PRIME EXAMPLE: Qiqihar Second Machine Tool Group Co. Ltd., a subsidiary of China General Technology (Group) Holding, Ltd., became China's No.1 producer of heavy machinery tools last year, showing local state-owned enterprises (SOEs) can secure remarkable growth after being merged into central SOEs (LI YONG)

After almost a year of painstaking deliberation, the State Council recently green-lighted a plan by China's state-owned assets regulator to set up an asset management company to push ahead reorganization of central state-owned enterprises (SOEs) in the industrial sector.

The new company, Guoxin Asset Management Co. Ltd., will focus on restructuring central SOEs and helping the State-Owned Assets Supervision and Administration Commission of the State Council (SASAC) turn small and unprofitable SOEs into money-making entities.

Known as a counterpart of Central Huijin Investment Ltd., founded in 2003 to recapitalize and stabilize China's major state-owned commercial banks in the financial sector, the new entity will be domestically oriented and serve the industrial sector. Central Huijin Investment became a wholly owned subsidiary of China Investment Corp. (CIC), the sovereign wealth fund that manages part of the country's foreign exchange reserves, in 2007.

Once established, Guoxin will be the third asset management company under SASAC, which designated China Chengtong Group (CCG) and State Development and Investment Corp. (SDIC) in 2005 to take over loss-making non-core businesses from central SOEs.

SASAC's Vice Chairman Shao Ning, who is reported to be chairman of the new company, described the three companies as "SASAC's trustworthy and reliable pushing hands" for state capital adjustments.

But neither CCG nor SDIC is strong enough to facilitate the overhaul of SOEs in the industrial sector, said a source close to SASAC.

Differing from previous practices of reducing the number of central enterprises individually through restructuring, the new entity will provide a platform for SASAC to package a dozen smaller central SOEs with complementary businesses into a new company, and speed up the reform and restructuring of central enterprises.

Necessary new entity?

Creating Guoxin Asset Management fulfills SASAC's need for a more powerful instrument than the current "trusteeship model" of state-owned assets management to realize strategic deployment and effective management of state-owned assets, said a 21st Century Business Herald report.

SDIC and CCG have already become trustees over a few loss-making SOEs or their non-core subsidiaries before the principle of separating SASAC's role as a sovereign investor, a manager and a supervisor of state-owned assets was stipulated in the Law on State-Owned Assets of Enterprises effective as of October 28, 2008.

The goal of a trustee is simple: strip some subsidiaries off a central SOE or take over the overall business to enhance its specialization and competitiveness, and improve the performance of businesses it acquired through mergers and consolidation, as was the case in 2005 when CCG streamlined China's telecommunications giant, China PTIC Information Industry Corp. China PTIC later changed its name to China Putian Corp.

But asset management includes not only functions such as stripping non-performing or non-core assets and enhancing these assets' productivity, but also dumping toxic assets, bringing loss-making businesses to bankruptcy, or closing and exiting certain industries altogether.

"SASAC is responsible for the value preservation and appreciation of state-owned assets, so it is reasonable for it to set up an asset management firm to deal with it," said Li Shuguang, an expert on state-owned assets at the China University of Political Science and Law.

Since its inception seven years ago, Central Huijin Investment has established and stood by its goal of value preservation and appreciation of state-owned assets in the financial sector, as exemplified by cases where the company restructured major state-owned commercial banks and large securities companies.

Modeling after Central Huijin Invest-ment's successes, SASAC will debut Guoxin Asset Management soon, aiming to foster a new management platform devoted to exit-focused disposal of non-performing assets and non-core business assets, said the 21st Century Business Herald report.

A number of smaller, less competitive central SOEs without clear-cut major business lines will be packaged into Guoxin, said SASAC's Vice Chairman Shao Ning. The SOEs are expected to regain competitiveness through professional management and investment, and then either merged with enterprises with similar business lines or sold to strategic investors, Shao said.

