Brokers, investors support Chinese state-owned enterprises and follow Beijing’s lead

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SHANGHAI: China’s top brokers and investors are praising the value in the state-owned sector of the economy as they follow Beijing’s lead in building a market “with Chinese characteristics”, causing a big jump in these companies’ share prices.

Brokers are rushing to recommend “undervalued” shares of state-owned companies (SOEs) to their clients, while fund managers are actively promoting industry-focused exchange-traded funds (ETFs) after China’s top securities regulator called for a better understanding of SOEs. net asset value early this week.

China has stepped up its efforts over the past three years to reform its state-owned enterprises to make them leaner and stronger, but that has done little to change the West’s perception that state-owned enterprises are inefficient and tend to overlook the interests of private shareholders to see.

The approval follows President Xi Jinping’s pledge last month to “unwaveringly consolidate and develop the public property system”, accelerate the restructuring of the state’s economy and make state-owned enterprises “stronger, better and bigger”.

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Shares of state-owned companies outperformed the broader market this week. An index tracking central state-owned companies has gained more than 3 percent, compared to the near-flat benchmark Shanghai Composite Index.

State-owned China Railway Construction was up about 11 percent this week and China Communications Construction was up about 25 percent, on track for its biggest weekly gain in seven years.

Yi Huiman, chairman of the China Securities Regulatory Commission, urged the securities industry to explore an idiosyncratic system of valuing different types of stocks so that resources can be better allocated.

“Extremely low valuations of publicly traded state-owned companies have hampered their ability to develop through additional share sales, mergers and acquisitions or restructuring,” Shenwan Hongyuan Securities said in a report this week promoting the revaluation of state-owned companies.

State-owned central companies, which are controlled by China’s central government, trade at 9 times earnings, compared to 16.8 for the broad market and 43.9 for listed private companies. That means private companies in China are valued about five times higher than their peers.

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Investing in state-owned companies is safe and potentially rewarding, as these companies are key to China’s national security and technological innovation amid “power rivalries,” Shenwan Hongyuan said.

Industrial Securities Co said central state-owned enterprises are the main force in China’s quest for technical self-reliance and supremacy, so state-owned enterprise reform and innovation is “the engine of revaluation.”

Other brokers, including Haitong Securities, Citic Securities and Guotai Junan Securities, joined the chorus of support for the revaluation of state-owned companies.

To help channel capital into the state sector, the China Securities Index Co this month released a series of new indices targeting state-owned companies in technology, energy and high dividends.

The state-owned index publisher is also rolling out a range of state-focused corporate bond indices to encourage fund managers to create ETFs.

“The window is opening for revaluation of state-owned companies,” Bosera Asset Management Co said in a statement on Thursday, promoting an ETF based on CSI Central-SOE’s Tech Innovation Index.

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But this system with Chinese features clashes with Western criteria, some foreign fund managers said.

US asset manager WisdomTree Investments runs a China-focused ETF that breaks down state-owned companies, believing that shareholder returns are not the top priority for these companies and that they are more adhering to government wishes.

As China continues to grow, “private companies ultimately generate better profitability than state-owned companies,” said Liqian Ren, who manages WidsomTree’s Chinese investments.

Thomas Masi, partner and equity portfolio manager in New York at GW&K, said he too largely avoids Chinese state-owned companies for fear of conflicts of interest.

“If the company is super successful, that’s not enough for us. What we’re asking is will the shareholders benefit or will the government ask the company to use cash in some way or do the conscription,” said Masi .

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