China has launched the biggest private equity fund to date: the China State-owned Enterprises Restructuring Fund aims to raise a whopping 350 billion yuan ($52.5 billion; €46.7 billion) to restructure state-owned enterprises, according to the nation’s state-assets watchdog, the State-owned Assets Supervision and Administration Commission (SASAC).
Head of SASAC Xiao Yaqing said in a statement: “Among SOEs controlled by the central government, some have excess capacity, while others are suffering from a severe lack of capacity. Setting up this new fund will help concentrate state capital on strategic and forward-looking industries.”
The fund, which will be managed by SASAC, will focus on restructuring assets relating to national security as well as strategic reserves of natural resources, oil and gas pipelines, power grids, and telecommunication infrastructure, according to the SASAC statement.
Capital amounting to about 37 percent of the 350 billion yuan fund has already been collected. According to a report from government-owned Xinhua news agency, about 131 billion yuan in funding was provided by 10 state-owned companies, including integrated logistics and investment management company China Chengtong Holdings Group, telecom company China Mobile, rolling stock manufacturer China Railway Rolling Stock Corporation, and oil and gas company China Petroleum & Chemical Corporation, also known as Sinopec.
SOE reform has been a key initiative of the Chinese government in recent years as China experiences slowing economic growth and a growing pile of debt from both corporates and government-owned companies. According to China’s Ministry of Finance, the total debt owed by SOEs has risen to 77 trillion yuan as of September 2015, compared with 71.8 trillion in August – an increase of almost 6 trillion yuan or nearly $1 trillion in a month. Data from credit ratings agency Moody’s shows that the ratio of China’s SOE debt to gross domestic product (GDP) has risen from 100 percent in 2012 to 115 percent in 201, and represents the lion’s share of China’s debt to GDP.
Although SOEs contribute a third of economic output and employment, debt-bloated SOEs take up nearly half of bank lending (37 trillion yuan) and more than 80 percent of corporate bond financing (9.5 trillion yuan), French bank Société Générale found.
In May this year, China’s State Council said it would streamline centrally-administered SOEs through mergers and industry consolidation.
The council also issued an ultimatum to “zombie enterprises” or highly indebted companies to make their business models more efficient. The council has drawn up a schedule to phase out all 345 large and medium-sized zombie enterprises in three years.