A private solution for China’s zombie company problem? Unlikely

Posted by: Admin | Posted on: September 24th, 2017 | 0 Comments

HONG KONG (Reuters) – China’s latest push to revive its bloated state-owned sector is set to pick up pace this year, with bankers and investors expecting possible spin-offs and asset sales to follow a key Communist Party Congress in October.

But the effort is likely to only involve a limited role for private money, even as Beijing has been promoting it as crucial for reforming state-owned enterprises (SOEs), according to people familiar with China’s plans.

Beijing would likely lean on cash-rich SOEs like China Life Insurance (601628.SS) and Citic Group Corporation to bail out the largest of the struggling companies, the people said.

They cited China Life stepping in to help China Unicom (0762.HK) raise $12 billion last month.

A limited role for private capital would raise questions about the depth of any overhaul of the SOEs. China hopes to speed up the reforms in order to meet ambitious economic growth targets and manage its corporate debt burden.

“The current model allows winners, companies doing better, to partially own those doing worse,” said Alicia Garcia-Herrero, chief Asia Pacific economist at Natixis. “In other words, this is a reshuffling of profit, loss among SOEs to a large extent.”

China Life is in talks with China Three Gorges New Energy, a unit of the country’s top hydropower developer, according to sources familiar with the matter.

They said it could also be critical to others in line for so-called mixed ownership, the injection of private capital into state enterprises. Those companies include China Southern Power Grid, China State Shipbuilding Corp and China Nuclear Engineering Construction Corporation..

China Life and Citic Group did not respond to requests for comment.

China’s state-run companies dominate the country’s key industries, from banking to insurance, energy, and telecoms. They retain an edge over their private rivals in investing both locally and overseas, in part thanks to easier financing.

But they also produce lower returns than their private counterparts and account for the biggest proportion of the bad loans on the books of the country’s banks.

The fund raising by Unicom, a state-owned telecoms group, had sparked hopes for the mixed ownership effort, as outlined in a 2015 government plan.

The partial privatization of Unicom in August, involving 14 investors, including the tech giants Alibaba (BABA.N) and Tencent (0700.HK), was welcomed by markets.

But, as Beijing balanced the need for cash with the need for control, China Life ended up with a 10.6 percent stake in the company, nearly a third of the total sold. New investors, including China Life, were given three of 15 board seats.

“For the SOE reforms to really take off, the ownership of these companies should be truly diversified both in terms of equity holding as well as governance,” said a Beijing-based lawyer who works with the National Development and Reform Commission, China’s top economic planning body, and private companies.

“That will be difficult to achieve: there is no incentive for private enterprises to invest in most of these state-owned firms,” said the lawyer, who declined to be named due to the sensitivity of the issue. “So it will be basically a case of using one SOE’s cash balance to try and revive another.”

The NDRC and SASAC did not respond to Reuters requests for comment.


Private capital is still expected to play an increasing role.

Responding to stagnating foreign direct investment and even a possible decline this year, China said last month that it would become more open to international investors – its latest statement about opening up to foreign cash.

That includes areas like banking, insurance and securities, where foreign ownership limitations have long grated on overseas companies trying to penetrate the China market.

And bankers – with one eye on next month’s Party Congress – expect the post-October wave of state enterprise reform to be more than just tie-ups. It could, some said, extend to smaller sales of unwanted, undervalued assets that may be more attractive to private investors, if they are allowed control.

The Party Congress “will be a very important inflection point,” Wei Sun Christianson, China chief executive and Asia Pacific co-chief executive for Morgan Stanley, said at a conference this month, referring to possible sales or spin-offs in the aftermath.

“All of that creates opportunities for investors.”

For now, the playing field is favoring the likes of China Life.

China Three Gorges New Energy, its next likely investment, according to the people familiar with the matter, is planning to raise about $1.5 billion from new investors.

Other potential investors in China Three Gorges, the next enterprise to receive outside cash, are also state-backed – and there is tepid interest from private investors in the company, said one of the people who has knowledge of the process.

We “will actively participate in the next round of mixed-ownership reforms,” China Life’s chairman, Yang Mingsheng, said at an earnings news conference last month.

But while some mixed-ownership candidates hold little appeal for private cash, some private players will be considering more than just returns when they weigh their role in China’s reform push.

