By Daniel Inman, Chao Deng and Shen Hong
Shanghai is positioning itself at the forefront of China's
campaign to reform state-owned enterprises by inviting private
investment in the city's companies and encouraging stock-incentive
plans for managers.
Improving the performance of the country's shambling state
sector is a key goal for China's new leadership, which laid out its
plans in a major blueprint last November. Shanghai was the first
local government to release its reform guidelines late last year
and the city has already seen a number of private-equity funds
invest in its government-owned companies.
In the most recent high-profile deal, Shanghai Jin Jiang
International Hotels (Group) Co. said last month that it received
the city's approval to sell a 12.4% stake for 3 billion yuan ($488
million) to Chinese private-equity group Hony Capital Ltd. The
hotel group is one of China's biggest and is set to operate a hotel
in the country's tallest skyscraper when it opens next year in
Shanghai's financial district.
As Shanghai sells stakes in its local enterprises, bigger deals
are taking place on a national level. China Petroleum &
Chemical Corp., or Sinopec, earlier this month said it would sell
nearly 30% of its sales and marketing unit to 25 investors for
$17.5 billion--a notable injection of private capital into China's
largest oil refiner.
For Shanghai, the central government is looking for it to live
up to its billing as a financial and commercial hub. The city is
also developing a free-trade zone designed to drive a remaking of
the country's financial system. Next month, a new program will link
stock markets in Hong Kong and Shanghai, allowing international
investors further access to China's largely closed off
equities.
"Shanghai in many cases has led the economic experiments in
China," said Tai Hui, chief market strategist for Asia at J.P.
Morgan Asset Management. "So if SOEs are starting to partner with
private equity, to me it sounds like it is going to be broadened
out to the rest of the country."
Analysts say investment from private equity can improve the
efficiency of state-owned companies because outside investors are
more likely to make changes that will yield higher returns, and
will be less influenced by government objectives such as high
employment and steady economic growth. Still, because they have
taken minority stakes private partners' influence on how a company
is run will be limited.
Hony, which is also paying 1.8 billion yuan for a 10% stake in
state-owned property developer and wastewater-management company
Shanghai Chengtou Holding Co., has been working to restructure
state assets since its founding more than a decade ago.
The firm is now doing "bigger, more significant deals" with
state-owned enterprises, said Chief Executive John Zhao. With
Jinjiang, he said, the priority will be helping the company put in
place "market-driven governance" measures, including employee
incentive programs.
There are other signs of change. Government-controlled Bright
Food Group, which bought U.K. cereal maker Weetabix Food Co. two
years ago, says half of its subsidiaries are now owned partly by
private investors. In February, Hong Kong-based private-equity firm
RRJ Capital said it will invest 1.5 billion yuan into Shanghai
Bright Holstan, a dairy farming joint venture with Bright Dairy
& Food, a subsidiary of Chinese conglomerate Bright Food
Group.
Bright Food has also implemented a stock-incentive scheme in its
subsidiaries that covers senior and mid-level management, and which
is typically based on three-year performance targets.
Further deals could be slow in coming, though. Investors say
Shanghai's state-owned enterprises are better run than their peers
in other parts of the country. As a result, there is little need
for external capital, leaving investment opportunities in the city
hard to find. "The government officials are fairly capable," said
Eric Xin, senior managing director of Citic Capital's
private-equity arm in China. "There's not an incentive to sell off
SOEs."
Signs of progress in Shanghai are significant because it is a
hotbed of state-owned companies. Its state-owned assets account for
60.1% of gross domestic product, the second-most among China's
provinces and municipalities, according to research from Credit
Suisse. All but one of the city's 20 largest companies that are
listed on the domestic stock market are controlled by the
government, according to data from ChinaScope Financial.
The city's big state-owned companies include major industrial
firms such as SAIC Motor Corp., China's largest auto group by
sales, and Baoshan Iron & Steel Ltd., or Baosteel, one of the
country's biggest steel producers. In August, a partnership was
announced between Shanghai Baosteel Gases Ltd. and private-equity
firm Warburg Pincus LLC to work together on industrial gas
projects.
Write to Daniel Inman at daniel.inman@wsj.com, Chao Deng at
Chao.Deng@wsj.com and Shen Hong at hong.shen@wsj.com
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