More about riches than reform

In late February 2014, China Petroleum & Chemical Corp (Sinopec) announced that it would give private investors an opportunity to invest in its domestic marketing and distribution operations. Many took this as an initial, positive sign that the government truly wanted to increase the role of private investment in the economy in line with policy pronouncements made during and following the Chinese Communist Party’s November 2013 18th Congress Third Party Plenum, and to reform state-owned enterprises (SOEs). The opening of Sinopec to foreign investment seemed to be based on the view that foreign investment provided a way to increase efficiency, decrease bureaucracy, and experiment with different SOE reforms.

Still, even from the time of Sinopec’s announcement, it was clear that the Chinese government had no intention of allowing majority foreign involvement. Specifically, total private investment was limited to 30 percent with restrictions seeming to be the order of the day for other strategic sectors, too. Such limited foreign stakes, constrained in both scale and scope, seem to have little likelihood of transforming behemoths like Sinopec. Even overlooking the critical fact that control would remain with the Chinese government or Chinese SOE, there is no sign that moneys raised from foreign investors—e.g., through share offerings—would be used for restructuring Chinese SOEs, which often are conglomerates running disparate, unrelated businesses such as convenience stores, property, hotels, power plants, and construction. Furthermore, it is entirely possible that any proceeds received from foreign investors would be used to fund more acquisitions, expand capacity in areas that do not necessarily need more capacity, or finance state-directed projects. Finally, new “foreign” investors actually might be state investors who likely would not bring new ideas, methods, or disciplines. Ultimately, it seems that the decision to offer foreign investors stakes is more about riches than reform.