Growing Moves in China to Restructure Companies
and Foster New Industries
Eiichi Sekine
Senior Analyst,
Nomura Institute of Capital Markets Research

I.

Making Chinese industry more competitive one of the main
aims of the 12th Five-Year Program

1. What is China's 12th Five-Year Program?
At the Fifth Plenum of the 17th CPC Central Party Committee, held from 15 to 18
October 2010, China's vice-president, Xi Jinping, was elected vice-chairman of the
CPC's Central Military Commission. As such, he is likely to become China's nextpresident at the 2012 Communist Party Conference.
On the economic front, the Plenum approved the Central Committee's Proposal on
Formulating the Twelfth Five-year Program ("Proposal"), the full text of which was
published on 27 October. Originally referred to as a five-year "plan," readers may not
be familiar with the term "program." The old term has been replaced by the term"program" ever since the 11th Five-Year Program (2006–10).
The main reason for the change of term was that "program" was considered tomean a set of general guidelines, whereas "plan" was considered to strongly imply
achieving a numerical target. In order to rectify the problems created by traditional
five-year plans in their zeal to achieve numerical targets (e.g., overproduction,
duplication of investment, and disparities), the 11th Five-Year Program sought to deal
with some of the disparities that had arisen as a result of earlier plans (rather thansimply pursue high economic growth and GDP targets), while reconsidering thegovernment's role and making the most of market mechanisms.
The change of name also reflects the strong influence of the Hu-Wen government's"concept of scientific development" with its emphasis on the quality (rather than thequantity) of economic growth and on populist economic and social policies.

2. Outline of the Proposal
The main objective of the Proposal is how to increase the rate of change of China's
economic development model in the five years from 2011. In order to achieve this, theProposal aims (1) to strategically restructure the economy ("main battleground"), (2)to make technological progress and innovate ("main pillar"), (3) to ensure and1

Nomura Journal of Capital Markets Spring 2011 Vol.2 No.4

improve people's standard of living ("departure and arrival points"), (4) to conserve
energy and protect the environment ("key objectives"), and (5) to reform and open up
the economy ("powerful driving force").
The Proposal consists of 12 sections with a total of 56 subsections: (1) changing
China's economic development model, (2) stimulating domestic demand, (3)developing agriculture and farming villages, (4) making China's industries morecompetitive, (5) increasing urbanization, (6) protecting the environment andconserving energy, (7) fostering science, education and training, (8) improving public
services, (9) fostering China's cultural development, (10) reforming the economy, (11)opening up the economy, and (12) gaining universal support for the Proposal's aims.
The aim of making China's industries more competitive marks a move away fromrelying on low-cost materials and labor in an attempt to change the status of Chinese
manufacturing, restructure Chinese industry, and to make the country a technologicalsuperpower.

3. Making China's industries more competitive
The section on making China's industries more competitive comprises six policies:(1) restructuring Chinese manufacturing and raising its game, (2) fostering thedevelopment of strategic new industries, (3) increasing the rate of development of theservice sector, (4) creating a modern energy industry and a better transport system, (5)improving information technology across the board, and (6) fostering the developmentof China's marine economy.
The policies of restructuring Chinese manufacturing and raising its game andfostering the development of strategic new industries involve not only restructuring
the corporate sector and creating new industries but also ensuring that debt and equity
markets, both in China and overseas, are able to meet the financial needs that willarise in the process of making China's industries more competitive (Figure 1).
In Chapter II we consider the government's policies to encourage corporate
restructuring, while in Chapter III we consider its policies to foster the developmentof new industries. In Chapter IV we analyze the different types of manufacturingindustry in China and their profitability, and see just how important strategic
investment by both private-sector Chinese companies and foreign companies is. In
Chapter V we take a closer look at moves to increase the enterprise value of central
state-owned enterprises (i.e., those run by the central government). Finally, in Chapter
VI, we examine the government's reassessment of the role foreign companies play inraising profitability and its new approach to reforming state-owned enterprises, andconsider their implications for Japan.

Growing Moves in China to Restructure Companies and Foster New Industries

2

Figure 1: Policies aimed at making Chinese industry more competitive
Objective

Policy document

Increase industrial

Proposal on Formulating the Twelfth
Five-year Program

competitivenessEncourage corporate
restructuring

Opinions on Promoting Enterprise
Mergers and Restructuring

Publication

Gist and key areas
Restructuring and raising the level of Chinese

10/27/2010 manufacturing, and fostering and developing
strategic new industries
Six sectors (automobiles, iron & steel, cement,
9/6/2010 plant & machinery, electrolytic aluminum, and rareearths) designated as key industries
Seven sectors (energy conservation and theFoster new industries

Decision to Accelerate Nurturing andDeveloping Strategic Emerging
Industries

environment; biotechnology; new materials; next10/10/2010

generation information technology; high-value-added
equipment manufacturing; new types of energy; andalternative energy vehicles) designated as strategic
new industries that need to be fostered
Range of activities in which private-sector capital
may be invested extended to the following six

Attract private-sector
capitalSeveral Opinions of the StateCouncil on Encouraging and Guiding
the Healthy Development of Private
Investmentareas: basic industry and basic infrastructure; public
5/13/2010

works in urban areas and the construction of social
housing; public welfare (healthcare, education,social welfare, and culture); financial services;
commerce, trade and distribution; and defenserelated science and technology

Attract foreign capital

Source:Several Opinions on Further
Improving the Work of Foreign
Capital Utilization

Industrial Catalogue for Foreign Investment revised
4/6/2010(e.g., high added-value manufacturing, high-techindustries, alternative energy, and energy
conservation and the environment)

Nomura Institute of Capital Markets Research, based on State Council data

II. Government's policies to encourage corporate restructuring
1. 12th Five-Year Program's approach to corporate restructuring
The Proposal puts forward the following five policies for restructuring Chinese
manufacturing and raising its game.
The first sees restructuring as the key to the future of Chinese manufacturing andemphasizes the need to improve both product quality and quantity, increase supply
chain capacity, and weed out obsolete industries.
The second is to foster the development of advanced equipment manufacturing,
restructure basic material production, restructure the production of consumer goods
and raise its game, and raise the level of Chinese manufacturing in general.
The third is to raise the level of R&D and system integration in the fields of basic
industrial technology, basic materials, and basic parts by means of key national
projects intended to develop key technological equipment and policies.
The fourth is to help companies adopt new technology to enable them to develop
new products and brands.

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Nomura Journal of Capital Markets Spring 2011 Vol.2 No.4

The fifth is to encourage companies to merge and restructure as efficiently as
possible, to encourage consolidation within industries, to develop large and mediumsized companies with internationally well known brands and core competences, toenable small companies to specialize, and to encourage companies to find the mostappropriate structure for them.

