New mechanism to ensure more funding options for businesses with sound prospects

China will use independent State-asset investment and operating companies to ensure flexible capital flows among businesses and to reduce direct intervention in State-owned enterprises, as part of its proposed reforms for the sector, according to sources close to the matter.

Zhao Changwen, director of the department of industrial economy at the State Council Development Research Center, who has read the guidelines for SOE reform, said on Tuesday that the State-asset investment and operating companies, similar to asset-holding firms, would be commercially oriented investors and would not be replicas of the State-owned Assets Supervision and Administration Commission, an administrative agency that oversees 150,000 SOEs.

The long-awaited guidelines have got the necessary approvals and will be released soon, SASAC said on Monday.

"The State-asset investment and operating companies will not be another layer between SOEs and SASAC. Under the new system, SASAC can authorize these companies to be shareholders of SOEs operating concrete businesses. The central government could also appoint them as shareholders of SOEs," Zhao said.

Such companies will not be directly involved in running the businesses and will perform asset management functions like Singapore's Temasek Holdings Pte. The Singaporean government's investment arm, which has a wide investment portfolio, allows its board of directors to make independent business decisions, experts said.

However, Zhao stressed Temasek is just one of the many models that China is considering. China will also learn from other models such as Norway's Government Pension Fund, and other sovereign wealth funds.

"There is a myth that SOEs will turn good as long as they adopt the Temasek model. That's not true," he said.

"The main job of these State-asset investment and operating companies is equity management. They will buy and sell equities in such a manner that State capital can enter or exit specific industries," Zhao said. "Some State firms will be cleared out, some will be restructured and merged, and some new ones will be created."

The move also seeks to end State capital for industries plagued by overcapacity and instead deploy it into sectors with promising outlook and good returns, he said.

Analysts said such asset management companies are essential for SOE reforms. Under the current scenario, the SASAC is engaged in the micro-management of individual SOEs. But whether the move can help transform the culture of SOEs is still a question for discussion.

"Temasek is a true corporation and except for the direct appointment of top officials, it functions as an independent entity for most purposes, including hiring talent. Investment is split among firms in Singapore, Asia and Western countries," said Qi Junjie, a commentator.