Cabinet Positions State-Backed Investment Vehicles

China’s State Council, the cabinet, issued new guidance for a pilot program to create a number of state-backed industrial investment concerns and asset managers. The goal is to generate reforms in state-owned enterprises that are plagued with low efficiency and overcapacity.

The guidance document issued Monday clarified two types of state-backed companies focusing on investment and asset management using state-owned capital, based on different investment strategies and responsibilities.

State capital investment companies are strategic investors seeking control of investment targets and focusing on industry development, according to the document. State capital management companies make equity investments to generate sound return on state assets, the document says. This is the first time the central government has clearly spelled out the positioning of the state-backed investors.

“Previously, there was no clear distinct between the two types of companies, and the market had no idea about the goals they were supposed to reach,” said a market source who closely follows reforms for state-owned enterprises, or SOEs.

State capital investment companies will focus on long-term investments in selected industrials with strategic importance, while state capital management companies will operate more like private equity firms that seek capital returns from investing in a wide range of assets, the source said.

In 2014 China initiated a pilot program to create state-backed industrial investors to push forward SOE reforms via equity investment, debt-to-equity swaps and other restructuring methods.

In 2016, two central government-owned asset management and investment companies, China Chengtong Holdings Group Ltd. and China Reform Holdings Corp., were established to make investments and to hold and manage shareholdings in some companies on behalf of the government.

Meanwhile, the State-owned Assets Supervision and Administration Commission (SASAC), which overseas central government enterprises, also selected eight SOEs in a pilot program to transform them into equity investors. The companies include State Development & Investment Corp., state food giant COFCO and China Energy Investment Corp.

According to company reports and official information, China Chengtong set up a 350 billion yuan ($51 billion) investment fund in late 2016 with nine corporate partners to invest in a range of SOE restructuring projects, including the mixed-ownership reform in telecom giant China Unicom.

China Reform set up a 200 billion yuan fund with partners to invest in technology innovation and industry upgrading projects involving SOEs.

Local governments have also set up dozens of locally owned investment firms in recent years.

As part of the pilot, COFCO, the national food production and trading conglomerate, has launched an internal restructuring to set up independent asset investment and management vehicles targeting agricultural and food industries.

State capital investment and asset management companies will make independent investment decisions and operate under market rules, according to the guidance document. The companies will not take part in industrial production and bear responsibility as shareholders in accordance with their shareholding, according to the document.

Also on Monday, the SASAC published rules putting large SOEs under closer scrutiny and holding company officials responsible for the loss of state-owned assets.

The commission detailed measures and punishments for officials who fail to perform their duties and whose actions result in asset losses or “other serious adverse consequences.”

Contact reporter Han Wei (weihan@caixin.com)