2. Approach to restructuring
1) Six sectors designated as key sectors for restructuring
Before the Fifth Plenum, China's State Council promulgated (on 28 August 2010)
and published (on 6 September 2010) its Opinions on Promoting Enterprise Mergers
and Restructuring ("the Opinions").
In its Opinions, the State Council designates six sectors (automobiles, iron & steel,cement, plant & machinery, electrolytic aluminum, and rare earths) as key sectors andannounces policies to encourage the restructuring of Chinese companies and crossborder M&A, consolidation and economies of scale, the development of companies
with their own intellectual property rights and brands, and the creation of large,
competitive corporate groups.
The State Council points out that the Opinions are necessary because, althoughsome success has been achieved in recent years (e.g., by means of mergers and thetransfer of equity and assets), some industries still suffer from duplication of
investment and serious shortcomings (e.g., insufficient consolidation, an inability todevelop their own products, and a lack of competitiveness). It also points out that thesituation is changing as Chinese companies face increasing constraints in terms ofresources and the environment, increasingly fierce international competition, and therise of protectionism.

2) Support for corporate restructuring
The Opinions advocate that, in order to encourage companies in the designated six
sectors to restructure, institutional obstacles should be removed, fiscal and financial
support should be provided, regulatory controls and administrative services should be
improved, and regulatory agencies should play a more active role. The fiscal andfinancial support would take eight different forms: (1) preferential tax treatment, (2)fiscal expenditure, (3) financial support, (4) measures to encourage technologicalinnovation, (5) the use of capital markets, (6) land management, (7) the resolution of
disputes between creditors and debtors, and the relocation of workers, and (8) the
reform of corporate governance. The Opinions make the following more detailed
proposals for ways in which financial support and the use of capital markets could
help companies to restructure.

Growing Moves in China to Restructure Companies and Foster New Industries4(1) Financial support
The Opinions call for the following five forms of financial support to help
companies merge and restructure.
First, commercial banks should be more positive about and take a longer-term viewof lending for M&A. This would increase the amount of funds available and makethem available for more reasonable periods.
Second, commercial banks should be encouraged to grant companies a general lineof credit once they have been merged or restructured.
Third, securities companies, fund management companies, equity investment funds(including private equity funds), and industrial funds should be encouraged to become
involved in mergers and restructurings, and to offer financial support to companies(e.g., in the form of direct investment, loans made via banks, and bridging loans).
Fourth, more should be done to develop new financing models for mergers andrestructurings (e.g., special M&A funds) and to provide exits for equity investors.
Fifth, companies should be offered more support for cross-border M&A (e.g., in
the form of M&A loans, domestic and international syndicated loans, and interest rate
subsidies).
What is interesting about this is that the Opinions envisage the use of cross-border
M&A and propose the use of funds and syndicated loans, both domestic andinternational, for this purpose.

(2) The use of capital markets
The Opinions call for the following three uses of capital markets to help companies
merge and restructure.
First, the range of capital market mechanisms to enable companies to merge andrestructure should be increased; the methods used to value companies should be
improved; rules and policies should be devised; companies should be encouraged touse capital markets to merge and restructure; and industries should be restructured andmodernized.
Second, eligible companies should be helped to raise the capital they need to merge
and restructure by issuing equity and debt securities (e.g., shares, straight bonds, andconvertible bonds).
Third, listed companies should be encouraged to use their equity and cash as meansof payment when merging or restructuring, to use a greater range of funding options
when merging or restructuring, and to restructure by using capital markets more
effectively.
The significant point is that companies are encouraged to adopt new approaches tomergers and restructuring by using capital markets (e.g., equity swaps and better ways
to value companies).
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Nomura Journal of Capital Markets Spring 2011 Vol.2 No.4

Figure 2: Division of responsibility for encouraging companies to merge and restructure
No.

Task

Department(s) in charge

1

Rewriting and removing regulations that make it
difficult for companies to merge and restructure

MIIT

2

Attracting private-sector capital

MIIT

3

Providing tax incentives
Granting M&A loans, granting lines of credit
following mergers and restructurings, assisting
cross-border M&A
Launching M&A funds, offering exit strategies,
issuing shares, bonds and convertible bonds
Establishing special funds within the budget for
central government state capital operations

Ministry of Finance (MOF)

Departments involved
Governments of all provinces,autonomous regions, and municipalities
directly under the central government
NDRC, MOLAR, State Administration for
Industry & Commerce (SAIC), CBRC,
etc.
State Administration of Taxation (SAT)

CBRC, PBC

NDRC, MIIT, MOF

CSRC, NDRCMIIT, MOF

MOF

SASAC, NDRC, MIIT, MOFCOM

4
5
6

7

Establishing interest rate subsidies, loans, andspecial M&A funds at local government level

Governments of all provinces,autonomous regions, andmunicipalities directly under thecentral government

8Adopting market mechanisms for mergers andrestructurings, using listed companies' sharesand cash to raise capital

CSRC

NDRC, MOF, MOFCOM, PBC, CBRC

9

Granting preferential treatment in the use of land

Ministry of Land and Resources(MOLAR)

MOF

10
11
12

13

14
15
16
17
18
19
20

Upgrading technology, establishing technology
centers, weeding out sunset industries, preventing NDRC, MIIT
irrational investment and duplication of investment
Restructuring debt and encouraging participation
MOF
of institutional investors
Hiving off non-core activities of state-owned
MOF, SASAC
enterprises, laying off unneeded workers
MOHRSS, MOF, governments of all
Devising employment policies and re-employing
provinces, autonomous regions, andunemployed workers
municipalities directly under thecentral government
Constructing a public service platform for both
MIIT
domestic and overseas mergers and acquisitions
Offering advice (e.g., from securities companies)
MOFCOMon cross-border mergers and acquisitions
Complying with regulatory requirements

MIIT

Resolving and analyzing problems that arise when
MIIT
companies merge or restructure
Ensuring that mergers and restructurings do not
MOFCOM
infringe China's Antimonopoly Law
Monitoring trading during important mergers andMIIT
restructurings
Apportioning responsibility among government
departments

Source:MIIT

MOF
NDRC, PBC, SASAC, CBRCMOHRSSSASAC

NDRC, MOFCOM, CSRC
CBRC, CSRC, MIIT, NDRC, etc.
NDRC, MOF, MOFCOM, SASAC, PBC,
SAT, SAIC, CBRC, CSRC
NDRC, MOF, MOHRSS, MOFCOM,
PBC, SASAC, CBRC, CSRC
NDRC, MIIT, SASAC, etc.
NDRC, MOF, MOFCOM, SASAC, CSRC
NDRC, MOF, MOHRSS, MOLAR,
MOFCOM, PBC, SASAC, SAT, SAIC,
CBRC, CSRC, etc.

Nomura Institute of Capital Markets Research, based on Opinions on PromotingEnterprise Mergers and Restructuring

3. Clarifying the role of the authorities involved
It is important to clarify the powers and responsibilities of the authorities chiefly
responsible for considering policies such as these. That is why the Opinions stipulate
the role of each of the government departments involved (Figure 2). More detailed
rules for implementing each of the policies for encouraging companies to merge andrestructure can be expected to emerge in the coming months.

