China to Accelerate SOE Consolidation in Bid to Build Corporate Giants

China is preparing to accelerate its consolidation of companies owned by the central government, aiming to create from existing enterprises about 80 corporate giants that can be globally competitive, a knowledgeable source told Caixin.

A key component of the plan involves dividing all major state-owned enterprises (SOEs) into three groups, according to the source at the State-Owned Assets Supervision and Administration Commission (SASAC), which oversees all companies owned by the central government.

A document now being drafted by SASAC will be released by the end of the year, with a target of classifying all companies as either investment, financial services or industry firms, the source said. Industry companies will also include manufacturers.

In a recent briefing, SASAC defined the three categories and disclosed future directions for their development, the source added, speaking on condition of anonymity because he was not authorized to speak publicly.

After completing the grouping, SASAC will use consolidation to reduce the number of companies under its supervision from the current 101 to about 80. Among those, about 20 will be investment companies; two or three will be from the financial services group; and about 50 will come from the industry category, the source said.

The new plan is based on an earlier pilot program involving the investment and financial service category classifications. Ten SASAC-supervised firms have been chosen to be classified under the two groups since 2014, including China Reform Holdings Corp. Ltd.

The pilot program aimed to change the way the government controls SOEs by placing Beijing’s focus on investment returns, while leaving day-to-day operations to the actual enterprises.

Most of China’s major SOEs were carved out from former monopolies that executed Beijing’s directives under the nation’s former socialist system centered on a centrally planned economy. But in the transformation to a market economy, Beijing is hoping to make those companies globally competitive by giving them more freedom to make their own decisions based on commercial factors.

Companies like State Development & Investment Corp. and China Poly Group Corp. belong to the first category of investment companies. With an ability to combine production and finance, they will develop into diversified companies with a focus on exploring strategic emerging industries.

The financial service companies are focused on preservation and appreciation of state-owned capital, with businesses that include stock equity and capital management.

The inclusion of a new industry group reflects SASAC’s desire to focus more effort on reform of that sector, the source told Caixin. That category includes industries that directly influence the national economy, such as power giant State Grid Corp. and oil major PetroChina Co. Ltd.

The three types of firms will exert different levels of control over their affiliated companies under the broader reform. Investment firms will hold controlling shares in most of their units, while financial service firms will hold noncontrolling stakes to give their units more flexibility. Industry firms will have the biggest level of control, allowed to wholly own and hold controlling stakes in their subsidiaries.

The consolidation is part of a nationwide campaign to reform and reconstruct lumbering SOEs. Since the drive was launched in 2013, a string of mergers and acquisitions has been carried out in industries such as steel making, coal mining and electricity.

In two of the latest examples, China’s largest coal producer, Shenhua Group Corp. Ltd., hinted at a megamerger with China Guodian Corp. earlier this month. China is also reportedly considering a merger between the country’s largest miner, China Minmetals Corp., and China National Gold Group., according to a Reuters report this week.

Contact reporter Song Shiqing (shiqingsong@caixin.com)