The Shenzhen government's decision to shake up over 20 state-owned enterprises (SOEs) has fuelled a stock market rally.

But some stock analysts have remained skeptical of the new policy, which involves the sale of a larger portion of government holdings in the designated SOEs to strong strategic investors. They doubt if the government can attract the right buyers for those SOEs which are poor performers deep in debt. Most of these SOEs are listed on the domestic bourse.

The measures, which were launched over the weekend by the municipal government of South China's economic hub, are designed to improve the performance and strengthen the competitiveness of those SOEs with the expected injection of management and technological expertise from new strategic investors.

Shenzhen is widely known as a pioneer in SOE reform.

It launched the first international tenders of SOEs' share in China in 2002, in which between 25 and 75 percent stakes were sold in five big profit-making SOEs, including the Shenzhen Energy Group, the Shenzhen Water Group and the Shenzhen Public Transportation Group. The step was deemed essential to improving the quality of the city's SOEs' assets.

According to the new policy, the government will progressively reduce its holdings in nine SOEs, including Accord Pharmaceutical Co, Shenzhen Textile, Shenzhen Property and Shenzhen Real Estate Development, to under 30 percent.

The local government will also reduce its holdings in seven other enterprises, such as Shenzhen Energy, Shenzhen Tianjian, Shenzhen Zhenye and Shenzhen Airport, thus reducing its own stakes.

A further 10 firms have been advised to change their internal structure to allow for sale of shares to strategic investors, management and employees.

Shenzhen Vice-Mayor Zhang Siping has warned that the proposed share restructuring could result in the closure or bankruptcy of some of the affected enterprises.

The number of "first-tier" SOEs under direct municipal government control will be reduced to 27 from 35 by the end of 2004.

Vice-Mayor Zhang pledged that the city will meet targets for the re-organization of SOEs under direct municipal government control by the end of 2005.

To meet this target "we have to do most of the work this year," he noted.

It is envisaged that, after re-organization, the SOEs will be sufficiently modernized to meet the requirements outlined in the city's economic plans.

Emphasizing the importance of the reform, Li Hongzhong, acting mayor of the city, said: "Most of our SOEs in non-monopoly industries are not strong enough to meet the challenges."

He warned that, "without timely restructuring and without introducing strong companies and famous brands into them, they will fail to survive amid the increasingly fierce competition."

According to official figures, about 70 to 80 percent of the profits generated last year by Shenzhen's SOEs came from monopoly industries, such as energy and ports.

The shares of most Shenzhen-based enterprises outperformed the market last Monday, with companies such as property firm Shenzhen Zhenye and television maker Shenzhen Huafa Co shares surging to their daily limit of 10 percent.

The up-trend carried on Tuesday, although the broad market recorded a slight drop. Shenzhen Zhenye shares rose another 10 percent, while Shenzhen Textile Co climbed 9.9 percent.

"Driven by the government's initiated restructuring programme, local listed companies will continue to perform well for some time with the inflow of new capital," said Xiang Jin, an analyst with brokerage firm Wanlian Securities.

"As the restructuring reform of Shenzhen's SOEs deepens, we believe the local companies whose basic factors have been greatly changed could bring sound returns to market investors," he added.

However, He Chengying, head of research at local brokerage firm Guosen Securities, said the government's new plan will have a limited impact on the stock market, despite the short-term gains witnessed by some locally listed firms.

"It's just a good start. The government has shown its determination to develop the SOEs which is actually good for the market, but the restructuring takes time and the procedure is complicated," said He. "It's still too early to be optimistic."

The re-organization will first take place in SOEs that are comparatively well-managed and efficient, with good financial situations and low debt levels, or in an industry that is reasonably competitive, such as Shenzhen Textile, Shenzhen Zhenye, and fellow property developer Shenzhen Tiandi, He told China Daily.

"But it's difficult to restructure those SOEs beset with serious problems, which normally have high levels of debt, as they have little resources that the government could attract buyers with," he noted.

Wu Shoukang, head of research of Guotai Jun'an Securities, said the government may invest in troubled SOEs in order to clear their debts before introducing strategic investors.

The government's plan was announced shortly after Sino-Pharm Medicine Holding Co, the country's largest pharmaceutical group, acquired 43.33 percent shares of the listed Shenzhen Accord Pharmaceutical Co from Shenzhen Investment Management Co, which has represented the government to manage the SOEs.

It won the deal in a heated contest with more than 37 competitors. After acquisition, Sino-Pharm will merge its Guangzhou company into Accord to make the listed company the largest pharmaceutical company in South China.

Sino-Pharm also promised to set up a medicine manufacturing base in Shenzhen with 80 million yuan (US$9.64 million) to improve Accord's manufacturing capacity.

"The government requires that strategic partners of its SOEs should be strong in the global or domestic market, should improve the quality of these SOEs and help optimize Shenzhen's existing industrial structure," said He.

However, some of the listed SOEs, including Shenzhen Zhenye, Shenzhen Real Estate Development and Shenzhen Property and Shenzhen Textile, issued statements last week saying they are not yet in negotiations with any firms over share transfers.

(China Daily February 16, 2004)