Growing Moves in China to Restructure Companies and Foster New Industries

6III. Fostering new industries

1. Seven sectors designated as strategic new industries
The Proposal designates seven sectors as strategic new industries that need to befostered: energy conservation and the environment; biotechnology; new materials;
next-generation information technology; high-value-added equipment manufacturing;new types of energy; and alternative energy vehicles.
On 8 September 2010 the State Council examined and approved the Decision to
Accelerate Nurturing and Developing Strategic Emerging Industries ("the Decision").
The Decision was promulgated on 10 October and published on 18 October.
The Decision describes the strategic new industries as major economic and social
driving forces, and points out that other major economies have identified them as key
industries to lead their economic and scientific/technological development.

2. Means and objectives of fostering new industries
1) Setting quantitative and qualitative objectives
The Decision sets both quantitative and qualitative objectives. First, its quantitative
objectives. It sets the objective of raising the contribution of China's new strategic
industries to GDP to 8% by 2015, the final year of the 12th Five-Year Program, and to
15% by 2020. Second, its qualitative objectives. It sets the objectives of having, by2030, strategic new industries whose overall innovativeness and level of development
are equal to the best in the world in order to be able to ensure continued economic andsocial development in China. The Decision also sets targets for each of the above
seven sectors (Figure 3)1.

2) Support for corporate restructuring
In order to foster the development of the seven designated sectors, the Decision
proposes the following measures: increasing technological innovation; fostering thedevelopment of markets and creating favorable market conditions; improving
international cooperation; providing fiscal and financial support; and reforming theadministrative system. The fiscal and financial support would take the following fiveforms: (1) fiscal expenditure, (2) preferential tax treatment, (3) financial support, (4)the use of capital markets, and (5) the use of investment funds. Measures (3) – (5)(financial support; the use of capital markets; and the use of investment funds) containthe following more specific proposals.
1

On 18 August 2010, 16 central state-owned enterprises joined together under SASAC's
guiding hand to form the Electric Vehicle Industry Alliance. The Chinese government
plans to invest RMB100 billion over the next 10 years in assisting the development of anew-energy vehicle industry (Shanghai Securities News, 18 August 2010).

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Nomura Journal of Capital Markets Spring 2011 Vol.2 No.4

Figure 3: Seven strategic new industries and key areas
Strategic new industry

Key areas
Energy conservation equipment, recycling equipment, environmental conservation equipment,
Energy conservation and theenergy and environmental conservation services, waste recovery and cyclic utilization, clean
environment
coal utilization, comprehensive utilization of seawater.
Development of new drugs (such as biomedical pharmaceuticals, new vaccines,
pharmaceuticals, and modern Chinese medicines) used in the prevention and control ofserious illnesses. Research, development and industrialization of advanced medical
Biotechnology
equipment, medical materials and other biomedical engineering products. Development of
new bio seeds, green development for agricultural use, development and application of coretechnologies for bio manufacturing, development and production of marine biology
technology.
New types of functional materials such as rare earth functional materials, high-performancemembrane materials, special glass, functional ceramics and semiconductor illuminationmaterials. Advanced structural materials as high-quality special steel, new types of alloy
New basic materials
materials and engineering plastics. High-performance fibers and their composites such ascarbon fiber, aramid fiber and ultra-high molecular weight polyethylene (UHMWPE) fiber.
Generic basic materials such as nanomaterials, superconductive materials, and intelligent
materials.
IT network infrastructure, next-generation mobile communications, next-generation network
core devices and intelligent terminals, triple play integration, Internet of things, and cloud
Next-generation information
computing. Core basic industries such as integrated circuits, new types of LCD, high-end
technology
software, and high-performance servers. Software services, valued-added Internet services.
Virtualization, creative and cultural industries.
Aerospace equipment such as general-purpose passenger aircraft and local route passenger
High-value-added equipment
aircraft. Satellite and satellite-related industries. Dedicated passenger railway lines and urban
manufacturing
railway systems. Marine project equipment. Intelligent manufacturing equipment.
New types of energy
Nuclear power industry, solar energy, wind power, smart grid, bioenergy.
Key and core technologies of power batteries, drive motors and electronic control systems.
Alternative energy vehicles
Plug-in hybrid vehicles, pure electric vehicles, low fuel consumption/energy-saving vehicles.

Source:Nomura Institute of Capital Markets Research, based on Decision to Accelerate
Nurturing and Developing Strategic Emerging Industries(1) Financial support
Financial support to foster the development of new industries would take thefollowing five forms.
First, financial institutions would be encouraged to establish credit controls anddue diligence procedures that accorded with the characteristics of the strategic newindustries.
Second, they would be encouraged to use innovatory forms of finance such as
supply chain loans and loans backed by intellectual property rights.
Third, the process of creating a multi-tier system of security and guarantees,
involving both government and private-sector finance, would be speeded up.
Fourth, greater efforts would be made to establish mid-tier financial institutions
and new types of financial services.
Fifth, widespread use would be made of preferential fiscal treatment to mitigate
risk, and financial institutions would provide more support to strategic new industries.
Much will depend on the extent to which financial institutions can provide services
that meet the needs of new industries. What is distinctive about these proposals is that
Growing Moves in China to Restructure Companies and Foster New Industries

8they involve not only training the necessary staff and acquiring the necessary knowhow but also the use of government money in one form or another to mitigate or
eliminate lending risk.
(2) The use of capital markets
The use of capital markets to foster the development of new industries would takethe following four forms.
First, the Second Board system (for start-ups) would be extended to enable
companies that meet the requirements to list.
Second, the OTC market system would be extended to enable companies atdifferent stages of development to meet their financing needs.
Third, a mechanism to allow companies to move between markets at different tierswould enable these markets gradually to be linked.
Fourth, China's bond market should develop to allow greater issuance of joint
bonds and joint medium-term notes by small and medium enterprises; active
consideration should be given to developing products such as high-yielding bonds andprivately placed convertible bonds; the development of enterprise bonds, corporate
bonds, commercial paper, and medium-term notes should be gradually stepped up;
and there should be a greater variety of debt-financing options.
What is noteworthy about these proposals is that they strongly advocate not only
the use of the Second Board and OTC market systems but also the issue of joint bonds
and high-yielding bonds by small and medium enterprises.
(3) Use of investment funds
The use of investment funds to foster the development of new industries would
take the following four forms.
First, in order to encourage investment in innovation and foster the healthy
development of equity investment, the necessary policy framework and regulatory
system need to be established.
Second, as far as risk controls allow, the conditions should be created for insurancecompanies, the National Social Security Fund, occupational pension schemes andother institutional investors to invest in these new industries (i.e., in innovation andequity investment funds).
Third, the government should assume responsibility for directing funds forinnovation investment to these new industries; this investment should be increased;
and private-sector funds should be directed especially to companies in these sectorsthat are either start-ups or have not been established for very long, making full use of
market mechanisms.

