State-owned giants could set the pace

Sinopec chief outlines plans for mixed ownership through divestment; and others could follow suit

Some Chinese companies are already as large as some provinces in terms of revenue. Their vision for the future, and especially their strategies to create that future, will grease the national economic machine, now that many cities and provinces are still not quite sure what to do to inject new quality and competitiveness into local business.

Indeed, administrators from many cities and provinces - as reflected by the views of their leaders from the annual sessions of the National People's Congress and the Chinese People's Political Consultative Conference National Committee - still cannot say more, or think more, than old ways to promote economic growth. Typically this is relying on big, capital-intensive industries that don't necessarily generate more sales and more jobs, and by granting more land rights to developers whose new houses don't necessarily sell well. It will take time for them to learn how to boost growth by streamlining the size and the power of their offices to make way for new industries and services.

So, at this point, much conjectural space exists for various enterprises to use their imagination and launch initiatives. Enterprises, even if state-owned, are closer to the market and understand better the way forward than government bureaucracies.

During the last few weeks, people have heard some interesting ideas from Fu Chengyu, chairman of the state-owned China Petrochemical Corporation, or Sinopec, one of the three largest oil and gas companies in the country.

China's oil and gas industry is dominated by the state and has been plagued by official corruption and poor safety. But Sinopec's Fu apparently wanted to create a different image for his company by presenting himself as a champion of further SOE reform at the two sessions in Beijing earlier this month.

He is one of the top executives of China's largest SOEs who answered with alacrity national leaders' call for converting SOEs into "mixed ownership" companies, meaning a significant divestment of equity to non-state investors. In mixed ownership, as is commonly understood, close to half the total equity of an SOE could be purchased by private or foreign entities.

In his Government Work Report to the National People's Congress, Premier Li Keqiang pledged that SOEs under the central government's direct control will be opened up to non-state capital, including in financial services, oil and gas, electricity generation and distribution, railways, telecommunications, development of resources, and public utilities.

But of all these industries, Sinopec is perhaps the first company so far to frame its mixed-ownership plans.

Of course, for an enormous company whose investment value (present market capitalization times 8 in P/E ratio) would be in excess of 3 trillion yuan ($500 billion, 352 billion euros), the pie has to be divided into specialized independent companies.

First of all, it could spin off its most lucrative distribution and sales of refined oil products. The system, which generated some 40 billion yuan in revenue in 2012, consists of more than 30,000 gas stations connected by more than 100,000 kilometers of pipeline nationwide, Fu said.

If Sinopec realizes its ambition, it would serve as an example for other large SOEs in the country.

In fact, it has already had some impact. Zhou Jiping, chairman of China National Petroleum Corporation, another large oil and gas company, told the CPPCC National Committee that the company is ready to set up six mixed-ownership platforms, including for shale gas exploitation and pipeline operation, with private and institutional investors.

In the meantime, the Chinese banking regulatory body is reportedly ready to grant approval to the country's first batch of privately-owned banks, some of which are equipped with much more experience in operating online retail business than traditional state-owned banks. They will prove healthy competition to old banks.

Compared with the still murky landscape of the various regional economies, investors may have a better chance to see old state-dominated industries, one by one, open up to private capital and competition.

New companies would be formed under mixed ownership. Smaller companies would become partners with larger ones in restructuring their business and organization. These activities will generate new opportunities in the capital market.

The author is editor-at-large of China Daily. Contact the writer at edzhang@chinadaily.com.cn

(China Daily Africa Weekly 03/14/2014 page11)