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