September 08,2009

China Fad: Cash Rich SOEs Swallowing, Reorganizing, and Allying with Private Companies

By CSC staff, Shanghai

Chinese state-owned enterprises (SOEs) are flush with cash, thanks to stimulus policy capital and the banks' profligate lending, and they have been snatching up, "reorganizing," smaller private firms that have not been the beneficiaries of the government's largesse, particularly in the fields of iron and steel, coal, and energy. Not all such deals have been predatory, though.


State-owned Shandong Iron and Steel Group and the privately operated Rizhao Iron and Steel jointly set up Shandong Iron and Steel Group Rizhao Corporation, Limited. Shandong Steel holds a 67% stake, while Rizhao Steel holds 33% of net assets after assessment. Both sides are keeping mum about Shandong Steel's investment.


Beijing has expressed its disapproval of expanding any iron and steel production projects, particularly in inland areas, so Shandong, anxious to develop its iron and steel industry, is taking over the private steel firm Rizhao Steel, with production capacity of 20 million tons, to continue development of its coastal area,.


In coal mining, China National Coal Group (CNCG) signed a reorganization agreement with Shanxi Gold Ocean Energy Corporation (SGOEC), one of the largest private enterprises in Shuozhou, Shanxi. CNCG is investing 3 billion yuan to take a 60% stake in the newly established joint-stock company, while SGOEC holds 38.68% and Shanxi Coal Import & Export Group took 1.32%. SGOEC has long been seen as an object for coal consolidation by the local government.

This is a common "shareholding approach" in the current consolidation of Shanxi coal resources, with local private firms becoming minority shareholders of state-owned miners.


In May, Greenland Group, a private Shanghai-based property developer and energy company, signed a strategic cooperation agreement with CNCG to set up a coal distribution and reserve base at Luojing wharf in Shanghai for transit, storage, screening, wholesale, and retail. CNCG will provide a total of 68 million tons of coal to Greenland in the next five years, while Greenland is responsible for logistics and trade services, expanding regional markets in Shanghai and East China, and establishing a long-term stable distribution network. Over the course of the contract, the coal supply will increase from 10.8 million tons in 2010 to 23.4 million tons in 2014. CNCG regards Greenland as a key client and has promised adequate supply and competitive prices in the future.


Energy has been a second pillar for Greenland in recent years, with sales income of nearly 10 billion yuan in 2008. The company has a fleet of coal bulk carriers and oil tankers, with a large-scale logistics coal base in Lianyungang, and is building large-scale oil storage base and pier in Waigaoqiao Bonded Zone in Shanghai. Greenland Chairman Zhang Yuliang says the firm's energy sector is expected to reach sales income of 15 billion yuan this year.


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