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Foreign Institutional Investors Tepidly Welcome CITIC

07-15 16:58 《财经》杂志 《财经》杂志
CITIC’s predicament in attracting investment highlights concerns over SOEs’ governance structure as well as their ability to operate in the market economy as the government exits the state sector of the economy.

By staff reporter Wang Xiaolu

On the verge of its listing in Hong Kong, so farinvestors have subscribed to 44 billionyuan’s worth of CITIC Limited’s (CITIC) shares.

This falls short of the estimated 50 billion yuan in stocksubscription; still, it is an achievement given China’s recent economic slowdown.After its first round of share subscription, which was dominated by state-owned enterprises (SOEs), CITIC strived to bring in foreignand private investors in subsequent rounds, in an effort to further optimize itsshareholding structure.

Indeed, domestic institutionalinvestors have subscribed to most of the shares CITIC is going to offer on the Hong Kong stockmarket; while foreign institutional investors, which reacted warmly when CITICapproached them early on, are reducing or even cancelling their subscriptions. 

The fact that most of CITIC’s shares have beensubscribed by China’s national Social Security Fund and the big four commercialbanks, or in other words state capital, points to a failure of CITIC’s effortsto introduce foreign investors.

Foreign investors’ lukewarm attitude, which took CITIC’sleadership by surprise, reflects the plight ofChina's SOE reform.

Foreign investors have noticed that SOEs’days of rapid expansion have ended due to changingdomestic and international economic conditions and the fact that the reformdividend of China’s last round of reforms has already been reaped, whichexplains SOEs’ recent difficulties in boosting companyprofits, promoting efficiency, and advancing reform.

One foreign investor expressed concern overSOEs’ personnel system. “If I invest in CITIC andone day the government appoints (CITIC Group Chairman) Chang Zhenming toanother post, who knows who will succeed Chang to lead the group?”

China now has 113 SOEs supervisedby the central government, and 53 of them enjoy vice-ministerial administrativerank, which means the appointment and dismissal of their company heads (partysecretary, chairman, or general manager) fall under the jurisdiction of theOrganization Department of the Central Committee of the CPC.

The State-owned Assets Supervisionand Administration Commission (SASAC) is responsible for appointing anddismissing company heads of the 60 remaining enterprises. The appointment anddismissal of heads of SOEs supervised by local governments, most of which arebelow bureau-level, are the responsibility of local SASAC branches.

Administrative overlap interms of personnel management and lack of transparency in the appointment anddismissal of corporate executives have caused SOEs to drift far away from theirbusiness objectives, as company executives were apt to put the relationswith officialdom high on their agenda in exchange for promotions.

In CITIC’s road show, the key question Chang was asked is how CITICplans to reform and hone corporate governance to transformitself into a genuine commercial organization. 

Through its upcoming IPO, CITICaims to reduce administrative intervention in itsbusiness operation by cutting the state’s holding in the company and establisha modern corporate system by diversifying the company’s equity structure. However,the market’s doubt over SOEs’ efficiency has made it difficult for CITIC toattract investors. So far, among all the institutional investors, only thenational Social Security Fund has subscribed to enough shares to make it to CITIC’sboard.

Bank of China Chief Economist Cao Yuanzhengsaid that CITIC’s predicament in attracting investment highlights concerns overSOEs’ governance structure as well as their ability to operate in the marketeconomy as the government exits the state sector of the economy.  

Full article in Chinese: http://magazine.caijing.com.cn/2014-07-14/114329351.html

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