Mixed ownership reform advances against headwinds

As a priority on China's reform agenda, diversifying the ownership of the country's state-owned enterprises (SOEs) is making progress although the road ahead may be bumpy.

IT engineers for digital map service provider Navinfo have become much busier these days after the SOE invited in Tencent Holdings in May by selling an 11.28-percent stake to the private IT titan for 1.17 billion yuan (187.6 million U.S. dollars).

The two companies are working on a smart in-vehicle navigation system with more accurate navigation and rich location-based services.

The tie-up of Navinfo, a subsidiary of the China Aerospace Science and Technology Corporation, and Tencent marked the first step taken by an SOE to open up to private capital in order to forge mixed ownership.

Such reform is high on China's to-do list for 2014 as the country aims to invigorate generally torpid SOEs and provide fair chances to different market entities.

"China will loosen grips on all the competitive sectors and set up an arena in which private investors can fairly compete," said the National Development and Reform Commission (NDRC), China's top economic planner, in a statement last month.

The commission later released a first batch of 80 programs to solicit private investment. They mainly involve transport infrastructure, new energy projects and telecommunication facilities.

As one of the country's three telecom operators, China Telecom has also taken action. The company is working with Amazon and Japanese auto maker Infiniti among others to incubate 68 innovative projects.

The State Development and Investment Corporation (SDIC) went even further. Nearly 80 percent of the company's subsidiaries have diversified their ownership by drawing in private investment so far.

REFORM BENEFITS ALL

"Navinfo and Tencent are highly complementary," said Ren Yuxin, Tencent's chief operating officer, explaining that Navinfo has strong mapping capacity and Tencent has a sea of consumer data collected from a huge user base.

Combining the advantages can enable the two to create new location-based services and enrich Navinfo's in-vehicle navigation system by adding functions like instant messaging and music playing, according to Ren.

The deal is also expected to put Tencent in a favorable position in digital map services against BaiduMap and Alibaba's AutoNavi.

The SDIC also benefits from diversified ownership. Its contract with private insurance company Taikang helped the SDIC expand insurance market share. Partnering with the corporation, Taikang is expected to be able to raise investment more easily.

"The mixed ownership reform pushes us closer to the market and boosts our vitality and competitiveness," said SDIC board chairman Wang Huisheng.

China has thousands of SOEs and 113 of them are directly administered by the country's central authority. These enterprises are deemed as the backbone of China's economy. But their monopoly in many scopes shuts out smaller market entities and causes low efficiency and poor services.

"The mixed ownership reform is a remedy," said Zhao Linghuan, CEO of investing firm Hony Capital, which has been doing business with SOEs for a decade.

PROBLEMS AHEAD

Despite a number of successful cases, failures have showed that pushing forward mixed ownership is not easy.

A photovoltaic project managed by an SOE in northwest China's Qinghai Province refused to invite in private investment. The project is one of the NDRC's 80 programs.

A senior executive surnamed Xie said, "We have abundant capital and can easily get credit from banks. If the ownership becomes complicated, management will get difficult."

Cai Zebin, general manager of a Nanjing-based private electrical equipment manufacturer, is also hesitant to invest.

"Even if we participate, we have no controlling stakes. Who can safeguard our interests against powerful SOEs?" said Cai.

"To dismiss these worries, China should lay down rules or even make laws to regulate activities during the reform and make sure private investors are treated fairly," said Gao Minghua, an SOE researcher with Beijing Normal University.