Home / Pros and cons of China’s SOEs: untapped potential or not?

(pictured: Chi Lo)

Investors need to be patient with their China exposures. There are unlikely to be any new reforms or other positive – or negative – announcements from Beijing until the next parliament in 2018, according to China expert Chi Lo.

Chi Lo, the senior economist for Greater China (including Hong Kong and Taiwan) for BNP Paribas Investment Partners, says that the Chinese Government does not want any “shocks” at the moment, with moves such as the freezing of IPOs likely to remain a while longer and privatisations among state-owned enterprises put on hold.

“Any major reform policies will be put off until 2018,” he said on a trip to Australia last week to hold client meetings. “So, from a growth perspective, it will be a slow two years.”

The more interesting privatisations and IPOs tend to be in “strategic” industries such as telecoms, energy and aerospace, which Beijing is not yet willing to open up to foreign investment. But there was still a lot of opportunity to invest in companies that provide services to the SOEs in those sectors.

Chi Lo says that an investment highlight will be those SOEs which the Government is willing to sell but are not yet ready for the market. They include companies in areas such as retail, services – including health – and education.

There is already a lot of interest from the burgeoning number of private equity firms operating in China to get in on the ground floor.

Not all foreign fund managers like to invest in partial SOEs, however. Many, in fact, will steer clear of them because they believe the government influence is too difficult to predict. Others believe they are usually well rewarded for their loyalty to Beijing’s wishes.

Chi Lo says there are two types of SOEs: ther stereotypical “lazy” companies with excess capacity; and the newer-economy companies which have started on the reform process and are looking to lift returns.

An example of a big SOE he believes will be privatized at some stage is Jin Jieng, which is a conglomerate in hospitality services and tourism-related sectors and the largest company of its kind in China.

In contrast, Henderson Global Investors last month launched an Australian-domiciled global emerging markets fund, with Glen Finegan, the firm’s head of EM equities, and Rob Adams, executive chair Pan Asia, addressing investor and media briefings on the manager’s style and process.

Finegan told a briefing in Sydney that Henderson tended to shun SOEs with its China exposure because it was akin to doing “national service”. He said: “It’s important that the manager’s ‘watch list’ of stocks – totaling about 350 – not only had good strong track records but also had good ESG characteristics.”

He said that private companies tended to use the global financial crisis as a reason to cut costs, but government-owned ones had not gone down that path as yet.