SASAC, the Big Boat that Tugs and be Tugged

There is a news piece about the Chinese SOEs (state-owned enterprises). If you are not familiar with how the Chinese system operates, it would be quite inspiring.

MoF as an Activist Investor: What A News Piece Reviews

The news is about the negotiation between the SOEs and SASAC (State-owned Assets Supervision and Administration Commission of the State Council, a long name that you should remember). SASAC is a government agency that manages the SOEs worth $1 trillion -$4 trillion, including major resource-based, government-monopolized Fortune 500 companies.

The story goes that because of diminishing profit in ‘08 ($100 billion or 30% below ‘07 level, after 30% increase in ‘07), SOEs are pleading for a deduction in budgeted profit turn-in, but SASAC is not relenting, stating that the money is of crucial use, for things like capital investment in strategically important SOEs and capital replenish for the weakened state-owned utilities and airlines. MoF weighed in to support SASAC’s view.

I have thought that Chinese companies hold too much cash, and paying out extra cash to relocate the capital may be a good idea, despite of the less efficient capital market. (As a reference point, share buyback have been a popular move for S&P 500 corporations in recent years.) Since the CEOs are increasingly richer and more powerful, most individual investors could only act as dividend takers.

It is a completely different case when the government steps in. It must be a tough act for the SOEs.

The Long Value Chain

What’s more interesting is the nexus of money of the colossal Chinese SOE system. I’ve raised the issue when looking at China Shenhua, a partially-listed, state-owned coal and utility company.

Let me belabor the point with yet another example – PetroChina.

• PetroChina, Limited is a public oil & gas company listed on Shanghai Stock Exchange, Hongkong Stock Exchange, and ADR-ed on NYSE, with ‘08 sales of RMB1 trillion and book assets of RMB1 trillion.
• The above is 87%-ly owned by PetroChina Corporation, who is not a mere holding company but one with a much larger size, with ‘08 sales of RMB9 trillion and book assets of RMB14 trillion. It is ranked #38 of Fortune 500.
• The above is a SOE managed by SASAC, thus 100% owned and managed by the Chinese government.

How the government runs the SOEs such as PetroChina? You may ask. The answer is quite complicated, but here’s a quite telling executive order. The order mandates that SOEs shall do a separate book-keeping with the government, with items including budgeted profit turn-in, capital gains from selling state-owned shares (which is another complicated matter that drives the vicissitude of the Chinese stock market), etc.

In return, I assume that the government would (have to) ensure the overall profitability, in one way or another. What’s socialism is about otherwise?

Should you Invest with China, Inc.? Individual Investors’ Perspective

If you are an individual investor asking for stock advices on PetroChina and its ilk, I don’t know what to tell you – I am not prepared for this. The success very much depends on how well you read the multi-trillion China, Inc. and how it works. In other words, besides reading the 10Ks of the listed companies that is only a tip of the iceberg, you should read the much bigger (somewhat opaque) book behind.

The good news is that instead of an invisible hand, the hand is visible. The bad news is that it is quite unpredictable: imagine to tell the fortune of a child with powerful parents, who would presumably take care of his interest. But it is a big family and parents are busy with a range of considerations. That child - though spoiled a bit - may not be the preferred from time to time.