Oct 22, 2010 07:47 PM

Shanghai's Slow Boat to State Asset Reform

At least 30 percent of the Shanghai municipal government's state-owned commercial assets are supposed to be consolidated within listed companies by the end of the year to meet a key goal of the soon-to-end 11th Five-Year Plan period.

The project's aim has been to improve asset capitalization and increase equity levels in company ownership structures.

But in fact, the years-long effort to reform state-owned assets so far has neither strengthened Shanghai companies'domestic market positions nor significantly weakened local government influence in business.

Figures from the Shanghai state-owned assets regulator show the percentage of securitized assets in companies under Shanghai government control rose to 25.4 percent in 2009 from 17.6 percent two years earlier. The 30 percent goal, then, appears to be within reach.

Liu Xie, spokesperson for the Shanghai State-owned Assets Supervision and Administration Commission, repeated assurances September 28 that SASAC would fully support public listings by eligible companies.

Liu also said the agency would back research institutions as well as small- and medium-sized enterprises seeking to list on the SME board and ChiNext. SASAC is also behind companies seeking to boost equity value by reshuffling assets, mergers and acquisitions.

Liu's statement triggered a rally on the Shanghai stock market the next day, proving that the capital markets welcome the restructuring of state-owned enterprises.

Nevertheless, domestic demand for Shanghai-made brands has been weakening, and market shares commanded by Shanghai companies outside their hometown region have been declining.

Restructure Once, Twice

The Shanghai government has long shaped the city's economic growth model, setting overall goals during the 11th Five-year Plan for reform and development of state-owned assets. One target was to distribute 80 percent of operating state-owned assets to the largest companies and groups.

Shanghai SASAC was founded in 2003 to restructure these state-owned assets. Thirty-six major groups that had been controlled by various committees and agencies came under SASAC's umbrella, including Bailian Group, Jinjiang Group and SAIC.

One by one, they set up asset investment companies, built experience in capital operations, and created investment platforms accessible to all levels of the Shanghai government.

A second round of restructuring began in 2008 with the release of the government's Opinions on Further Promoting the Development of Shanghai State-owned Assets.

Bailian, a large retailer, has had a typical experience. It was established in April 2003 with guidance from Shanghai SASAC through the merger of four groups: Shanghai Yibai, Hualian, Friendship, and Shanghai Materials and Equipment. But administrative integration did not substantially improve operations.

As of June 30, the retailer was listed in a middle of the domestic industry pack, with total assets of 13.8 billion yuan and only average net profit growth, return on net assets and sales margins.

Li Guangdou, a brand strategy consultant for Shanghai companies, once admitted, "I don't see a lot of prospects for this sort of large, administrative restructuring program. Shanghai is still using methods from the planned economy to build brands, and Shanghai's brands have been shrinking for decades."

"It's difficult to find large (Shanghai) brands with real national influence today."

Speculation Drive

In 2008, Shanghai SASAC stepped up a push to support the role of capital markets in state-owned asset reforms.

"The development of state-owned enterprises is inseparable from the capital market," an SASAC official said. "We hope the core assets of companies can be listed, or preferably entire companies, unless there are some assets that cannot be put into a listed company, such as land for agricultural use."

Backed by supporters of full utilization of the capital market, efforts to raise the proportion of assets in stock became a core standard for SOE reform.

"Our original goal was an approximately 18 percent securities ratio," the official said. "Taking into account several years of efforts, we re-analyzed the accounting and thought that, in the end, it could be around 40 percent. This meant we placed more emphasis on use of the capital market."

Yet these restructuring moves have done more for stock market speculation than expanding Shanghai industry.

Shanghai officials once had exciting things to say about SOE reform: "State-owned asset reform is open, market-oriented restructuring," said one official. "It is intended to turn Shanghai companies into national businesses and bring national businesses to Shanghai for development."

To implement this guiding ideology, the Shanghai government had many private company representatives participate in symposiums focusing on Shanghai state-owned assets reform.

Yet nothing changed the direction of reform. In fact, many analysts say the city's state-owned asset reform has been inconsistent with market mechanisms. But it has strengthened the government's hand in the marketplace.

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