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Economy

China's cash-strapped companies sell stakes to local governments

Pressure from trade war pushes listed corporations into state control

Chinese Communist Party delegates raise their hands at the party's National Congress in November 2017. Local governments in China are strengthening control over private sector companies.   © Reuters

BEIJING/SHANGHAI -- More than 50 companies listed on the Shanghai and Shenzhen stock exchanges have received investment from Chinese local governments this year, pushing government-affiliated companies into top shareholder positions in half of these cases.

The aim is to extend a helping hand to companies in financial straits from the U.S.-China trade war and President Xi Jinping's deleveraging campaign. But the trend of local governments snapping up private-sector companies symbolizes the return of a worrying phenomenon, often described as guo jin min tui, meaning "the state advances, the private sector retreats."

In the January-October period of this year, asset managers under local municipalities invested a total of 30 billion yuan ($4.3 billion) in more than 50 companies listed on the country's two main stock exchanges. In roughly half the cases, these government-affiliated companies have gained control of the corporations by becoming the top shareholder.

The cities of Beijing and Shenzhen have stood out in particular. An asset manager under Beijing's Haidian District, often dubbed "China's Silicon Valley," has invested in such companies as Beijing Sanju Environmental Protection & New Materials, a maker of environmental technology.

Shenzhen's asset manager has backed cloud services company Montnets Technology and electronic parts maker Shenzhen Yitoa Intelligent Control, among others, mostly in the information technology field.

"We decided on these acquisitions to save companies in deteriorating financial positions," said a Shenzhen official.

An employee inspects drink bottles on a production line at a factory in China's Henan Province. Companies have faced difficulty borrowing money amid the country's deleveraging campaign.   © Reuters

Some media outlets are arguing, however, that local governments and affiliated companies are not rescuing private corporations in a pinch but scooping them up at rock-bottom prices -- a new form of guo jin min tui. The authorities have denied that, saying these are normal transactions among state-owned and private companies in a market economy that are beneficial for both sides.

"It has been the consistent and unwavering policy of the Communist Party of China Central Committee to support the development of the private sector," Xi said at an event for entrepreneurs earlier this month. Vice Premier Liu He also said the government would renew efforts to assist private companies facing financial difficulties.

A statistics bureau survey of industrial companies over a certain size showed that aggregate profit at state-owned enterprises from January through September was 1.53 trillion yuan, compared with 1.26 trillion yuan for private businesses. It was the first time since 2010 that state-owned companies surpassed private ones.

Some local governments are even stepping over provincial borders. A state-owned company from Fujian Province, where many products like flat-screen TVs are assembled, has invested in a liquid-crystal display maker in Jiangxi Province. An energy fund managed by Sichuan Province, which is stepping up production of natural gas, took a stake in an Anhui Province environmental company as well.

The central government is increasing investment in private enterprises, too. A space technology company under its jurisdiction took a stake in a Zhejiang Province developer of synthetic fibers and electric batteries through a fund. A company controlled by the China Institute of National Defense Finance Studies invested in a Shanghai maker of coating material, probably for military purposes.

Stocks are usually acquired directly from founders and other large shareholders. Executives tend to use their stakes as collateral when taking loans. Debt backed by stocks totaled 1.5 trillion yuan at the end of September, a securities company estimates. Shareholders and executives have therefore had trouble obtaining financing as Shanghai-listed stocks plunge 20% since the start of this year.

"Stock prices have fallen 20% to 30% from their peak," said an executive who sold some stock to a company affiliated with a local government. "There was no choice but to go under the government's umbrella."

With the backing of municipal governments, however, local financial institutions that cities have influence over seem to be making more loans to these companies.

Local governments are expected to pour more money into private companies going forward. Liu Shiyu, head of the China Securities Regulatory Commission, told state-run Xinhua News Agency that he encourages funds backed by local governments to rescue financially distressed companies, noting that Shanghai-listed shares reached a nearly four-year low in mid-October.

Debt at China's listed companies stood at nearly 33 trillion yuan at the end of 2017, nearly doubling over the last five years. Aid from local governments will only delay deleveraging and invite moral hazard. Excessive investment could also worsen asset turnover. Though freely granted aid can prevent companies from being weeded out, it will not make them stronger.

Xi has originally aimed to deleverage companies and local governments facing excessive debts. But the intensifying trade war and downward pressures on the economy have forced him to change tack.

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