Investors check share prices at a brokerage in Haikou, Hainan province, on Monday. Reports on planned State-owned enterprise mergers pushed the benchmark Shanghai stock index to a seven-year high of 4,527.40 points. [Photo/China Daily]

Stocks surge on belief that restructuring and mergers will create globally competitive giants

The nation may slash the number of central State-owned enterprises to 40 from 112 at present through large-scale mergers as part of a broad plan to reform the inefficient State sector, a report in China's official media said on Monday.

"The reorganization will initially focus on the commercial sector, especially companies in highly competitive industries," a source told the Economic Information Daily, which is owned by Xinhua News Agency.

"Resources will be further allocated to large companies to prevent vicious competition, similar to what happened in the high-speed rail sector when CSR Corp and CNR Corp competed on bids for international projects."

However, the State-owned Assets Supervision and Administration Commission on Monday refused to confirm the news.

It said in a statement that it has taken note of recent media reports about mergers and restructuring of central SOEs on a large scale. "But we have not given any interview to the media on this, and thus could not confirm the news," it said.

Nonetheless, the report pushed China's stock market to a new seven-year high on Monday, with PetroChina Co, China Petroleum & Chemical Corp, COSCO Shipping Co and Baoshan Iron & Steel Co Ltd leading gains, all jumping by the daily limit of 10 percent.

The Shanghai Composite Index rose more than 3 percent to 4,527.40 points. The index has risen 95 percent in the past six months, the most among benchmark indexes globally.

Analysts said that the current index level is just the start of the stock market boom, and they urged investors to watch for further measures that will support the country's economic growth.

State-owned enterprises have always been an important element of China's economy, but the State sector has long been seen as lagging behind private-sector companies when it comes to performance, because of a lack of innovation and competitive pressures.

SOE profits fell in the first quarter, sliding 8 percent year-on-year to 499.73 billion yuan ($81.52 billion), the Ministry of Finance said in a statement on its website.

Four key sectors－steel, nonferrous metals, coal and petrochemicals－depressed the overall profits of the State sector. If those four sectors were excluded, profits would have been basically flat, the statement said.

Li Jin, chief researcher with the China Enterprise Research Institute, said that mergers and restructuring will be important factors in raising the performance of the lumbering State sector.

"There will be a new round of mergers and reorganizations in the State sector, as the challenge that SOEs face today is largely from the global market," he said. "Combinations of SOEs will make them more competitive than their rivals in the overseas market and avoid predatory mergers and acquisitions by international companies."

The merger of CNR and CSR can create a $26 billion company, strong enough to win global rail deals from rivals such as Germany's Siemens AG and Canada's Bombardier Inc. Another possible merger between China Railway Group Ltd and China Railway Construction Co Ltd is likely in the second half of this year.