China Launches $11 Billion of Funds to Reform State-Owned Firms

China is taking another step to shape up state firms with a new fund aimed at reforming a sector that has emerged as the nation’s biggest source of credit risk.

China Reform Holdings Corp., a state-run investment firm, and a group of local state asset regulators have launched a suite of equity investment funds totaling 70 billion yuan ($11 billion) to help improve state-owned enterprises’ corporate governance and turn them more market oriented, the company said in a statement Thursday.

The announcement marks the latest move by Beijing to make the country’s cumbersome and inefficient SOEs, especially those at the local level, more commercially viable and financially healthier. A wave of bond defaults by state-linked firms since late last year and the ongoing debt saga at China Huarong Asset Management Co., a top bad-loan manager, have challenged long-held assumptions of government support for such firms.

The first batch of the newly established funds will total 35 billion yuan, which will be deployed in six cities including Shanghai, Shenzhen, Shenyang, Hangzhou, Xi’an, and Qingdao, said the statement, without offering further details about the specific uses of the funding.

China’s state asset regulator, including its local branches, oversees the vast majority of the nation’s SOEs, except for financial firms including banks and bad-loan managers such as Huarong that are overseen by financial regulators.

China’s state-linked borrowers, which have more than $4 trillion in outstanding onshore bonds, are facing increased scrutiny. Including its silence over Huarong’s debt woes, Beijing is sending a clear signal that poorly run SOEs won’t be automatically bailed out as President Xi Jinping seeks to reduce moral hazard in the country’s financial markets.

Deepening concern about the level of backing for state firms at the local level has in part caused new debt sales to plunge in financially weaker provinces such as Henan and Shanxi this year.

©2021 Bloomberg L.P.

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