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Eyes on oil titans as SOE reforms gather steam
Last Updated: 2014-03-20 21:23 | Global Times
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Two of China's largest oil conglomerates were thrust under the spotlight recently after announcing plans to open up their businesses to social capital amid the central government's drive to promote a mixed-ownership economy. Although the market's reaction to this news has been largely positive, it remains to be seen whether such reforms can really break the State's oil monopoly and improve efficiency in the country's energy sector.

China National Petroleum Corporation (CNPC) plans to bring in outside investors to finance its upstream oil and gas exploration projects, and each project could be set up as an individual company to draw social investment, with majority stakes held by CNPC, Zhou Jiping, chairman of the oil giant, said on the sidelines of the annual session of the National People's Congress in March. Zhou also mentioned that the top energy producer will open six of its business divisions - such as unused reserves, unconventional oil and gas resources, pipeline construction, refining and financing - to private capital.

CNPC's move follows similar steps by China Petrochemical Corporation, also known as Sinopec Group, which announced plans last month to restructure its downstream distribution business by allowing private and social capital to claim up to 30 percent of its shares. Fu Chengyu, chairman of Sinopec, also said during the two sessions meeting in Beijing that in addition to its retail business, the conglomerate also intends to implement a mixed-ownership structure at its shale gas operations.

On February 20, one day after the announcement of its reorganization scheme, Shanghai-listed shares of Sinopec-controlled China Petroleum & Chemical Corporation surged by the 10 percent daily limit to 5.17 yuan ($0.83). The stock went on to gain 18.36 percent during the first 13 trading days after restructuring news broke, with its price at one point rocketing to a new 10-month high. Related stocks were buoyed as well, with the oil sector outperforming the broader market during the period as Sinopec Shandong Taishan Petroleum Co and Shanghai Lonyer Fuels Co both hit the daily limit several times.

Although reform guidelines published shortly after the Third Plenary Session of the 18th Communist Party of China Central Committee called for State-owned enterprise (SOE) reforms and diversification of SOE ownership, no specific measures were put forward at that time to accomplish these goals. As the first SOEs to announce mixed-ownership plans with clear-cut objectives, Sinopec and CNPC could set guiding examples for reforms across the rest of China's State sector.

The market seems to have high hopes for the arrival of social capital, which many view as an inevitable first step toward ending the monopolization of the oil industry and pushing State oil giants to become more efficient. But while these restructuring plans may be the clearest we've seen to date, the details are still very much on the drawing board. Many uncertainties remain as to how effective these maneuvers will be and how private investors can play a role in the reform process.

This is not the first time China has moved to shake up monopoly industries by opening the door to private players. For example, over the past decade relevant authorities have gradually widened market access to the civil aviation sector. Yet, private airlines are struggling to compete against State rivals, all of which enjoy greater access to market resources, stronger regulatory support and even subsidized fuel from time to time. The same is true for some privately held gas stations, which often find themselves at a disadvantage against State peers. Thus, fears over government biases and market obstacles may offer some explanation as to why private domestic investors seem more hesitant than their foreign counterparts to tap monopoly industries at present.

Another big question, of course, is how much power CNPC and Sinopec will cede to private investors. It remains unclear whether stake sales will change the operational mechanisms within SOEs or whether the introduction of private capital is simply a strategy to relieve funding pressures. If private investors are not involved in management, then the mere introduction of social capital will not be enough to improve efficiency, let alone cure any of the other problems facing SOEs.

Fundamentally, the point of ownership diversity is to improve efficiency and create more market-oriented competition between SOEs. Relevant authorities should carefully consider all measures which allow private investors to play a meaningful role in these enterprises. Failure to do so could rob these reforms of their meaning.

The author is a reporter with the Global Times.

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