China's mixed-ownership reforms take long road - S&P report

   China's mixed-ownership reforms aimed at improving efficiency, governance, and accountability at state-owned enterprises (SOEs) have been slow-going. One reason is that private capital is reticent to buy into SOEs if it means government backing of the enterprise will weaken, according to an article S&P Global Ratings published today, titled, "China Credit Spotlight: Catching The Mice In Mixed-Ownership Reform."
  "Most Chinese SOEs continue to be controlled or dominated by government bodies after a mixed-ownership change, and this year we've seen more SOEs investing in or rescuing private companies than vice versa," said S&P's credit analyst Cindy Huang. "This shows that the progress of mixed-ownership reform has been slow."
  Nonetheless, S&P believes the initiative's success shouldn't be measured on ownership patterns alone. It thinks the end goal is efficiency. Wider and more independent shareholding structures can reduce wasteful spending at the corporate level, enhance governance, and boost returns on investment. However, there is no one-size-fits-all approach. As the saying goes: "It doesn't matter whether the cat is black or white, so long as it catches mice."
  In some cases, cutting bureaucracy and idle capacity will reap productivity gains. In others, investors may feel more comfortable knowing government stakes and relationships remain strong. Sometimes the "mixed ownership" involves well-run SOEs investing in less successful state-owned counterparts.
  "There is no clearly defined path to mixed-ownership reform," said Ms. Huang. "The credit impact of mixed-ownership reform varies, in our view. This is all the more so amid slowing economic growth--reform benefits may not be easily realized while government support for SOEs could fall if the government stake is reduced and companies become more commercially arm's-length."
  Mixed-ownership is a fairly open process based on guidelines published by state planners originally in 2015, and updated in a series of follow-up rules recommending increased management incentives, wider shareholding structures, and asset-valuation principles. That said, there are some requirements and deadlines. For example, SOEs need to appoint nonexecutive directors on its boards by 2020.
  The report is part of is part of S&P's "China Credit Spotlight" series, which examines the credit conditions for China's top corporates and banks, key sectors, local and regional governments, and structured finance. It examines a number of mixed-ownership deals over the past few years, noting a wide variety of approaches.
  "Progress to date has been slow," said Huang. "Through trial and error, some workable models will likely emerge."