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Nomura Journal of Capital Markets Spring 2011 Vol.2 No.4

Fourth, private-sector capital should be encouraged to invest in these strategic newindustries.
What is noteworthy about these proposals is that they encourage institutional
investors such as pension funds and insurance companies to invest in these industries
in the awareness that the publicity surrounding the government's commitment to theseindustries will itself have a positive impact.

IV. Distribution and profitability of Chinese industrial
enterprises

1. Definition of "industrial enterprise"
In this section we analyze the profitability of Chinese industrial enterprises in the
public and private sectors as well as that of foreign-invested enterprises. Before that,
however, we need to define what the term "industrial enterprise" means in China.
When companies are officially registered in China, it is as one of three main typesof business entity: "domestic enterprises," "enterprises formed by investors from
Hong Kong, Macau or Taiwan," and "foreign-invested enterprises." Domestic
enterprises may be state-owned enterprises, collectively owned enterprises, stock
cooperative enterprises (the shares of which are jointly owned by the workers), jointly
operated enterprises (the shares of which are owned by at least two legal persons),
limited liability companies (with 1–50 shareholders), companies limited by shares (orjoint stock companies), private enterprises (formed and run by natural persons) or"others."
As, in the case of state-owned enterprises operating in the industrial field, jointly
operated state-owned enterprises are included in the statistics for jointly operated
enterprises and wholly state-owned limited liability companies are included in thosefor limited liability companies, our analysis needs to include them in the statistics forenterprises registered as state-owned enterprises in the narrow sense of the term.
Similarly, since the state-owned economy is included in companies limited by sharesfrom the point of view of ownership but cannot be separated from the statistics for the
non-state sector, we have included it in "others."
2. Distribution of industrial enterprises (in 2009)
We now consider the distribution of state-owned enterprises, private enterprises,
enterprises formed by investors from Hong Kong, Macau or Taiwan, foreign-invested
enterprises, and "others" on the basis of the principal economic indicators forindustrial enterprises above a certain size (annual sales of RMB5 million) in the China
Statistical Yearbook. We can see from these data that private enterprises and foreigninvested enterprises already constitute the majority of industrial enterprises in terms ofboth size and number.
Growing Moves in China to Restructure Companies and Foster New Industries

10Figure 4: Key data for Chinese industrial enterprises above a certain size
Added industrial
value(RMB100mn)(RMB100mn)

Operatingrevenue(RMB100mn)(RMB100mn)

9,105

45,64868,68547,035

1,973

639

256,031

162,026

91,176

156,604

9,678

2,974

34,36552,221

44,514

51,130

3,448

1,143

Foreign-invested enterprises

41,011

100,466

79,96399,133

6,659

1,307

Other

18,651

16,664

10,641

16,263

1,067

326

Total

359,163

377,025

294,979

370,165

22,825

6,390

Number ofcompanies
State-owned enterprises
Private enterprises
Enterprises formed by investors from
Hong Kong, Macau or Taiwan

AssetsTotal profit

Number of
employees(10,000s)

Note:

1. "Above a certain size" here means an industrial enterprise with annual sales of at least
RMB5 million.
2. "State-owned enterprises" includes jointly operated state-owned enterprises and wholly
state-owned limited liability companies.
3. "Other" includes collectively owned enterprises, stock cooperative enterprises, and jointly
operated enterprises.
Source: Nomura Institute of Capital Markets Research, based on China Statistical Yearbook

1) Number of companies
Whereas there are only 9,105 state-owned enterprises, there are (in descendingorder) 256,031 private enterprises, 41,011 foreign-invested enterprises, and 34,365
enterprises formed by investors from Hong Kong, Macau or Taiwan (Figure 4). In
percentage terms, state-owned enterprises account for only 3% of all Chinesecompanies, while private enterprises, foreign-invested enterprises, and enterprises
formed by investors from Hong Kong, Macau or Taiwan account for 71%, 11%, and10%, respectively (Figure 5).
2) Added industrial value
Whereas state-owned enterprises generate RMB4,564.8 billion of added industrial
value, private enterprises, foreign-invested enterprises, and enterprises formed byinvestors from Hong Kong, Macau or Taiwan generate RMB16,202.6 billion,
RMB10,046.6 billion, and RMB5,222.1 billion, respectively (Figure 4). In percentage
terms, state-owned enterprises account for 12% of total added industrial value, while
private enterprises, foreign-invested enterprises, and enterprises formed by investors
from Hong Kong, Macau or Taiwan account for 43%, 27%, and 14%, respectively(Figure 5).

11 Nomura Journal of Capital Markets Spring 2011 Vol.2 No.4

Figure 5: Breakdown of key data for Chinese industrial enterprises
above a certain size
Number of companies (2009)
State-owned
enterprises
3%

Other
5%

Foreign-invested
enterprises
11%Enterprises formed
by investors from
Hong Kong, Macauor Taiwan
10%

Private enterprises
71%

Added industrial value (2009)
Other
4%
Foreign-invested
enterprises
27%

Other
4%

Operating revenue (2009)

State-owned
enterprises
23%

Foreign-invested
enterprises
27%Enterprises formed
by investors from
Hong Kong, Macauor Taiwan
15%

Private enterprises
31%

Other
4%
Foreign-invested
enterprises
27%Enterprises formed
by investors from
Hong Kong, Macauor Taiwan
14%

Total profit (2009)

Other
5%

Private enterprises
43%Enterprises formed
by investors from
Hong Kong, Macauor Taiwan
14%

Assets (2009)

State-owned
enterprises
12%State-owned
enterprises
13%

Private enterprises
42%

Number of employees (2009)

State-owned
enterprises
9%

Foreign-invested
enterprises
29%

Other
5%
Foreign-invested
enterprises
20%State-owned
enterprises
10%

Private enterprises
42%Enterprises formed
by investors from
Hong Kong, Macauor Taiwan
15%Enterprises formed
by investors from
Hong Kong, Macauor Taiwan
18%

Private enterprises
47%

Note:

1. "Above a certain size" here means an industrial enterprise with annual sales of at least
RMB5 million.
2. "State-owned enterprises" includes jointly operated state-owned enterprises and wholly
state-owned limited liability companies.
3. "Other" includes collectively owned enterprises, stock cooperative enterprises, and jointly
operated enterprises.
Source: Nomura Institute of Capital Markets Research, based on China Statistical Yearbook

Growing Moves in China to Restructure Companies and Foster New Industries123) Assets
Whereas state-owned enterprises have assets worth RMB6,868.5 billion, private
enterprises, foreign-invested enterprises, and enterprises formed by investors from
Hong Kong, Macau or Taiwan have assets worth RMB9,117.6 billion, RMB7,996.3
billion, and RMB4,451.4 billion, respectively (Figure 4). In percentage terms, stateowned enterprises' assets account for 23% of the total, while those of private
enterprises, foreign-invested enterprises, and enterprises formed by investors from
Hong Kong, Macau or Taiwan account for 31%, 27%, and 15%, respectively (Figure5).

