Marrying State Capital: A Financial and Political Analysis of China's Mixed Ownership Reform (2014 – 2019)

Abstract

On August 24th, 2015, the State Council released the “Guiding Opinions of the Central Committee of the Communist Party of China and the State Council on Deepening the Reform of State-owned Enterprises” which described a new type of state-owned enterprise reform: mixed ownership reform (MOR). With President Xi Jinping’s enthusiastic stamp of approval, mixed ownership reform has been rolled out gradually in five progressively larger rounds. Mixed ownership reform differs from past ownership mixing reforms because of its unique two-pronged design: both encouraging state-owned enterprises (SOEs) to sell minority stakes to non-state enterprises and encouraging SOEs and state capital to purchase stakes (especially large/majority stakes) in non-state companies. This strategic divestment of state capital from SOEs and state expansion into the private sector marks a camouflaged pivot from the trajectory of the previous four decades of SOE reform, shifting away from market-oriented and autonomy-strengthening reforms toward a contemporary model of state capitalism. With ambitious state-set guidelines to reform the majority of SOEs into mixed ownership firms by 2020, mixed ownership is set to become the primary model for SOEs and, perhaps, POEs as well. While Chinese government’s stated goals of mixed ownership reform are “to improve SOE efficiency and corporate governance” by selling equity stakes and offering board seats to substantial investors, the state has paradoxically maintained majority control and strengthened oversight mechanisms. At the core of mixed ownership reform is also a level of secrecy. Despite going on nearly five years, the government still has not released a formal list of mixed ownership SOEs, partner companies, or non-state companies that have sold stakes to the state. In this thesis, I sought to compile the first comprehensive list of mixed ownership companies and to better understand the Chinese government’s motivations and contradictory actions. Using both quantitative and qualitative analyses, I attempt to answer the questions 1) can we identify determinants of reform? 2) what impact does mixed ownership reform have on a company’s core financial metrics vs. market valuation? 3) what are the economic and political implications of the reform? My findings validate the hypothesis that mixed ownership reform changes perceptions more so than reality – increasing company valuation as measured by market capitalization without significantly impacting firm profitability or efficiency. My findings suggest that the Chinese government is indeed focused on divesting from SOEs to reduce debt (offloading it to the private sector) while using that capital to take over underperforming private firms in strategic and profitable industries that are underrepresented in the state’s portfolio (e.g. IT). While improved efficiency, profitability, and governance of SOEs may be an upshot or side effect of mixed ownership reform in the future, the government’s retention of majority/plurality stakes and corporate board control may be inhibiting new strategic investors from exerting a financially observable positive influence. The State Council guidelines and standard MO procedures suggest that the state does not plan to give up oversight or control – quite the opposite. While in the short-term, mixed ownership reform seems to be a win-win scenario for all parties (SOEs reduce debt, the government expands control to new sectors, struggling private firms gain state support, and strategic non-state investors gain access to new markets, political connections, and better financing options), the long-term effects of widespread hybrid ownership and state sector expansion are yet to be seen. Certainly “advancing the state at the expense of the private sector” would have substantial ramifications for the private sector, the Chinese economy, and international policy vis-à-vis China.