May 12,2009

SASAC Acts on Concerns Over Management of $1 Trillion in SOE Overseas Assets

By CSC staff, Shanghai

As China's state owned enterprises (SOEs) accelerate their overseas acquisition of equity and resources, the total overseas assets owned by SOEs now amount to more than $1 trillion. How to manage these assets and protect their safety constitutes a large headache for the State-owned Assets Supervision and Administration Commission (SASAC), which is stepping up the formulation and promulgation of regulations for overseas property management.

SASAC Deputy Director Li Wei recently flew to Australia to research the status quo of recent acquisitions of Chinalco, China Minmetals, Wuhan Iron and Steel Group (WISCO) and Sinosteel there, as well as the local legal and regulatory systems.

Li says that with the implementation of the "going out" strategy and the increasing size of central enterprises'  foreign assets, strengthening the management of overseas property rights has become prominent on the agenda and rules on overseas state-owned property rights management must be mapped out as soon as possible.

Lu Youqing, Chinalco's deputy general manager, adds that "the importance of overseas asset management lies in unified management of risk prevention and financial cost control."

According to Xing Houyuan, director of the Department of Multinational Operations and the Research Center of Overseas Investment of the Ministry of Commerce (MoC), says that at present, the MoC and other ministries attach great importance to overseas property management of SOEs, and the MoC will join hands with the Ministry of Foreign Affairs to publish a series of training textbooks on cross-border operation.

MoC says that to enhance the safety of overseas projects involving property management, during the approval process of foreign investment projects it will mainly review the risks, such as political relations between the two countries, the foreign investment environment and related laws, instead of mainly focusing on operational feasibility and assets.

A SASAC study on SOEs in Australia and Singapore revealed problems, such as disorderly competition for overseas investment, a lack of management talent, poor evaluation systems, and compensation of dispatched personnel.

Different SOEs have used different methods to conduct overseas investment. Large SOEs are multilevel structures in general, and foreign owned bits of domestic SOEs can turn into "dark corners" of management. Problems existing in overseas assets such as complex property rights, flexible operations, non-standardized management, and informal regulation will become SOE "bleeding points."

In early April, SASAC brought together 12 central enterprises, including Chinalco and China Minmetals, to hold seminars on overseas property, exploring new modes of overseas property management. At the meeting, Lu Youqing gave a special report on the management of Chinalco's foreign assets.

From 2007 to 2008, Chinalco sped up its overseas investment, establishing Chinalco Overseas Holdings in Hong Kong in 2007 to specialize in overseas investment and development in non-ferrous metals and trading, as well as to unify management of Chinalco's overseas assets. In addition, it set up Chinalco Canada Holdings, Limited, in Canada, in charge of the specific operation of acquiring Peru Copper, and then as the main shareholder of Peru Copper.

Senior management personnel are sent out by the parent company. For example, Chinalco has dispatched a deputy general manager to Peru Copper, and also set up a representative office involved in the management of the acquired assets of the Peru Copper. Chief financial officers for overseas enterprises are  also appointed by the corporate headquarters.

Financial management of Chinalco's overseas enterprises is merged into the parent company, which conducts special management of tangible assets, equities, mineral rights, and intangible assets as well as cost budgets.

WISCO is adopting a "progressive" approach in overseas acquisition. During its overseas investment in mines this year, it invests gradually. If the development goes well, it continues to invest, thus reducing its risk.


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