4) Operating revenue
Whereas state-owned enterprises generate RMB4,703.5 billion of operating
revenue, private enterprises, foreign-invested enterprises, and enterprises formed byinvestors from Hong Kong, Macau or Taiwan generate RMB15,660.4 billion,
RMB9,913.3 billion, and RMB5,113.0 billion of operating revenue, respectively(Figure 4). In percentage terms, state-owned enterprises generate 13% of total
operating revenue, while private enterprises, foreign-invested enterprises, andenterprises formed by investors from Hong Kong, Macau or Taiwan generate 42%,27%, and 14%, respectively (Figure 5).

5) Total profit
Whereas state-owned enterprises generate RMB197.3 billion of total profit, private
enterprises, foreign-invested enterprises, and enterprises formed by investors from
Hong Kong, Macau or Taiwan generate RMB967.8 billion, RMB665.9 billion, andRMB344.8 billion of total profit, respectively (Figure 4). In percentage terms, stateowned enterprises generate 9% of total profit, while private enterprises, foreigninvested enterprises, and enterprises formed by investors from Hong Kong, Macau or
Taiwan generate 42%, 29%, and 15%, respectively (Figure 5).

6) Number of employees
Whereas state-owned enterprises employ 6.39 million people, private enterprises,
foreign-invested enterprises, and enterprises formed by investors from Hong Kong,
Macau or Taiwan employ 29.74 million, 13.07 million, and 11.43 million people,
respectively (Figure 4). In percentage terms, state-owned enterprises employ 10% of
China's working population, while private enterprises, foreign-invested enterprises,
and enterprises formed by investors from Hong Kong, Macau or Taiwan employ 47%,
20%, and 18%, respectively (Figure 5).

13 Nomura Journal of Capital Markets Spring 2011 Vol.2 No.4

Figure 6: Return on assets (all-sector average)

(%)
12.00

10.94

10.61

9.48

10.00

7.81

8.00

7.35

8.12

6.82
6.00
4.80

4.30

4.00

2.00

0.00
State-owned enterprises

Privately owned enterprises

2007

Note:
Source:2008

Foreign-invested enterprises

2009

Return on assets has been derived by dividing the total profit of each type ofcompany by its total assets.
Nomura Institute of Capital Markets Research, based on China Statistical
Yearbook

3. Comparison of profitability of China's industrial enterprises (in 2007–09)
We now compare the profitability of state-owned enterprises, private enterprises,
and foreign-invested enterprises on the basis of the principal economic indicators forindustrial enterprises above a certain size (annual sales of RMB5 million) in the China
Statistical Yearbook. More specifically, we compare their return on assets, return on
equity, and ratio of profits, taxes and interest to average assets for 2007–09 (i.e., thethree-year period straddling the financial crisis).

1) Return on assets
Return on assets (ROA) is a general indicator of profitability, showing how
efficiently a company's total assets have been used to generate profit. In this report,
for the sake of convenience, we have calculated this using the formula total
profit/total assets.
What we found is that the ROA of state-owned enterprises declined from its 2007
level of 6.82% to 4.80% in 2008, when the global financial crisis worsened, and to
4.30% in 2009 (Figure 6).
In contrast, the ROA of private enterprises rose slightly from its 2007 level of
9.48% to 10.94% in 2008 but declined slightly to 10.61% in 2009. According to a
spokesperson for the Development Research Center of the State Council, the reason
the ROA of private enterprises rose in 2008, when the global financial crisis worsened,

Growing Moves in China to Restructure Companies and Foster New Industries

14Figure 7: Return on equity (all-sector average)
(%)

30.00
25.12
25.00

22.78

23.96

20.00

18.63

18.27
16.72

15.74
15.00
11.71

10.90

10.00

5.00

0.00
State-owned enterprises

Privately owned enterprises
2007

Note:
Source:2008

Foreign-invested enterprises
2009

Return on equity has been derived by dividing the total profit of each type ofcompany by its owners' equity.
Nomura Institute of Capital Markets Research, based on China Statistical
Yearbook

was probably that financial restructuring and cost cutting took effect2. Similarly, theROA of foreign-invested enterprises declined slightly from its 2007 level of 7.81% to7.35% in 2008 but recovered to 8.12% in 2009.
We can see from these findings that the ROA of private enterprises and foreigninvested enterprises is generally higher than that of state-owned enterprises and thatstate-owned enterprises were still suffering the effects of the global financial crisis in
2009.

2) Return on equity
Return on equity (ROE), the ratio of a company's net profit to its owners' equity, is
an indicator of the extent to which a company's management is fulfilling its
obligations to the company's shareholders. In this report, for the sake of convenience,
we have calculated this using the formula total profit/owners' equity.
What we found is that, as with ROA, the ROE of state-owned enterprises declined
from its 2007 level of 15.74% to 11.71% in 2008, when the global financial crisis
worsened, and to 10.90% in 2009 (Figure 7).
2Particularly with regard to cost-cutting, the spokesperson thought that the reduction in
employment costs as a result of the loss of some 10 million jobs for migrant agricultural
workers in 2008 and the reduction in inventories as a result of the closure of factories(especially private-sector factories) in the north of China because of the Olympics thesame year had enabled such enterprises to avoid losses caused by higher material costs.

15 Nomura Journal of Capital Markets Spring 2011 Vol.2 No.4

Figure 8: Ratio of profits, taxes and interest to average assets (all-sector average)
(%)

25.00
19.67

20.00

18.33
17.18

15.00

13.79

12.59 12.68 13.08

11.77 11.29
10.00

5.00

0.00
State-owned enterprises
2007

Note:
Source:Privately owned enterprises
2008

Foreign-invested enterprises

2009

Ratio has been derived by dividing the total profit, total taxes, and interest
payments of each type of company by its average total assets.
Nomura Institute of Capital Markets Research, based on China Statistical
Yearbook

In contrast and as with ROA, the ROE of private enterprises rose from its 2007
level of 22.78% to 25.12% in 2008 but declined slightly to 23.96% in 2009. Similarly,
the ROE of foreign-invested enterprises declined slightly from its 2007 level of
18.27% to 16.72% in 2008 but recovered to 18.63% in 2009.
We can see from these findings that the ROE of private enterprises and foreigninvested enterprises is also generally higher than that of state-owned enterprises. Also,
as with ROA, the reason the ROE of private enterprises rose in 2008, when the global
financial crisis worsened, may have been that financial restructuring and cost cutting
took effect.

