Shenzhen’s state-owned enterprises (SOE) and their controlled investment vehicles are on a private sector buying spree, taking up stakes in some of China’s leading companies under the stewardship of the city’s SOE watchdog.
And the elite enterprises are itching to get a bigger share of the private sector as Beijing looks to the southern economic hub to pioneer SOE reform.
Vanke, one of China’s largest private realty developers, has effectively changed the nature of its ownership after Shenzhen Metro Group, the state-owned operator of the city’s subway network, salvaged it from a hostile takeover bid in 2017.
The metro operator is now the developer’s largest shareholder after a 29.2 billion yuan (US$4.48 billion) share purchase.
In February, Shenzhen’s SOE investment platforms also competed to scoop Suning, a major home appliance retailer, out of bankruptcy with cash injections of 14.8 billion yuan.
This deal came hot on the heels of a 25 billion yuan share swap between leading developer China Evergrande by another Shenzhen SOE entity set up to construct subsidized housing for the city’s talent and migrants.
Last year, when the beleaguered tech giant Huawei sought to spin off its Honor smartphone business to fund drawdowns amid Western sanctions, Shenzhen’s SOEs pooled their funds, outbid other suitors and acquired the brand.
The flagship Shenzhen Investment Holdings (SIH), under the umbrella of Shenzhen municipal government’s State-owned Assets Supervision and Administration Commission (SASAC), is also the second-largest shareholder of China Pingan, one of the nation’s largest financial services and insurance brokers.
The total assets of all SOEs and their affiliate firms whose operations and performance are overseen by Shenzhen’s SOE commission hit the 4 trillion yuan mark at the end of 2020. That SOE asset figure ranked behind only Shanghai and Beijing.
Shenzen’s SOEs have stakes in 34 listed firms spanning industries from agriculture to airport operation to artificial intelligence, according to Shenzhen SASAC’s 2020 annual report.
Yu Gang, the chief of Shenzhen’s SASAC, acknowledged during a press event in March that the high-profile private mergers and acquisitions (M&As) by the city’s SOEs had raised eyebrows in Beijing and questions among observers who know Shenzhen for its economic liberty and freewheeling private sector rather than its state firms.
Some now wonder if these big-ticket and high-profile M&As are part of Beijing’s new drive to extend the state sector into competitive industries and into the boardrooms of leading businesses.
Yu denied this at the press event, saying that the national SOE watchdog had sent officials this year to Shenzhen to examine the city’s books and review its strategies.
“It’s now impossible to remain low-key with these big deals by our SOEs and their capital but all the transactions are aimed at preserving and increasing the value of state assets and driving the economy,” Yu said.
“To achieve that end, Shenzhen’s SOEs should be allowed to compete in all sectors in which they have the chance to excel, instead of an indiscriminate pullback from these sectors.”
The influential Southern Weekend newspaper reported that the Chinese State Council was once concerned that Shenzhen SOEs’ dabbling in realty, retail and high-tech sectors could run counter to Beijing’s directives to withdraw state capital from these competitive industries and to focus it instead on infrastructure development, public utilities and frontier and emerging sectors and technologies.
Yet Shenzen’s many landmark SOE deals and subsequent impressive return on investment results, effectively the antithesis of Beijing’s decree for SOEs to divest most of their holdings, has apparently gained certain currency among top officials in Beijing.
In 2019, Shenzhen was assigned an exclusive role to trial new SOE reform initiatives including mixed ownership, asset securitization, market-oriented corporate decision-making and emolument systems to woo top-flight talent.
With its deep coffers as China’s third-largest city economy, Shenzhen’s city cadres reportedly injected 320 billion yuan into several key conglomerates like SIH and Shenzhen Metro Group over the past five years as seed capital to bolster their M&A activities.
SIH has indicated a goal of replicating the success of Singapore’s state-run Temasek investment arm, which boasts a 45-year compound annualized investment return of 15%, in the Shenzen SOE watchdog’s new five-year plan for 2025. It’s apparently well on its way as a new entrant to the Fortune Global 500 club despite its short history.
A suite of liberalization policies ranging from ownership to capital operations have been cribbed by SIH straight from Temasek’s corporate governance chapters and investing guidelines. It also has plans to poach top talent from Singapore and Hong Kong, Shenzhen Special Zone Daily reported.
Shenzhen’s ambitions to create a Chinese Temasek are believed to have the backing of Li Rongrong, the former chief of China National SASAC, who in his tenure sought to promote market-oriented management and appraisal of Chinese SOE giants. He is known to have paid several visits to the Singaporean government investment company to compare notes.
Yet governance accountability and transparency are already issues being flagged by observers like Shenzhen-based financial commentator Liu Xiaobo. The former business reporter with state news agency Xinhua said he once requested SIH to disclose its debts and accounting but was rebuffed.
Yu, the chief of Shenzhen SASAC, nonetheless, revealed in September that the overall debt-to-asset ratio of the city’s major SOEs stood at 65%, or more than 2.5 trillion yuan, nearly the size of the city’s economic output in 2019.