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Brokers, investors back Chinese state firms, toeing Beijing’s line

SHANGHAI: China’s biggest brokers and investors are following Beijing’s policy of building a market with “Chinese characteristics”, touting the value of the state-owned sector of the economy, and seeing the stock prices of these companies plummet. causing a rise.

After China’s top securities regulator called for a better understanding of state-owned enterprise (SOE) shares, brokerage firms rushed to recommend “undervalued” stocks of state-owned enterprises (SOEs) to clients. Fund managers are actively promoting sector-focused exchange-traded funds (ETFs). Intrinsic value earlier this week.

Over the past three years, China has stepped up its efforts to reform SOEs to make them leaner and stronger, but they say SOEs are inefficient and tend to overlook the interests of private shareholders. Perceptions in the West remained largely unchanged.

The support follows President Xi Jinping’s pledges last month to “steadily integrate and develop the public ownership system,” accelerate the restructuring of the national economy, and make state-owned enterprises “stronger, better and stronger.” It’s about making it bigger.

SOE shares outperformed the broader market this week. The index tracking central state-owned enterprises is up more than 3% compared to the broadly flat benchmark Shanghai Composite Index.

State-owned China Railway Construction Co. has surged about 11% this week, while China Communications Construction Co. has surged about 25%, putting it on track to achieve its biggest weekly profit in seven years.

China Securities Regulatory Commission Chairman Yi Huiman urged the securities industry to explore a unique system of valuing different types of stocks to better allocate resources.

“Excessively low valuations of listed SOEs are hampering their ability to develop through additional equity sales, M&A, or restructuring,” Shenwan Hongyuan Securities said in a report this week promoting SOE’s revaluation.

Central state-owned enterprises under the control of the central government of China trade at 9 times higher profits compared to 16.8 times the general market and 43.9 times the public private companies. In other words, China’s private companies are valued about five times better than their national peers.

Investing in state-owned enterprises is safe and potentially rewarding because these companies hold the key to China’s national security and innovation amid a “power struggle,” said Shenwan Hongyuan. rice field.

Industrial Securities said that the central SOE is the main force in China’s pursuit of technological independence and hegemony, and SOE reform and innovation are “the driving force for reassessment.”

Securities firms such as Haitong Securities, CITIC Securities and Guotai Junan Securities have also joined the chorus in support of the revaluation of state-owned enterprises.

To support capital inflows into the state-owned sector, the China Stock Index this month released a number of new indices covering state-owned technology, energy and high-dividend companies.

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

Bosera Asset Management Co said in a statement Thursday that “the window is open for SOE’s re-evaluation,” promoting an ETF based on the CSI Central-SOEs Tech Innovation Index.

But the system, with its Chinese characteristics, clashes with Western standards, some overseas fund managers said.

U.S. asset manager WisdomTree Investments, which manages a China-focused ETF that splits SOEs, says returning profits to shareholders is less of a priority for these companies and more loyal to the government’s wishes. thinking about.

As China continues to grow, eventually “private companies will generate better profitability than state-owned enterprises,” said Liqian Ren, who manages WidsomTree’s China investment.

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

“Even if a company is wildly successful, it is not enough. It’s a matter of asking them to do it,” Masi said.

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