China's Sinopec sale points to next round of state privatisation

by Reuters
Thursday, 27 March 2014 02:22 GMT

(In March 4 story, corrects 6th paragraph to remove reference to banks)

By Matthew Miller and Charlie Zhu

BEIJING, March 4 (Reuters) - China's decision last month to sell a stake in a subsidiary of Sinopec Corp signals more privatisation of its bloated state-owned sector will take place soon, with plans likely to be discussed at this week's parliament session, officials and experts said.

Sinopec, Asia's biggest oil refiner, said on Feb. 20 that it would sell up to 30 percent of its marketing arm, which owns more than 30,000 petrol stations, in a multi-billion dollar asset restructuring. No details have been provided.

It was China's first announcement of a major restructuring since President Xi Jinping unveiled sweeping reforms of the socialist economy at a Communist Party conclave last November. He promised to encourage more private participation in state-owned enterprises (SOE's), which include some of the world's largest companies.

"Reform towards fully mixed ownership will increase, in such areas as petroleum and petrochemicals, power and telecommunications," said Zhang Chunxiao, an adviser at the State-Owned Assets Supervision and Administration Commission (SASAC).

"State-owned enterprises will look to attract high-calibre strategic investors, including foreign capital," he told Reuters.

SASAC is a ministerial-level body run by China's cabinet and is directly responsible for 113 state-owned companies, including Sinopec, oil giants PetroChina and CNOOC, and China Mobile , which operates the world's biggest network of mobile phone users.

Beijing will however retain control of critical lifeline industries, including enterprises related to national security and key economic sectors - upstream energy, transportation and ports, Zhang said.

Policies governing state-owned enterprise restructuring and the introduction of private investment will be discussed at the annual session of China's parliament that begins on Wednesday, state media reported.

Over the last 20 years, China has gradually introduced private investment and Western-style management to its state firms and turned the country's biggest government conglomerates into stock market-listed shareholding firms.

Beijing's central government-controlled SOE's owned 378 subsidiaries trading on global stock markets by the end of 2012. Provincial and local government firms had listed another 681 companies by the end of last year.

Critics say the sheer size and market dominance of big state firms creates a drag on the economy through vast opportunities for waste and corruption. State-owned companies enjoy privileged access to low-cost credit and draw more than 35 percent of total bank loans.


The stake sale in the Sinopec subsidiary is significant since it will offer investors a chance to enter China's highly controlled and sprawling downstream fuel market.

It remains unclear whether Sinopec would divest the stake through a trade sale to investors or through an initial public offering on the stock market.

The possibility of bringing in a foreign strategic investor like Royal Dutch Shell or BP Plc, which already operate retail joint ventures with Sinopec and PetroChina, also can't be ruled out, analysts said.

"This time (private) capital is being brought into production and management," said Chen Yongjie, deputy secretary-general of the China Center for International Economic Exchanges, a well-connected think-tank in Beijing, adding that the model was likely to be extended to other stake sales.

Provincial and local governments which control the vast majority of the country's more than 140,000 SOE's are also getting into the act. In recent weeks, local governments in several provinces, including Guangdong and Shaanxi, have said they will seek more non-state investors.

In the southern coastal city of Zhuhai, the government is seeking strategic investors to buy a big minority stake in Zhuhai Gree Group, a major household appliance maker.

Besides making SOE's more responsive to market forces, such privatisations could help unlock enormous hidden value.

The marketing and distribution division of Sinopec, which also engages in oil and gas exploration and production, refining and chemicals production, accounts for nearly half of the group's annual total operating profits.

The segment posted an unaudited operating profit of 27.03 billion yuan ($4.46 billion) in the first nine months of 2013, down 10.5 percent year on year, partly because of a slowing Chinese economy.

Sinopec shares in Hong Kong have gained more than 11 percent since it announced the divestment.

China's biggest state-owned industrial companies and conglomerates reported main business income of 25.8 trillion yuan ($4.20 trillion) last year, about one-quarter of the total for all industrial companies. State enterprise assets amounted to 91.1 trillion yuan ($14.83 trillion).

However, much more needs to be spelled out before private investors will be confident of any privatisation scheme, analysts caution. Corporate governance at state-controlled joint ventures remains problematic and management often puts national interest ahead of minority shareholders.

Private investors also may be wary of the risk of nationalisation. The government set off howls of protest when it forced out private investors from the oil fields in northern Shaanxi province in 2005, and coal mines in neighboring Shanxi province four years later.

"A lot more is needed. (Incremental and marginal privatisation) in of itself doesn't do much," said Arthur Kroeber, head of research at Gavekal Dragonomics, an independent global economic research firm.

"I find it hard to imagine a substantive privatisation of these big central SOE's. In that context, I find it hard to imagine how bringing in marginal outside investors will have a fundamental impact on the behavior of these companies.

"There needs to be a break with the traditional joint venture model." ($1 = 6.1450 Chinese yuan) (Additional reporting by Yan Huang in Beijing; Editing by Raju Gopalakrishnan)

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