March 23, 2017 4:45 am JST

Chinese industrial consolidation kicks into high gear

Number of core state enterprises seen falling below 100 this year

SHUNSUKE TABETA, Nikkei staff writer

A nuclear plant in Pakistan where China National Nuclear Corp. is doing construction work.

BEIJING -- The number of key state-owned companies is likely to fall to roughly half the 2003 levels by the end of this year, as the Chinese government accelerates consolidation of such entities in pursuit of larger slices of overseas markets.

Nuclear fusion

Listed companies owned by China National Nuclear Corp. and China Nuclear Engineering & Construction recently announced a merger between the two groups. The two sides will hash out the structure of the new entity, merger ratios and other details for the deal slated to be completed sometime this year.

CNNC and CNEC came into being after a previous nuclear entity was split up in 1999. CNNC mainly creates nuclear reactors, as well as nuclear fuel and weapons. CNEC chiefly handles construction of nuclear plants. The reunification is expected to speed up the development of original nuclear power equipment and technology.

China divided state-owned enterprises in the late 1990s in pursuit of improved efficiency spurred by increased competition. In recent years, the government has turned to the opposite direction, seeking to boost business efficiency by curbing excessive domestic competition for orders and merging research and development functions. China South Locomotive & Rolling Stock and China North Locomotive and Rolling Stock Industry, for example, spun off from each other in 2000, only to rejoin 15 years later.

Military-industrial complex

China Poly Group, a conglomerate with strong ties to the People's Liberation Army, is moving to absorb Sinolight. Poly was formed amid reforms advanced by the late Chinese leader Deng Xiaoping to provide jobs for personnel who were let go when Deng modernized the armed forces.

The state-owned enterprise exports everything from military hardware to artwork, and it engages in property development at home and abroad. The group is effectively controlled by Honorary Chairman He Ping, Deng's son-in-law.

Sinolight's operations center around textiles, but the company also produces paper, alcoholic beverages, sugar, cigarettes and other products. In recent years, Sinolight has undertaken various projects overseas, such as plant construction. Becoming a part of the Poly group means Sinolight will likely be able to win more orders overseas with the backing of the Chinese government and military. The deal is seen as advantageous for Poly's offshore enterprise expansion as well.

Down by half

Premier Li Keqiang spelled out Beijing's intentions to reorganize and reform state-owned enterprises during his policy speech at the National People's Congress this month. The revelation of merger plans involving four large state companies immediately after the meeting highlights the government's commitment to that agenda.

The central government directly manages high-priority "central enterprises" through the State-owned Assets Supervision and Administration Commission. The body has pushed forward the overhaul and integration of these government-owned corporations since its founding in 2003. Currently only 102 such companies remain, down from 196 prior to the commission's birth.

Together with another group that is finalizing a merger announced in 2016, the count is expected to drop to 99 by the end of this year. "In the era of President Xi Jinping, the number of business consolidations that support overseas expansion has increased," said an analyst who is an expert on Chinese state-owned companies.  

Critics, however, assert that the integrations only heighten the domestic oligopoly enjoyed by state enterprises, putting additional pressure on privately run businesses. Others say the government is merely forming bigger groups, which will not lead to improved operational efficiencies. It also remains unclear if Beijing will follow through on proposals to allow private-sector investment in state-owned corporations. 

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