China's SOEs May See Ownership Overhaul in Wake of H-Share Plan

(Bloomberg) -- Some of China’s biggest companies may see a shake-up of their ownership structures if authorities follow through on reported plans to lift a ban on share sales by owners of state enterprises.

A trial that would raise or remove the limit on the public float of mainland companies listed in Hong Kong, known as H-shares, would mark another step in China’s push to open its markets and assets to foreigners. While the reported trial would only feature two companies, if fully enacted it would mean companies like Postal Savings Bank of China Co. and China Reinsurance (Group) Corp. could be permitted to issue all their shares in Hong Kong. In the case of Postal Bank, only shares accounting for $12 billion of the firm’s $48 billion market value are available to trade.

The move could change how some of the world’s biggest companies are managed and owned, said Fraser Howie, who has two decades of experience in China’s financial markets and co-authored the 2010 book “Red Capitalism.”

“It does give greater flexibility to major shareholders, state-owned enterprises, to raise funds by selling directly or just using those shares as collateral,” Howie said by phone. “It can partly feed into public-private partnership type ideas, into paying down debt. In that sense this is a good step. It gives C-suite executives greater flexibility how they manage their share capital.”

The State Council, China’s cabinet, will start a trial to increase the float of two Hong Kong-listed companies, according to a report Wednesday by Caixin, which cited unidentified people. There are about 250 Hong Kong-listed mainland companies, called H-shares, 97 of which are also listed on the mainland, according to data compiled by Bloomberg.

Capital Concerns

The ban was put in place at an early stage in China’s opening-up, as authorities believed there was a danger that allowing domestic companies to float all their stock in Hong Kong would trigger outflows, according to Howie.

“These companies were not trusted to have all their shares traded in Hong Kong at the time, partly for capital flight reasons,” Howie said. “Now five, 10, 20 years on, you are now at that stage where these companies are feeling some funding pressure.”

The reforms could lower the cost of capital for some Chinese companies, as the value of holdings in their listed units would be better reflected when used as collateral, said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA in Hong Kong. 

“This move allows the market to price the company in a more effective way,” she said by email. “Although this increases the supply of tradable shares in the market, we are not particularly worried about a large fluctuation for large companies, as the main ownership is usually state-related parties.”

An official from bourse operator Hong Kong Exchanges & Clearing Ltd. said the company doesn’t comment on media reports or market speculation. The China Securities Regulatory Commission didn’t reply to faxed questions seeking comment.

HKEX shares rose as much as 2.4 percent on Thursday, the most since Oct. 16. The company would stand to benefit if market turnover increases under the full float regime, said Hao Hong, the Hong Kong-based chief strategist at Bocom International Holdings Co.

--With assistance from Cindy Wang

To contact Bloomberg News staff for this story: Gary Gao in Shanghai at cgao58@bloomberg.net, Benjamin Robertson in Hong Kong at brobertson29@bloomberg.net, Amanda Wang in Shanghai at twang234@bloomberg.net.

To contact the editors responsible for this story: Sam Mamudi at smamudi@bloomberg.net, Ben Scent

©2017 Bloomberg L.P.

With assistance from Gary Gao, Benjamin Robertson, Amanda Wang