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25 Jul 2019, Stella Zlatareva, EMIS M&A Team

China pushes on with mergers in attempt to reform SOEs

The restructuring of China’s vast network of state-owned enterprises (SOEs) has been a fundamental element of the country’s economic reform efforts. It started with Deng Xiaoping’s market-oriented policies that allowed private companies to develop and flourish following decades of nearly full government control over the economy. While private firms were able to contribute immensely to China’s production, allowing the nation to become a global economic superpower, many SOEs remained underperforming and reliant on state loans and subsidies.

In 2015, Beijing set forth a renewed plan to streamline the operations of SOEs after several previous attempts failed. One of the key tools the government wanted to use was consolidation in the hopes that by merging state-run companies into national giants, it would eliminate excess capacity, cut leverage, and boost global competiveness. As Chinese president Xi Jinping himself said during a 2018 visit to a petrochemical plant, SOEs “should continue to become stronger, better and larger”.

Recent data shows that, indeed, the government is planning more and more mergers and acquisitions of state-controlled entities. In the first half of the year, the government has proposed 644 transactions for a total estimated amount of CNY 590bn (USD 86bn), according to financial services provider Hithink RoyalFlush Information Network. The volume compares to 281 planned deals in the first six months of 2018, while even further consolidation in the state sector is expected in the remainder of 2019. Of those, two deals featured central SOEs – first, the combination of China’s two biggest state-owned shipbuilders China State Shipbuilding and China Shipbuilding Industry, and then the acquisition of silk producer China Silk by state-owned conglomerate China Poly Group.

In an interview with China Daily, a senior official at state assets regulator SASAC said that Beijing is also supportive of the idea to list SOEs on the STAR Market, the Shanghai Stock Exchange’s new science and technology innovation board. The market could allow companies to develop capabilities in various emerging industries and to innovate. Such listings could additionally provide SOEs with a much-needed contact with the market and, potentially, more independence over operations and strategic planning.

China faces the challenge of a bloated, out-of-touch state sector, often criticised for its high debt and low returns. Time will tell whether merging SOEs is the right way to go but many would argue that an innovation-driven economy, which seems to be what Beijing is aiming for, can be only achieved through bolstering competition and a commitment to more genuine reforms. Original source: EMIS - DealWatch