What to make of the $11.7 billion ownership revamp of China Unicom, the flag-bearer for Chinese state-owned enterprise reform?
The sale by Unicom’s state parent of a 35.2% equity stake to investors including Tencent, JD.com, Baidu and Alibaba is at first glance exactly what the market wants to see: private-sector participation on the shareholder register of state-owned national champions.
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But China Unicom is, in several respects, a special case.
This was spelled out explicitly by the China Securities Regulatory Commission (CSRC) in the wake of an oddly chaotic process: Unicom announced the deal on August 16, withdrew all its corporate filings five hours later and republished exactly the same documents on August 20.
It appears that the ownership change plan violates a CSRC rule stating that private placements cannot exceed 20% of total ownership. The deal was only relaunched after the commission said it would allow this one deal through in the name of “the significance of the trial scheme of China Unicom for state-owned enterprise reform”.
The inference is that further exceptions will not be made, which does not make the deal much of a useful template.
More broadly, China Unicom is not really representative of troubled SOEs. One of three telecom operators in the country, it is exposed to wonderful demographic patterns. Contrast this with, say, coal miner Shenhua Group, wrestling with overcapacity, lack of pricing power and a global shift in sentiment away from coal.
Ordered to merge
Shenhua has been ordered to merge with power generator China Guodian, which might help, but we do not yet see private-sector leaders rushing to take a stake.
Also it was interesting to hear Weijian Shan, now chairman and CEO of Chinese private equity house PAG, recalling his time on the China Unicom board, from which he stepped down about 10 years ago.
“In the scheme of things, it [the sale] has very little significance,” he said at the Milken Institute’s Asia Summit in September.
When he was on the board, he recalled, it was a Hong Kong-listed red-chip company with foreign and private capital participation; he was an independent director (and was known for standing up to Beijing while there) and says the company was paying the market rate for executives. It was already at the point where China today aspires for it to be.
“There is a lot of celebration as if this is a very significant step in SOE reform,” he said. “I don’t think much of it.”
The real proof of the success of SOE mixed ownership reform will come in the more challenging cases. China Railway has formally put out invitations to potential investors in both the state and private sectors.
In the long run, the State-owned Assets Supervision and Administration Commission wants to whittle the 98 SOEs under its control to 40 (it started with almost 200).
Unicom is progress but we are a very long way from the model China eventually wants to arrive at.