China's CITIC Restructures, Blazes New Trail for State-Owned Firms

China’s CITIC Group will become the first state-owned enterprise (SOE) to fulfill Beijing's pledge to overhaul government controlled businesses. A shareholder vote on June 3 approved a plan for Hong Kong-listed CITIC Pacific to buy the assets of the parent company for US$37 billion.

The merger may serve as the new model for SOEs to become more efficient and transparent, said the Wall Street Journal. Injected into the Hong Kong-listed entity, the SOE's subsidiaries will be subject to stricter rules and disclosure requirements, and to international standards. 

Still, the restructuring is just one step, Julian Evans-Pritchard, an economist at Capital Economics, told the Journal. “Unless shareholders in Hong Kong have a true say in the running of the company and in business decisions, just listing the company doesn’t change the management in itself.”

Next wave of reforms

The acquisition is subject to approval by relevant regulatory bodies, and is expected to be completed on or before 29 August 2014, said the company, which will change its name to CITIC Limited.

To help pay for the acquisition, CITIC Pacific will issue about US$29 billion in new shares that will eventually be bought by the parent company. Other Chinese state entities such as the National Social Security Fund will buy US$8 billion in shares.

Financial services accounts for 34% of the CITIC Group's assets, followed by resources and energy (21%) and manufacturing (16%). In 1990, it injected some assets into CITIC Pacific and listed the entity in Hong Kong.

“The authorities want to use the upcoming Hong Kong listing for it to become a role model again in the next wave of SOE reforms,” Li Xiaoyang, an assistant professor of Economics and Finance at Beijing’s Cheung Kong Graduate School of Business, told the Journal.

Who's next?

Despite dominating financial services, energy, telecommunications and other sectors of the Chinese economy, SOEs like CITIC have lagged behind private-sector companies in return on assets, average 2.29% annually from 2006 to 2013, notes the Journal. In contrast, private-sector firms had returns averaging at 5.8% over the same period.

Other SOEs are expected to explore the trail blazed by the CITIC Group, although it remains to be  seen whether the restructuring will indeed improve transparency and governance, and increase returns.

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