Shanghai's Great Leap FEER By David Murphy/SHANGHAI Issue cover-dated August 09, 2001 IT MAY YET ADD UP to Shanghai's sale of the century. A city government enterprise has been tasked with selling off stakes in state assets and shares in order to fund Shanghai's plans to build up a hi-tech industrial base. What's new is that for the first time financial institutions that are relatively strong players within China's financial sector are on offer. That should make a change for interested foreign investors weary of being offered a tired old mix of bankrupt state factories with large numbers of dependent workers. Assets that are set to be offered for sale include stakes in Shanghai Bank, the Pudong Development Bank, the Bank of Communications, PICC insurance and Guotai Junan Securities. And there are more. City-owned assets in Shanghai are worth about 400 billion renminbi ($48 billion), estimates Zhu Shiyin, president and CEO of the Shanghai State-owned Assets Operation, or SSAO, the enterprise that holds the sole right to trade state assets in Shanghai. "If I want to operate these state-owned enterprises we can get them, as we have the franchise to operate this equity," says Zhu. And other cities are following Shanghai's lead. Beijing municipality and Jiangsu province have also established their own version of the SSAO, and last month officials from the coastal city of Qingdao visited Shanghai to find out more. Unlike China's asset-management corporations that take possession of debt-laden companies and try to dispose of them, Zhu and his staff of 50 will only take on assets if he already has a buyer lined up. "Whether we want it depends on the investors. If they want it, we can ask the municipal government to transfer the equity to us." By the end of this year the Shanghai Finance Bureau and the Municipal State Asset Office are expected to transfer all of Shanghai's securities and equities in the insurance and investment sectors to SSAO. After that, the assets will be sold as soon as buyers are found. But who might they be? That depends a great deal on the strategic focus of the buyer. Even if it's a good deal, major United States banks would be reluctant to take a minority stake in a small Chinese bank, though smaller foreign banks who were late entrants to the China market might be interested, analysts say. Having a controlling influence would be crucial, say bankers, who point out that, with the exception of the vehicle industry, small strategic investments have not had a history of success. "Logical buyers would be domestic companies," says Christian Murck, managing director of APCO China, an investment consultancy, who points to the oversubscription of recent domestic A-share offerings as evidence of high mainland liquidity. The assets on offer may not be distressed, but neither are they blue chip, and the real devil will lie in the details that emerge in any negotiations around the terms of purchase, the size of the stake and the asking price. In an underdeveloped regulatory environment, SSAO is still feeling its way. "Although there are barriers or restrictions for foreign investors to directly hold the shares in a financial institution, insurance companies and securities brokerages, our company can design legitimate ways of selling these shares to prospective foreign investors," the company said in a statement. But entities like SSAO do answer criticism of poor asset quality that has plagued China's previous attempts to organize the mass sale of state assets, primarily through four asset-management companies that are now essentially the bad-debt departments of the big four banks. Founded in 1999, SSAO has kept a low profile and focused on asset transfers between wholly Chinese-owned entities, including Dazhong Transport, one of Shanghai's biggest taxi operators, Orient Securities and PICC insurance. In 2000, it arranged deals valued at 3 billion renminbi involving a mixture of shares, land, equipment and entire companies. The 5 billion renminbi float that the city government gave the company to enable it to buy assets for the short term before selling them on to investors also allows for a quirky sort of bridge financing. Unable to issue loans itself, SSAO can speed up a deal by depositing money with a bank that in turn lends it to the buyer firm at a rate higher than normal. The asset company collects an introductory fee when it simply brings two companies together, but slaps a tariff of up to 20% onto the sale price if it first buys the asset. SSAO sits on the board of directors and supervisory committees of the companies it holds stakes in but takes no role in daily management. "We make strategic investments and only own the equity in the short term," says Zhu, who stresses the need to have a method of disposal before acquiring the assets. "One principle is that before we own equity we will research how to transfer and set up a withdrawal channel." Zhu's firm is also tasked with finding buyers for state equity in publicly listed companies, much of it not currently tradeable on the stockmarket. The funds raised are intended to help firms pay debts and restructure before heading for a wider listing that would allow foreign investors to buy shares--which to date have been effectively off limits. "Based on a healthy shareholder structure we could arrange equity transfers to interested investors including foreigners," says Zhu. Such a move need not entail regulatory changes, the China Securities Regulatory Commission recently told foreign bankers. The sale of A shares is generally restricted to mainland Chinese citizens and entities, but there are exceptions to this. In certain industries, Sino-foreign joint-venture companies can purchase A shares indirectly, something SSAO can broker using a method whereby a Chinese entity buys A shares and transfers them to an investment company set up to receive the shares. The investment company can then sell the shares to the foreign-invested joint venture. Such purchases should become less complicated in the near future when regulations are expected to relax. "Investors will be able to buy shares directly from the investment bank," says Zhu.