“In China, you can’t always think about how to make money,” said one private investor who joined Unicom’s fundraising drive.

“You also need to take part in such reforms to show your support for the government’s policy.”

Reporting by Julie Zhu and Sumeet Chatterjee; Editing by Clara Ferreira-Marques and Philip McClellan

A celebrity listing crashes Japanese exchange’s party

Posted by: Admin | Posted on: September 24th, 2017 | 0 Comments

TOKYO (Reuters) – On Japan’s newest exchange, fame can pay off. That may not be so great for investors though.

Last month, Hikaru, a Japanese YouTube star so famous he can go by a single stage name, listed himself on Valu, a platform for people to raise money, often for personal projects or businesses, by essentially selling shares in themselves.

Unlike many crowdsourcing sites, which are platforms for people or businesses to raise money online from large groups of individuals, the exchange also allows the trading of those who list their “Valus” on the exchange.

That means that prices can rise and fall. And rise and fall Hikaru did.

Soon after listing, Hikaru, whose YouTube channel boasts 2.6 million subscribers, soared on the market as his fans dived in.

But then, just a week after going public, Hikaru and two friends, who go by the stage names Ikkun and Raphael, cashed out, according to officials from the exchange. That made his Valu drop precipitously, prompting howls of outrage on the Internet.

“I was a fan of Hikaru so I bought his ”Valu“ partly to support him and this is what happened,” said one tweet from someone calling themselves Hikaru Valu Victim. “I want my money back.”

Hikaru said in a video that he and his friends had been competing to make the most money off the exchange.

Many people listing on the exchange often cite altruistic aims for doing so – like one person raising funds for a project to encourage young people to move to rural Japan. But Hikaru has said that he listed on the exchange just to get attention.

He apologized for the move that may have ended his career, but noted that his actions did not constitute wrongdoing under the rules of the exchange. Those rules just say that members should not post untrue or deceptive information.

There is also nothing illegal about driving up Valus and cashing in, since they are not considered a financial product by the Financial Services Agency.

An official from the watchdog said it had been watching the Valu exchange, but would only advise it to inform investors that listings did not require financial disclosure.

Since the Hikaru debacle, Valu has added restrictions on the frequency of trading to prevent similar occurrences.

Hikaru and his two fellow YouTubers did not respond to requests for comment.

VAZ Inc, a company that represents Japanese YouTubers, including Hikaru and his two friends, said the star and friends made a total profit of about 50 million yen ($444,000) in bitcoins, the currency of the exchange.

He bought back an unspecified number of Valus in an effort to make amends, he said on Twitter, which VAZ and the exchange confirmed. But his Valus never recovered their highs.

His shares, which hit a peak of 0.090 bitcoin, or around $387, before he sold out, tanked to as low as 0.0075 bitcoin. They last stood at 0.014 bitcoin on Friday, or about $50 at the current bitcoin rate.

The exchange declined to comment on how much his supporters lost.

The incident was a rude awakening for Valu, which was launched this summer and has so far attracted about 60,000 members. Fund raisers sell Valus to the members, who are free to buy and sell their stakes.

Valu’s operator, a subsidiary of a company called Party Co, makes clear in its rules that listings have no intrinsic value.

There are also no requirements for reporting results, or any other information. There are no voting rights, or dividends.

That means the sole basis for rising shares is speculation.

“What Valus represent is a big question,” said Makoto Sakuma, a researcher at NLI Research Institute. “Despite their name, Valus have little economic fundamental value.”

Party Co says buying Valus should be seen as a donation or show of support rather than an investment.

“Our service can directly support people in any places across the globe,” said Kohei Ogawa, president of Valu Inc.

Kenta Toshima, 30, listed himself on the exchange to raise funds for equipment for a project to help rehabilitate elderly people with virtual reality.

He said he had raised about 200,000 yen from about 40 people within a few weeks after listing himself.

The exchange’s operators say they will keep going. But the backlash against Hikaru appears to have taken its toll on the YouTuber.

In early September, Hikaru posted a video in which he appeared with Ikkun and Raphael, and said he would halt his YouTubing activities.

($1 = 112.64 yen)

Additional reporting and writing by Hideyuki Sano