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SASAC Steps in to Save Bleeding SOEs
Summary:The supervisory body that administers the operations of more than a hundred of China's biggest and most powerful state-owned companies has been dropping by the offices of those companies that have dragged down the overall profits of the state sector in 2012 with their huge losses.

By Kang Yi (康怡) and Zhang Xiangdong (张向东)
Issue 620, May 20, 2013
News, page 1
Translated by Pang Lei
Original article: [Chinese]

This is an extended abstract of an article that appeared in this week's edition of The Economic Observer, for more highlights from the EO print edition, click here.

Over recent weeks, some of China's biggest state-owned enterprises have been visited by their biggest investor - the State-owned Assets Supervision and Administration Commission (SASAC).

The supervisory body that administers the operations of more than a hundred of China's biggest and most powerful state-owned companies has been dropping by the offices of those companies that have dragged down the overall profits of the state sector in 2012 with their huge losses.

The first point of call for SASAC officials was Anshan Iron and Steel Group (鞍山钢铁集团公司), the second-largest state-owned steel-making enterprise in China. After that they asked executives at COSCO Group (中远集团) to explain the huge losses that the company ran up last year. Next it will be the Aluminum Corporation of China Limited's (中国铝业) turn to be grilled and the China Metallurgical Group Corporation (中国冶金科工集团公司) will also be paid a visit.

The move is being interpreted by those who monitor SASAC as the first major initiative of Jiang Jiemin (蒋洁敏), the new director of SASAC, since he took office earlier this year.

Earlier this year, the State-owned Assets Supervision and Administration Commission (SASAC) instructed the more than one hundred state-owned enterprises (SOE) under its supervision that it expects them to achieve profit growth of over 10 percent in 2013. This is the first time that the central government body has set such a profit growth target for the SOEs under its supervision. At the same time, the supervisory agency also announced that it was establishing a special "maintain growth" working group to help some of the centrally-administered SOEs deal with some of the challenges that they are facing.

A person connected to SASAC told the EO that the new team will not offer assistance to all the SOEs operating under SASAC's remit, noting that they would instead "put the focus on companies with huge losses and also on those big companies making big profits."

From May 6 to 14, officials from SASAC's new work group paid a visit to Anshan Iron and Steel Group. A week after this first visit, Huang Shuhe (黄淑和), one of the deputy directors at SASAC, returned to the steel making group to discuss some fo the requests for financial and policy support that Angang had raised.

Policy Support of Financing?

Anshan Iron & Steel Corporation posted a net loss of almost 4.2 billion yuan in 2012.

The company's general manager Zhang Xiaogang (张晓刚) attributed these losses to the domestic and international economic environment, overcapacity in the steel industry, lack of demand, a heavy historical burden and other factors. During the week long consulation with SASAC, executives from the company sought assistance from SASAC in relation to some of these problems. Zhang Xiaogang also said that he hoped that SASAC could provide the group with both policy and capital support in order to get through this difficult period.

The message coming from inside SASAC is that the main tasks of these "maintain growth" teams are to "take the pulse" and "prescribe medicine," noting that SASAC is there to help the company not come in and take it over.

A participant in the process revealed to the EO that some of the support that Angang hoped to receive on a policy level, for example addressing some of the "historical issues" and the company's role in providing social services, were not easily addressed as they would require coordination between various departments and levels of government, especially local government.

In addition, the steel group also called for support in terms of raising capital, because even the big steel companies are now finding it difficult to borrow money from the banks.

China Ocean Shipping Group (COSCO) has also made similar requests for assistance to SASAC calling on the agency to help the group get access to cheaper financing and to help deal with overcapacity in China's shipbuilding industry. COSCO also wants SASAC's help to strengthen policies that put pressure on other big state-owned companies to sign strategic long-term freight deals with the shipping company.

A person connected to SASAC told the EO that the agency would be willing to provide appropriate policy support but they won't be helping these large state-owned companies get access to loans from financial institutions.

"To ask us to use SASAC's influence to get loans from financial institutions, this is not the kind of thing that an investor should be doing," the above-mentioned source at SASAC told the EO.

Analysts also believe that, at least according to recent statements made by high-level officials, there will be no large stimulus package similar to the one introduced in 2009 to help prop up state-owned companies. However, this means the recent talk of "defending growth" teams will not be backed by any firm guarantees of money

How to Cut Losses

Even before teams from SASAC began to pay visits, many centrally-administered SOEs had begun to look for ways to cut their losses.

One option is for companies to sell-off some inefficient or less succesful assets. Some SOEs have already sold their under-performing assets.

One of the recommendations that Huang Shuhe made when visiting Anshan Steel was that the company should cease engaging in projects that it shouldn't do or that it doesn't do well.

Jiang Jiemin's First Major Initiative

SASAC is currently under a lot more pressure than it has been over the past few years. April's macroeconomic indicators came in below the expectations of many economists and some investment banks have been lowering their GDP growth forecasts for 2013. As the general economic outlook begins to cloud, central SOEs are being pressured to step up and take on the role of maintaining overall economic growth.

SASAC is now also showing signs that it's beginning to be tougher when it comes to approving investments by the SOEs it supervises. Earlier this month the agency did not approve China Energy Conservation and Environmental Protection Group's (中国节能环保集团公司) purchase of a 55 percent stake in Xinhua Hydro (新华水力发电) for almost 4 billion yuan. Someone familiar with the decision told the EO that the main reason the deal was rejected was that the purchase was not considered as being in keeping with the main business of China Energy Conservation and Environmental Protection Group.

People close to SASAC say that the decision to set growth target for profits and establish "maintain growth" work teams, are examples of how Jiang Jiemin, who took office in May, is living up to the reputation he developed at China National Petroleum Corporation for being decisive.

Whether it marks a turning point for the loss making SOEs is another question.

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