Risk Management and Acquisition     

On one aspect, the state-owned enterprises are required to control risk amid the financial turmoil, and on other aspect, they are encouraged to acquire assets abroad, even through lending loan from bank that was forbidden in China before November 2008. It seems a couple of contradictions.
   China has officially allowed the commercial bank to lend money to domestic enterprises for the purpose of merge and acquisition since November 2008, and possibly open the door to finance oversea acquisition. (Page 6 this issue) A bond counted in US dollars, around US$1 billion, will be issued by China National Petroleum Corporation (CNPC), China's biggest oil company, to domestic commercial banks. This news identified the firm confidence of Chinese government to encourage domestic enterprises to 'Go Abroad'. In another word, the acquisition in such a downturn period is actually cheaper for Chinese enterprises, although some managers hold a cautious attitude still. Different viewpoints from different angle, some economists suggest that Chinese mergers can gain oversea resources in a lower price when helping the sellers to survive the financial crisis, and others warn risks in acquiring abroad exist still.
    On March 28th, Shao Ning, vice director of the State-Owned Assets Supervision and Administration Commission (SASAC) who manages more than 100 large sized state-owned enterprises including CNPC and Sinopec Group, introduced the experiences in controlling risks. Shao pointed out this crisis has of course impacts on China, and on enterprises under SASAC. Luckily, China has not opened fully its financial sector and China's financial organizations just started to join in the financial actions in the global market, so the credit system remains normally now. In 2008 all SASAC enterprises reported a sale of RMB11 900 billion, an increase of 17.9% and a gross profit of RMB665.3 billion, a drop of 33.8%.
    According to Shao's report, SASAC enterprises made much effort on eliminating high risk investment, strengthening fund management, cutting cost, controlling trade risks in 2008. Under the warnings of SASAC, many enterprises have aggressively reduced their planned investment. Six SASAC enterprises including CNPC, Sinopec Group and Chinalco totally reduced RMB89 billion of planned investment in 2008. (CNPC, RMB20.72 billion in June CCR2008 No.19) In other aspects, SASAC enterprises scrambled to grasp cash in hand. CNPC recovered back around RMB6 billion in the fourth quarter of 2008. Sinopec Group increased RMB13.9 billion in profit for 2008 by cutting cost.
   By April 15th, 30 listed chemical firms predicted publicly the fiscal result for the first quarter. Within that, 17 firms predicted a loss, six are expected to grow up their profit, five predicted a profit decline and two firms will gain a net profit compared to the loss in the same period last year. The cause of loss or decline is always attributed to the financial crisis.
     Li Rongrong, Director of SASAC, stated on the BOAO Forum for Asia April 19th that the operational performance for SASAC state-owned enterprises recovered in March, with a year-on-year increase of 26% in the combined profit. The profit in March increased 86% over February. The total sale in March declined 5.4% year over year, but went up 26% than that in February this year.

Zhong Weike
April 22nd, 2009