s pipeline business, Sinopec’s $17.5 billion sale of some retail assets in 2014 and China Eastern Air Holding Co.’s sale of its cargo-and-logistics unit.
The Reference Shelf
- A Bloomberg story on China’s biggest SOE makeover since the 1990s.
- An IMF working paper on China’s SOE reforms.
- A Bloomberg story on Unicom’s share sale plan.
- A Bloomberg Intelligence report on the historical inefficiencies of the SOEs.
- A Gadfly column on Unicom’s share sale.
— With assistance by Jing Yang De Morel, Aibing Guo, and Winnie Zhu