Cover, issue no. 403 January 19 2009
Translated by Liu Peng
Original article: [Chinese]

China was poised to classify a batch of key subsidiaries under central government run firms (central-owned firms) as "Not for Sale". The move was aimed to protect the state's control in strategic industries and resources.

Sources from the State-owned assets watchdog--State-owned Assets Supervision and Administration Commission of the State Council (SASAC) revealed to the Economic Observer that the commission would define and publish a list of key subsidiaries of central-owned firms within this year.

Analysts said that it was necessary to strengthen controls on these subsidiaries in their process of restructuring and shareholding reform as many subsidiaries held key assets of their parent central-owned firms.

Not for Sale
At a meeting with heads of central-owned firms at the end of 2008, Li Rongrong, who heads up SASAC, called for the publication of a list of key subsidiaries where the state must maintain its dominant control.

In a document from June last year, SASAC defined the "key subsidiaries" as subsidiaries of central-owned firms which were engaged in the operation of their parent firms' main businesses and were directly administrated or controlled by these parent firms.

The document also noted that subsidiaries of central firms contributing to over 60% of their parent firms' worth was a qualification.

"The number of subsidiaries that meet the above two requirements would be few because SASAC has demanded each central-owned firm to develop three main businesses at most," said Wang Zhigang, director of enterprise reform and development research department of SASAC research center.

Historical data showed that in 2001, one third of state-owned net assets and two thirds profits came from the listed subsidiaries of these central-owned firms, and over the past years, these firms have noticeably accelerated their listing process.

Sources from SASAC told the EO that the commission had outlined a plan to strengthen state-owned control of capital in such the subsidiaries.

However, a more detailed approach was still in discussion and the subsidiary list would be published within the year, the source added.

The list would cover firms in seven industries including defense, power, petrochemical, telecommunication, mining, civil aviation and shipping.

A press officer at the State Grid Company told the EO that most of the company's subsidiaries were controlled by state-owned capital.

According to recent statistics from Industrial Securities, there were 40 enterprises in the above seven industries, which contributed 75% and 79% of assets and profits respectively to central-owned firms.

However, the list wouldn't be limited to the above industries. Wang Zhigang held that having a strong voice was also a key point of maintaining dominant power.

In response to the policy, sources from Beijing municipal state-owned assets supervision and administration commission said Beijing would also publish the local key subsidiary list gradually after concluding a thorough investigation.

Loopholes
The SASAC data showed that over 100 central firms had underneath them some 17,000 subsidiaries.

However, SASAC only had the power to administrate and supervise these parent central-owned firms and not their subsidiaries' operations. As a result, SASAC has been at risk of losing management control of state assets.

Zhu Boshan, general manager of Tacter Consulting, said SASAC was often lagging in reviewing these subsidiaries' shareholding reforms due to a loophole in regulations for reporting on mergers and acquisitions. As a result, SASAC was often stuck in a passive role in reviewing such cases.

Sources from SASAC revealed that starting in 2009, SASAC would gradually push these parent central-owned firms to diversify their stock ownership. "Therefore, it was absolutely necessary to define a list of key subsidiaries in order to strengthen the state's controlling power in them," the above source added.

Supervision Approaches
Cheng Wei, director of the macro strategy research department at the SASAC, said that it was simply a matter of the shareholder having the right to manage.

"SASAC appears to have extended its antenna, but it has been necessary as many subsidiaries held the key assets of the central-owned firms," he added.

Wang Zhigang agreed. He said SASAC would adopt a different management approach for key and other subsidiaries of central-owned firms. Some decision-making power, such as staff appointments, would be centralized at SASAC, he said.