Enterprises merged into Guoxin Asset Management will go through a second round of restructuring—some may survive, some consolidated while others will be forced to file for bankruptcy, he said.

At the national work conference of state-owned assets supervision and management last December, SASAC's Chairman Li Rongrong said the regulator would continue to promote closures or bankruptcies of incompetent SOEs this year, and ensure they exit the market in an orderly and steady manner.

China's central SOEs reaped 74.3 billion yuan ($11 billion) in profits this January, a 14.5-percent decrease from December 2009, said SASAC statistics.

The regulator has also ordered central enterprises to shed their hotel assets worth up to 100 billion yuan ($14.6 billion) and focus on their core businesses.

The new company is said to have registered capital of 20 billion yuan ($2.93 billion), with initial funding from the state-owned assets management budget and dividends paid by the central SOEs to SASAC last year, according to a source close to SASAC.

But details including the company's asset size and how many SOEs will initially be packaged into the new entity are still unknown.

Playing the part

The new company is expected to help SASAC achieve its goal of cutting the number of central firms from 127 to 80-100 and accelerating cultivation of 30-50 large corporations to globally competitive levels by the end of this year.

SASAC statistics showed revenues of top 10 central SOEs accounted for nearly 50 percent of the total of central SOEs in 2008. While PetroChina ranks first with total assets worth 5.56 trillion yuan ($814 billion), the total assets of the smallest company, China Far East International Trading Corp., stood at only 70 million yuan ($10.2 million).

The efficiency-oriented shareholding reform has prompted SOEs to dispose of non-performing assets and adopt a market-based corporate governance system, allowing them to become public companies throughout the past decade.

In order to smooth over the reform of the banking sector, four financial asset management companies were established in 1999 to remove bad loans from the books of four major commercial banks and to recapitalize them. But CCG, SDIC and Guoxin are entrusted with not only stripping non-performing assets, but also fostering a number of large, globally competitive players from the central corporations under their authority.

The number of central SOEs has dropped from 196 in 2003 when SASAC was established to the present 127—the China National Packaging Corp. won approval to merge into CCG in February. At least another 28 central enterprises would be restructured or consolidated into larger companies by the end of this year.

In addition to packaging smaller central SOEs for consolidation, the new entity's future missions will also include nourishing flagship enterprises in vital industries and fields and facilitating the shareholding reform of some central SOEs at the capital market, The Economic Observer reported, quoting an SASAC official.

For instance, Guoxin Asset Investment will help with equity transfers or increase sovereign investments in these central SOEs, functioning as an invisible hand of SASAC in state-owned assets restructuring, said the SASAC source.

Guardianship

State-Owned Assets Supervision and Administration Commission of the State Council (SASAC): Established in 2003, the state-owned assets regulator is authorized by the State Council to perform investor's responsibilities, supervise and manage the state-owned assets of enterprises under the supervision of the Central Government. Its functions include supervising the value preservation and increment of state-owned assets, guiding and pushing forward the reform and restructuring of state-owned enterprises, and appointing and removing the top executives of the supervised enterprises.

Central Huijin Investment Ltd.: The sovereign investor was established in December 2003 to exercise the rights and obligations as an investor in major state-owned financial enterprises on behalf of the Chinese Government as part of the State Council's efforts to reform and restructure major state-owned commercial banks. Central Huijin became a wholly owned subsidiary of China Investment Corp. as part of its initial capital contribution came from the Ministry of Finance in September 2007. It has been authorized by the State Council to make equity investments in major commercial banks and securities companies.

China Investment Corp. (CIC): Established as a wholly state-owned company in September 2007, the sovereign wealth fund is authorized by the State Council to make long-term investments with $200 billion of China's foreign exchange reserves. CIC does not usually take a controlling stake or seek to influence operations in companies that it invests in. CIC has full operational independence, and its investments are not limited to any particular sector, geography or asset class.