3) Ratio of profits, taxes and interest to average assets
The ratio of profits, taxes and interest to average assets shows a company's ability
to obtain a return on its total assets and is derived by dividing the sum of its total
profit, total taxes, and interest payments by its average total assets for the period
concerned. The ratio is already calculated in the China Statistical Yearbook.
What we found is that the ratio for state-owned enterprises declined from its 2007
level of 13.79% to 11.77% in 2008, when the global financial crisis worsened, and to
11.29% in 2009 (Figure 8).
In contrast and as with the two other ratios, the ratio for private enterprises rosefrom its 2007 level of 17.18% to 19.67% in 2008 but declined slightly to 18.33% in

Growing Moves in China to Restructure Companies and Foster New Industries

16Figure 9: Sector-by-sector comparison of key profitability ratios
ROA
SectorRatio of profits, taxes and interest to
average assets

ROE
StateForeignow ned
investedenterprises enterprises

Privatelyow nedenterprises

Stateow nedenterprises

Privatelyow nedenterprises

Privatelyow nedenterprises

Foreigninvested
enterprises

Overall

4.30

10.61

8.12

10.90

23.96

18.63

11.29

18.33

13.08

Coal extraction/cleaning/dressing

6.83

18.39

15.33

17.50

36.79

40.97

13.66

32.46

21.19

Extraction of oil and natural
gas

12.57

16.44

44.58

22.95

23.53

271.55

18.43

23.72

51.77

Processing of agricultural
by-products as food

4.79

14.67

8.85

12.73

27.65

22.75

9.41

23.38

13.58

Textiles

0.69

8.24

5.31

1.83

20.38

10.76

4.12

15.11

9.37

Clothing/footw ear/headgear

5.31

11.12

9.57

16.45

24.41

18.94

8.17

19.58

15.18

Production ofpharmaceuticals

8.20

10.40

12.87

15.67

20.93

23.21

13.53

17.72

19.67

Iron smelting/rolling

1.06

8.89

4.57

2.84

25.16

13.26

5.01

15.65

8.82

Production of transport
equipment

6.52

8.42

12.15

18.76

22.64

31.28

12.62

14.63

20.91

Production of
telecommunications
equipment/computers/otherelectronic equipment

2.81

8.48

5.40

6.22

19.30

13.39

4.93

13.72

7.37

Note:
Source:ForeignStateinvested
ow nedenterprises enterprises

Shading marks those sectors where privately owned and foreign-invested enterprises are
more profitable than state-owned enterprises.
Nomura Institute of Capital Markets Research, based on China Statistical Yearbook

2009. Similarly, the ratio for foreign-invested enterprises rose slightly from its 2007
level of 12.59% to 12.68% in 2008 and recovered to 13.08% in 2009.
We can see from these findings that the ratio of profits, taxes and interest to
average assets for private enterprises and foreign-invested enterprises is also generally
higher than that of state-owned enterprises. The reason the ratio for private enterprisesrose in 2008, when the global financial crisis worsened, may have been that financial
restructuring and cost cutting took effect.

4) Sector comparison (2009)
A sector-by-sector comparison of ROA, ROE and the ratio of profits, taxes andinterest to average assets in 2009 (Figure 9) shows that private enterprises in thefollowing sectors obtained high returns: coal extraction/cleaning/dressing, processingof agricultural by-products as food, textiles, clothing/footwear/headgear, iron

17 Nomura Journal of Capital Markets Spring 2011 Vol.2 No.4

smelting/rolling ("iron industry"), and the production of telecommunications
equipment/computers/other electronic equipment (e.g., mobile telephones)3.
Similarly, foreign-invested enterprises in the following sectors obtained highreturns: extraction of oil and natural gas, production of pharmaceuticals, and the
production of transport equipment (vehicles, including two-wheel vehicles). The
situation is much as one would expect as a result of the establishment of operations in
China by foreign pharmaceutical and auto companies.

V. Establishing the equivalent of a China Investment
Corporation for industry

1. Establishment of China Reform Holdings Corporation
The Chinese government has been considering setting up sovereign wealth funds
modeled on similar funds in Singapore (e.g., Temasek and GIC) in order to increase
the competitiveness of central state-owned enterprises. Also, as we have mentioned, it
has proposed in its 12th Five-Year Program policies aimed at increasing thecompetitiveness of Chinese industry as part of its efforts to change China's economic
development model.
As a result, on 22 December 2010, China's State-owned Assets Supervision and
Administration Commission (of the State Council) (SASAC) held a general meeting
to mark the establishment of China Reform Holdings Corporation and the Chinese
government's intention to increase the value of the central state-owned enterprises forwhich it is responsible.
In reports in the mainland Chinese press the new company is sometimes referred toas "the industrial equivalent of China Investment Corporation" (the institution
established in September 2007 to diversify the way in which China's foreign exchange
reserves are invested and to achieve a higher return on these investments) or "CICMark II."

2. Brief description of China Reform Holdings
According to SASAC, Xie Qihua, former chairwoman of Baosteel Group
Corporation, has been appointed chairwoman of China Reform Holdings with aregistered capital of RMB4.5 billion, while Liu Dongsheng, former chairman of
SASAC's board of supervisors (a vice-minister level position), has been appointed
president. The role and position of the new company, the types of company it will be

3However, there is also the question to what extent private enterprises shoulder the cost ofcomplying with and maintaining environmental standards.

Growing Moves in China to Restructure Companies and Foster New Industries

18Figure 10: Schematic diagram of establishment and operationof China Reform Holdings
Establishment

SASAC

China Reform Holdings
Restructuring andreorganization oftransferred enterprises
Transfer

Central state‐owned
enterprises

Transferred
enterprises

Conversion to
joint‐stockcompany
Formation ofgroups
Source:Conversion
from partial tofull listing

Sale of non‐core
operations

Nomura Institute of Capital Markets Research, based on SASAC

responsible for managing, and the kinds of operation it will support are as follows(Figure 10).

1) New company's role
First, the new company will own and manage the assets of the central state-owned
enterprises transferred from SASAC, and will share the responsibility for restructuring
these companies.
Second, once the central state-owned enterprises as a whole have been listed, it
will confiscate and restructure non-core assets and the assets that are left over in order
to increase the competitiveness of the central state-owned enterprises' core operations.

2) Position of new company
It is clear from the new company's role that the new company is no different fromother central state-owned enterprises in that it will operate as a business concern.
Second, the new company has a special role: namely, of restructuring central stateowned enterprises and their assets.
Third, the new company will manage assets rather than engage in production or
investment.

19 Nomura Journal of Capital Markets Spring 2011 Vol.2 No.4

3) Types of company China Reform Holdings will manage
It is envisaged that SASAC will transfer three types of company for managementby China Reform Holdings.
The first is companies that are small and weak, and that do not belong to a sector
that is critical for either China's national security or its economy.
The second is companies with relatively few connections with the operations ofother large central state-owned enterprises and which stand to gain little from therestructuring of these enterprises.
The third is companies with a particular (e.g., public welfare) role that makes it
inappropriate for them to become involved with companies in other sectors.

