Monday, January 5, 2009

Privatization of Central SASAC Assets

I saw a story in today's South China Morning Post saying that Jiangsu Shagang, China's largest private steelmaker (and second largest overall, I think ... behind Baogang) is looking for an outside investor or possibly an overseas listing. (I won't bother posting a link to SCMP stories since they disappear after about a week.)

Anyway, this reminded me of a conversation I had last month with a journalist friend of mine who is based in Bejing. We were discussing the apparent trend away from privatization, and the consolidation of state ownership over China's most important industries. We pretty much agreed that Li Rongrong, head of SASAC, rather than gradually privatizing SASAC assets, appears to be moving full steam ahead with plans for long-term state ownership.

Not long after this conversation, I came across this article in the 21st Century Business Herald that seemed at first to refute what my friend and I had discussed.

According to the story, the aforementioned Jiangsu Shagang (hereafter "Shagang") are apparently buying the shares of Zhangtong Gongsi, a listed firm (currently "ST" status*) whose controlling stockholder is Gaoxin Investment Group (中国高新投资集团公司), a Central SASAC wholly-owned enterprise (中国高新为国务院国有资产监督管理委员会下属的国有独资企业). (Those interested may search for that Chinese phrase in the pdf file on this page to see the explanation of controlling ownership.)

There are a couple of interesting observations here. First, Shagang, because it is private, has been struggling to raise capital until now, but by buying Zhangtong (its "ST" status notwithstanding) it now gets a back-door listing. In other words, rather than going through the major bureaucratic hassle of filing for its own listing (and risk getting shot down), Shagang gets a listing simply by buying another listed company and injecting its assets. Frankly, I'm surprised that the authorities are allowing a private firm to get listed at this time, especially through a back-door listing.

Second, and on the other hand, I guess I'm not surprised that an ST company owned by a Central SASAC firm is being cut loose since Li Rongrong has made it clear numerous times before that SASAC only intends to keep firms that are among the top three in their respective industries. The general managers of these SASAC firms are probably under pressure to dump under-performing assets -- even if that means giving them to the private sector. On yet another hand, this may, in a roundabout way, support the trend away from privatization my journalist friend and I had discussed, in that only the junk assets are being privatized, which ultimately results in a stronger public sector and a weaker private sector.

*Note: "ST" stands for "special treatment". It is appended to the ticker symbols for all Chinese firms that have lost money for two or more years in a row, and/or that have negative equity. It's sort of a warning to unsophisticated investors that this company may not be a good investment.


  1. Keep going -- looks like a promising start.

    Rich Kuslan, Editor

  2. Hi there: Anderson
    Nice to read your blog. You are talking about "Highlighting interesting issues in business-government relations in Greater China." It is worth discussing!
    I am Toby Ho a PhD student. My research is on the work-unit (danwei) system, the stratum of private entrepreneurs - wherein includes private enterprises, private entrepreneurs, and their serving social organizations. One of my research cases is to talk about auto-industry. I can illustrate this aspect of industry, almost all of which is derived from state/collective enterprises (SEs/CEs). People working in this industry most come from(SEs/CEs. Particularly, those high-rank-staff are selected by local party/government. Even these staffs actually are local officials or party members. Any forms of public-recruitment are false. The CCP never allows their authority/power lost.Controlling enterprises is also a money-control and a power-control.
    My undestanding is that there is a real private sector in China. In China's transition, the party has made institutional arrangements for the transfer of this authority. This also fits well with what Deng Xiaoping envisoned Socialism with Chinese Characteristics.

  3. A great start to your Blog, I look forward to reading future posts. It would be intersting to hear any thoughts/comments you may have on Logistics & freight within China.

  4. @Shek Hei (Toby):

    Thanks for your thoughtful comments!

    "Any forms of public-recruitment are false."


    Chinese seem to instinctively know this.

    Even non-Chinese (like me) can examine the evidence and make such a judgment.

    All of which begs the question: If no one is fooled why all the pretense and fanfare?

  5. Hi, Greg. I don't see why it follows that the state's selling off junk assets (let's assume for the sake of argument that they are indeed junky) makes the private sector weaker. It all depends what the price is. Even junk has a price that reflects its risk-adjusted earning power. If I can get it for less than that, I'm getting a good deal that makes me economically stronger. Buying junk weakens me only if I overpay for it. But what's the evidence that buyers are overpaying for what the state sells off? In the abstract, I would think it more likely that they would *under*pay, since the actual human beings negotiating on behalf of the state seller don't benefit directly from getting a high price.

    Don Clarke

  6. @ChinaLawProf (Don):

    Very good points! Thanks for extending the discussion on this.

    "But what's the evidence that buyers are overpaying for what the state sells off?"

    As you suggest, it is certainly possible that Shagang is getting a great deal on this transaction, and will do a better job of managing the business. In other words, maybe it's "junk" simply because it has been mismanaged by the present owner. If that's the case, everyone benefits from this transaction. The state gets rid of an asset it can't manage properly, and the private sector finds a way to generate value from it.

    At least that's the view according to neoclassical economic theory.


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