BREAKINGVIEWS-China's SOEs bulk up for market heavy lifting

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Chan Ka Sing

HONG KONG, Oct 29 (Reuters Breakingviews) - With great power comes great responsibility. Consolidation among China's state-owned enterprises have picked up as economic growth slows. It's part of Beijing's plan to boost market capitalisations and shore up the $11 trillion stock market. That's the easy part. Unlocking cost savings and cutting industrial overcapacity will be the real challenge for these new giants.

Between May and mid-September, there have been more than 46 M&A deals announced involving mainland A-share firms listed in Shanghai and Shenzhen, Xinhua news agency reported. Among those are mammoth mergers, including last month's proposed combination between Guotai Junan Securities 601211.SS and Haitong Securities 600837.SS that would create China's biggest brokerage with $230 billion in assets, as well as the union between China CSSC 600150.SS and China Shipbuilding Industry 601989.SS to form the world's largest shipyard.

Executives are answering Beijing's call for creating bigger and more valuable companies. There are only 15 companies with a $100 billion-plus market capitalisation listed on the mainland, versus over 100 in the United States. In January, the State-owned Assets Supervision and Administration Commission, in charge of managing SOEs, made it clear that it will include "market value management" as one of the requirements in its performance appraisal system for officials at listed state firms. More recently, as part of a policy package to shore up investor confidence, the stock market watchdog announced new measures to encourage more M&A and consolidation, including fast-tracking approvals for large-cap companies; firms in key stock indices are also urged to establish "market value management" departments.

Anchoring the stock market with larger blue-chip firms could help bring some much-needed stability. Creating state-owned giants might also help with industrial overcapacity in sectors including steel and solar panels. In September, industrial profit plunged over 27% year-on-year, the steepest decline this year.

State-backed groups will face an uphill battle to prove bigger is better, however. Years of easy credit and preferential treatment have resulted in many bloated and inefficient dinosaurs. In the nine months to September, SOEs recorded a 6.5% slump in profit from a year earlier, grossly underperforming the 0.6% decline at private firms, official industrial data show.

Take the $19 billion Haitong, for example. It is grappling with falling revenue and mounting losses at its offshore subsidiary. A merged Guotai Junan-Haitong entity will have more than 28,000 employees - 8% more than current industry leader, the $54 billion Citic Securities 600030.SS, whose 2023 revenue is 1.2 times the two smaller rivals' combined.

Engineering larger companies is just the start. Investors will be closely watching whether these mergers can create value.

CONTEXT NEWS

Listed companies should use mergers and acquisitions to improve their asset quality, the China Securities Regulatory Commission (CSRC) said in a consultation document published on September 25. In a separate consultation paper, the CSRC also suggested index constituents should come up with plans to monitor and boost market caps.

State firms have announced a number of multibillion M&A deals this year, including a merger between Guotai Junan and Haitong Securities to create China’s largest brokerage by asset size, as well as combining China CSSC Holdings and China Shipbuilding Industry to create the world’s biggest shipyard.

(Editing by Una Galani and Aditya Srivastav)

((For previous columns by the author, Reuters customers can click on CHAN/ KaSing.Chan@thomsonreuters.com))