4) Kinds of operation China Reform Holdings will support
Once the management of a company has been transferred to it, China Reform
Holdings is responsible for converting it to a joint stock company and restructuring its
assets.
The first type of operation is where China Reform Holdings injects capital into andthen (after restructuring) lists companies with the potential to compete and that
operate in sectors government industrial policy is seeking to foster.
The second type is where China Reform Holdings supports the operations ofcompanies with the potential to be restructured and to provide services related to
strategic new industries.
The third type is where China Reform Holdings bears the cost of restructuring
companies that have lost their ability to grow and recommends that the state
withdraws its capital while safeguarding the rights of their employees.

3. China Reform Holdings' future
SASAC has had considerable success in recent years in reducing the number ofcentral state-owned enterprises it manages. From 181 at the end of 2004 the number
has declined to 122 (as of 23 December 2010) (Figure 11) and is expected to decline
further to about 100. In this connection, we have noted considerable interest among
those involved with China Reform Holdings in how it is going to restructure thecompanies whose management has been transferred to it.
In restructuring central state-owned enterprises, it needs to ensure that its own
governance is adequate and that it has staff with the necessary expertise. We therefore
expect it to further cement its links with the Singaporean sovereign wealth funds onwhich it has modeled itself.
Japan's Industrial Revitalization Corporation (established in April 2003 anddisbanded in March 2007) had experience with corporate turnarounds. China Reform

Growing Moves in China to Restructure Companies and Foster New Industries

20Figure 11: Number of central state-owned enterprises reporting to SASAC(Number of companies)
190
End-2004: 181 companies

180
170
160
150
140
130
120
23 Dec 2010: 122 companies

110
04/12 05/6 05/12 06/6 06/12 07/6 07/12 08/6 08/12 09/6 09/12 10/6 10/12(y/m)

Source:Nomura Institute of Capital Markets Research, based on SASAC

Holdings can also draw on the experience of the Innovation Network Corporation ofJapan (INCJ), established in July 2009 to create new industries that cut acrosstraditional business boundaries.
As more details are announced of China Reform Holdings' organizational structure
and the companies it will have to manage, we will begin to have a clearer picture of
its overall operations.

VI. Further efforts to increase the competitiveness of Chinese
industry

1. Greater use of private-sector capital
As we saw in Chapter IV when we compared the profitability of different types ofcompanies, Chinese private-sector capital and foreign capital remain key to fostering
the development of new industries and restructuring Chinese companies in order toachieve the 12th Five-Year Program's objective of increasing the competitiveness ofChinese industry.
With regard to the use of private-sector capital, China's State Council published on
13 May 2010 Several Opinions of the State Council on Encouraging and Guiding the
Healthy Development of Private Investment. These are a revision of the Opinions of

21 Nomura Journal of Capital Markets Spring 2011 Vol.2 No.4

the State Council on Encouraging, Supporting and Guiding the Development of
Individual and Private Economy and Other Non-Public Sectors of the Economy
published five years earlier in February 2005. As both the earlier and the more recent
Opinions consist of 36 articles, the more recent document is sometimes referred to as"The New 36 Opinions." In the New 36 Opinions the government extends the range ofactivities in which it will allow private-sector capital to be invested to the following
six areas: (1) basic industry and basic infrastructure; (2) public works in urban areas
and the construction of social housing; (3) public welfare (healthcare, education,social welfare, and culture); (4) financial services; (5) commerce, trade anddistribution; and (6) defense-related science and technology. In addition, it encourages
the private sector to invest in reforming state-owned enterprises.
Subsequently, on 26 July 2010, clarification of how this should be implemented
was issued in the form of the Notice of the State Council General Office on the
Division of Key Tasks for Encouraging and Guiding the Healthy Development of
Private Investment. According to this, local (provincial) governments are to be
responsible for coordinating the restructuring of state-owned enterprises when thisinvolves several regions, while SASAC, the Ministry of Human Resources and Social
Security (MOHRSS), and the China Banking Regulatory Commission (CBRC) are to
be responsible when this involves, for example, the use of private-sector capital toacquire a stake, a controlling interest, or assets in a state-owned enterprise.

2. New process for reviewing use of foreign capital
On 6 April 2010 the State Council promulgated Several Opinions on Further
Improving the Work of Foreign Capital Utilization. These contained a number of key
new policies: selecting foreign capital on the basis of industrial policy; attracting
foreign capital to China's central and western regions; and devolving to local
governments the power to approve the use of foreign capital.
In particular, (1) foreign companies are encouraged to acquire equity stakes in andmerge with domestic Chinese companies in order to reorganize and restructure them;(2) A-share companies are encouraged to find strategic investors, whether overseas or
Chinese; and (3) foreign companies will be allowed to acquire Chinese companies andengage in inward portfolio investment. In order to make it easier for foreigncompanies to become involved in restructuring Chinese companies, the State Council
published on 18 August 2010 a follow-up to its Several Opinions on Further
Improving the Work of Foreign Capital Utilization. In it the Ministry of Commerce(MOFCOM) is given overall responsibility for devising policies and enacting
legislation but is to be assisted by the China Securities Regulatory Commission(CSRC), the National Development and Reform Commission (NDRC), and theMinistry of Industry and Information Technology (MIIT) (Figure 12).
In this connection it is perhaps worth mentioning that we now see the possibility
that central state-owned enterprises, which until now have only had the option of apartial listing that involved disposing of some of their assets when China Reform
Holdings restructured companies and assets, will now have the option of a full listing.

Growing Moves in China to Restructure Companies and Foster New Industries

22Figure 12: Division of main responsibilities for implementing Several Opinions on
Further Improving the Work of Foreign Capital Utilization
Objective
Tasks
Department in charge
1. Optimizing the
Revise Industrial Catalogue for Foreign Investment
structure of utilization (e.g., high added-value manufacturing, high-tech
NDRC
of foreign investment
industries, alternative energy, and energy conservationand the environment)
Give foreign investment projects priority access to land MOLAR
Encourage foreign-invested enterprises and local
NDRC
companies to cooperate in R&D
Encourage foreign-invested enterprises to establish
regional headquarters
2. Guiding foreign
Revise Catalogue of Priority Industries for Foreign
investment to central Investment in the Central-Western Region
and western regions,
Provide tax incentives to invest in the Central-Westernand to increase
Regioninvestment
Encourage foreign banks to establish branches in theCentral-Western Region
3. Promoting thediversification ofutilizing foreign
investment

Departments involved
MOFCOM

Ministry of Science andTechnology (MOST), MOF

MOFCOM

SAFE, CBRC, NDRC, MOF, SAICNDRC

MOFCOM

MOF

NDRC, MOFCOM, SAT

CBRC

-

Encourage foreign investors to participate in the reform,
consolidation and reorganization of domestic
enterprises
Attract domestic and overseas strategic investors in A- MOFCOM
share listed companies

CSRC, NDRC, MIIT

Regulate participation in domestic securities
investments and acquisitions of domestic enterprises
Encourage qualified enterprises to utilize overseas
capital markets by listing abroad
Encourage foreign investors to establish bonding
companies for small and medium enterprises
Establish venture capital and private equity funds

CSRC

NDRC, MOFCOMNDRCMOFCOMNDRC

MOFCOM, SAIC, CSRC, SAFE

PBC

CSRC, CBRC, NDRC, MOFCOM

NDRC

-

MOFCOM

NDRC

NDRC

MOLAR, Ministry of Housing and

SAFE

Urban-Rural Development(MOHURD), MOST, MOFCOM-SAIC

MOFCOM

Enable qualified foreign-invested enterprises to publicly
offer shares and issue enterprise bonds and mediumterm notes
Expand scope of overseas entities eligible to issue
RMB bonds in China
4. Deepening thereforms in foreign
investment
management
systemDelegate project examination and approval to local
governments
Simplify the procedures and minimize the scope of
examination and approval, etc.

