CHINA/SOE REFORM: A DALIAN PERSPECTIVE

UNCLAS SECTION 01 OF 02 SHENYANG 000174 SIPDIS SENSITIVE SIPDIS STATE FOR EAP/CM PSECOR, JYAMAMOTO TREASURY FOR OASIA RDOHNER, BCUSHMAN USDOC FOR 4420/ITA/MAC/CEA/MCQUEEN USTR FOR BHATIA/STRATFORD/WINTER/ALTBACH/MCCARTIN E.O. 12958: N/A TAGS: ECON ENRG EINV EPIT EFIN CH SUBJECT: CHINA/SOE REFORM: A DALIAN PERSPECTIVE REF: BEIJING 005639 ¶1. (SBU) Summary. Dalian's State Assets Supervisory and Administration Commission (SASAC) is, like other SASAC entities throughout China, seeking to reform its thirty-eight state-owned enterprises (SOE),by improving internal management, reducing the overall number of companies, and changing ownership structures, both through joint ventures and through stock-listing of companies. Dalian SASAC controls a variety of companies in critical areas such as petrochemicals, transportation, and power generation which complicate the emerging ownership picture. Dalian SASAC Deputy Director, Yu Baohe, said the overall goal is to develop four industrial bases--petrochemical, shipbuilding, equipment manufacturing and information management software--around Dalian's rapidly developing logistics and transportation center. He also said that the total number of assets would be reduced to enhance efficiency. End Summary ¶2. (SBU) In discussions with Econ Minister Counselor, Mr. Yu cited several different industrial companies that are currently undergoing changes in ownership structure. He said SASAC's goal is to achieve a variety of ownership structures tailored to the needs of particular industries. For example, Dalian Heavy Industries-Dalian Crane Works Group Ltd., a manufacturer of large cranes, wind turbines and cargo handling equipment, is trying to attract strategic investors to purchase thirty-five percent of the overall shares, with the remaining sixty-five percent being secured by its existing assets. Bidding for the shares is on-going. Mr. Yu mentioned several financial houses interested in the project, including Bain Group, JP Morgan Chase and the World Bank's Rural Finance Corporation. Another key Dalian SASAC asset, Dalian Machine Tool Group is also pursuing capital via a share offering, planning to list on the Hong Kong Exchange. ¶3. (SBU) Yu mentioned several other companies which are pursuing joint venture arrangements with foreign firms. He noted that one of the earliest of these operations is Goodyear's joint venture with Dalian Bingshan Group, of which Goodyear owns seventy-five percent. Yu said that Dalian Bingshan is presently negotiating with Japan's Sanyo Corporation to establish a similar arrangement in the manufacture of air conditioners. ¶4. (SBU) While these negotiations are fairly straightforward, Yu pointed out that the nature of the industry can sometimes complicate joint ventures. As an example, he mentioned Wafangdian Bearing Group's negotiations with SKF, the world's largest bearing manufacturer. SKF would like to establish the joint venture via a stock acquisition, but since Wafangdian is a key defense industry supplier, foreign investors are not allowed to hold a controlling interest. Yu said the final ownership ratio is still under negotiation. ¶5. (SBU) Other key developments in Dalian include the West Pacific Company, an oil exploration and development joint venture involving Dalian SASAC, Sinopec and France's Total, a joint venture for port development with Maersk-Sealand, and Dalian Ship Heavy Industry's Lushun Shipyard. Yu pointed out that other aspects of development in public transportation, thermo-power, and infrastructure are going to remain fully state owned. ¶6. (SBU) While overall trends for development are excellent, Yu pointed out that some companies will be allowed to go bankrupt and their assets will be liquidated. SASAC's goal, he said, is to reduce the total number of Sompanies owned from the present thirty-eight to a target of twenty. While some consolidation will occur, most of the reductions will come from outright sale of companies or their remaining assets. Stock listed companies will be sold in the listing markets, but non-listed companies will be sold through the Dalian Ownership Exchange, a Dalian SASAC subsidiary. ¶7. (SBU) The Dalian Ownership Exchange is one of two such exchanges in Liaoning Province and is responsible for Dalian's SOEs. The Shenyang Exchange is responsible for the rest of Liaoning Province. (Note. Only Liaoning and Guangdong Provinces have multiple exchanges at the provincial level. There are three central level exchanges located in Beijing, Shanghai, and Tianjin. End Note) The Dalian Exchange disposes of assets via a web-based auction system. Mr. You told us that anyone is welcome to bid on the assets. SHENYANG 00000174 002 OF 002 He said that SOEs being liquidated must use the exchange, and that private persons or companies were welcome to use it if they choose. ¶8. (SBU) Auctions last for a period of twenty days, and will be renewed if no qualifying bids are received. In order to bid, one simply logs on to the site and sets up a user account. There are no restrictions as to who may bid. Mr. Yu said the point of using the web is not only to make things convenient, but also to ensure that auctions are not manipulated. A demonstration of the system showed something looking very much like real estate in an E-Bay mode. The website is located at www.daee.cn. ¶9. (SBU) Mr. Yu said that changes in ownership did not entail a reduction in assets under SASAC's control. On the contrary, total asset value has increased by thirty percent to a total of USD 14.8 billion. Yu said that net revenues to SASAC were up by sixty percent year on year. He went on to say that he expected Dalian to continue to outperform both other local economies and the national economy. WICKMAN