China to allow SOEs to set up investment arms

The Chinese government has outlined some of its new plans for reforms in the State-owned sector, including allowing some of them to set up their own investment divisions.

Xu Hongcai, assistant minister of finance, says more than 110 State-owned firms currently administered by the State Owned Assets Supervision and Administration Commission are going to be allowed to set up their own investment arms, much like Singapore's Temasek.

"Under the new system, the State-owned Assets Supervision and Administration Commission can authorize these companies to be shareholders of State-owned enterprises operating core businesses. The companies will serve as a layer between the government and the market."

The government began testing this model earlier this year in the Province of Shandong.

Shandong Luxin Investment Holdings Group and Shandong State-owned Assets Investment Holdings have been set up to act as investment arms for state-run companies in that province.

Professor Zhang Chunxiao with the Chinese Academy of Governance says the creation of these types of investment companies will help with efficiency.

"State-owned enterprises turning into independent market entities will help maintain and increase the value of state assets. At the same time, state assets regulators on different levels will have more time to focus on how to better supervise and manage state assets. In this way, SOEs' operating efficiency is improved and so is the supervision efficiency."

Li Daxiao, chief economist with Yingda Securities, says he believes the move will also help stabilize the stock markets.

"State-owned enterprises dominate China's A-share market. The guideline to deepen reforms of state-owned enterprises offers these companies more freedom to ensure their own future development. The reforms will gradually enhance the SOE's efficiency and should increase the valuation of their shares. Consequently, the A-share market, particularly among the blue chip stocks, will be more stable."

The new SOE reform agenda also calls for a gradual move to mixed ownership of SOEs.

A deadline of 2020 to implement the changes has been laid out.

It comes as the profits of State-owned companies continue to narrow.