5. Creating aStandardize and promote the development offavorable investment development zones, etc.
environment
Improve the foreign exchange management of foreign
enterprises and simplify the procedures for foreign
enterprises to convert foreign exchange into sharecapitalAllow foreign enterprises unable to make financial
contributions in time an extension of contribution
deadlines

Source:Nomura Institute of Capital Markets Research, based on Several Opinions on Further
Improving the Work of Foreign Capital Utilization

In the case of partial listings, we envisage cases where private-sector Chinese capitalor foreign companies bid for companies or assets, while, in the case of full listings onoverseas stock markets, including Hong Kong, we envisage cases where foreign
investors are involved. Although no list has been published thus far of the companies
that are due to be transferred to the management of China Reform Holdings, it has

23 Nomura Journal of Capital Markets Spring 2011 Vol.2 No.4

Figure 13: Geographical breakdown of foreign direct investment in China
2009
Rank
1
2
3
4
5
6
7
8
9
10
(cf.)

Note:1.
2.
3.
Source:Country/regionHong Kong
TaiwanJapan
Singapore
US
Korea
UK
Germany
Macau
CanadaEU
Whole world

2010
Actual amount$mn
Share (%)
53,993
60.0
6,563
7.3
4,117
4.6
3,886
4.3
3,576
4.0
2,703
3.0
1,469
1.6
1,227
1.4
1,000
1.1
959
1.1
5,952
6.6
90,033
100.0

Rank
1
2
3
4
5
6
7
8
9
10
(cf.)

Country/regionHong Kong
TaiwanSingapore
Japan
US
Korea
UK
FranceNetherlands
GermanyEU
Whole world

Actual amount$mn
Share (%)
67,474
63.8
6,701
6.3
5,657
5.3
4,242
4.0
4,052
3.8
2,693
2.5
1,642
1.6
1,239
1.2
952
0.9
933
0.9
6,589
6.2
105,740
100.0

Ranking is by the actual amount invested.
Foreign direct investment from Hong Kong and tax havens includes "round tripping."
The EU has 27 member nations.
Nomura Institute of Capital Markets Research, based on MOFCOM

been reported in the local media that China Minmetals Corporation (CMC), a metal
and mineral trading company, will be one of them4.

3. Lessons for Japan
1) New opportunity for direct investment in China
The Chinese authorities are counting on foreign strategic investors as well asprivate-sector Chinese capital to achieve this restructuring of Chinese companies,
fostering of new industries, and restructuring of central state-owned enterprises. What
this means is that Japanese companies will also have new opportunities for direct
investment in China. We think the combination of Japanese technological know-how
and the Chinese market offers Japan the opportunity to benefit further from China's
economic growth.
However, Japanese companies also have something to offer China. We can see
from a geographical breakdown of inward direct investment in China in 2009 that,with the exception of Greater China and some tax heavens, Japan was the largest
direct investor, with $4.1 billion (Figure 13), up from $3.7 billion in 2008. According
to the figures for 2010, Japan was the second-largest direct investor in China, with
$4.2 billion, after Singapore. We think the process of restructuring Chinese companies
and fostering new industries will present Chinese and Japanese companies with
opportunities for cooperation and cross-border M&A in key industries. It will beinteresting to see exactly how foreign companies take advantage of the wider range ofoptions for their involvement proposed in the Several Opinions on Further Improving
the Work of Foreign Capital Utilization.
4

21st Century Media, 20 December 2010.

Growing Moves in China to Restructure Companies and Foster New Industries

24Figure 14: Geographical breakdown of QFIIs (by domicile)

Note:
Source:Country

AmountShare(domicile)($100mn)

(%)

UK
US
Hong Kong
Japan
Singapore
Korea
Switzerland
Netherlands
NorwayBelgium
CanadaGermany
Australia
FranceLuxembourg
UAE
Malaysia
Total

37.90
28.60
24.00
20.00
11.50
10.45
10.00
8.25
7.00
6.50
5.00
4.75
4.50
4.25
3.00
2.00
2.00
189.7019.98%
15.08%
12.65%
10.54%
6.06%
5.51%
5.27%
4.35%
3.69%
3.43%
2.64%
2.50%
2.37%
2.24%
1.58%
1.05%
1.05%
100.00%Investment limit as of end-September 2010.
Nomura Institute of Capital Markets Research, based on ShanghaiWind Information Co., Ltd

2) Qualified foreign institutional investors as a source of liquidity
We expect to see China's public markets used as a source of capital for
restructuring Chinese companies and fostering new industries. As China's key
industries will need discerning investors with ample liquidity, we can see foreign
investors that have acquired this know-how overseas playing a more active role inthese markets.
Since 2002, China has had a "QFII" (qualified foreign institutional investor)
system. Under this system, overseas institutions (such as fund management companies,
insurance companies, securities companies, commercial banks, and pension funds)
that have been licensed by the CSRC are allowed to invest in Chinese securities (suchas listed equities, listed bonds, and shares in mutual funds) up to a limit (amount) set
by the State Administration of Foreign Exchange (SAFE). As of 17 November 2010,
103 foreign institutions had been licensed by the CSRC, and the limit set by SAFE, asof end-September 2010, was $18.97 billion.
Qualified foreign institutional investors can be expected to have the expertise andthe long time horizon needed to provide the liquidity needed by China's key industries.
With personal financial assets totaling some ¥1,400 trillion, Japan also has thenecessary liquidity. A geographical breakdown of qualified foreign institutional
investors (by domicile) reveals that Japan occupies fourth position in terms ofinvestment ($2.0 billion or 10.54% of the overall limit) after the UK, the US, andHong Kong (Figure 14). In view of the extent of foreign (including Japanese) interestin the QFII system, expectations are high that the number of licenses and theinvestment limit will be increased.

25 Nomura Journal of Capital Markets Spring 2011 Vol.2 No.4

Foreign investors also have an important role to play on overseas public markets insupplying the liquidity needed to restructure Chinese companies and foster new
industries. Investment banks also have an important role to play (in linking issuers
and foreign investors), and foreign (including Japanese) investment banks can be
expected to play a major role in fostering key industries in China.
It will be interesting to see how China continues to seek to make its industries
more competitive.

Growing Moves in China to Restructure Companies and Foster New Industries

26