Tuesday, 1 April 2014

Financial Blog Corliss Group: Citic's mega takeover deal comes as win-win for Beijing and Hong Kong

One move, two gains. Nowadays Beijing and Hong Kong may not agree on a lot of things, but the Citic deal is clearly a win-win for both sides.

Beijing's decision to let a Hong Kong-listed unit of Citic Group take over its parent company in a deal valued at about 225 billion yuan (HK$283.6 billion) surprised the financial community on Wednesday evening. In fact, the more surprised you feel, the clearer Beijing's resolve to reform its economic structure.

If you read the history of Citic Group - how the firm was founded with special permission from the late paramount leader, Deng Xiaoping, about 35 years ago as the first new type of state-owned enterprises to help the mainland attract foreign capital and expand investments abroad - any big decision about the company will not be made without approval by the very top-level mainland leaders.

That is to say the asset purchase of Citic Group by Citic Pacific, the Hong Kong-listed steel-to-property conglomerate, is more than just a mega-sized acquisition; it means the beginning of a new round of government-led reforms on its major state-owned enterprises through completely new thinking, such as letting the "son" (Citic Pacific) acquire its "father" (Citic Group in this case).

Such a son-to-acquire-father-move is controversial in that it rarely happens in the mainland's business world, in particular to any significant state firm the size of Citic, which is a sign of how desperate Beijing is to reform its state enterprises, many of which have often been linked with big bribery and corruption scandals. They are also under pressure to be transparent about corporate governance and show increased management efficiency.

Interestingly, about 35 years ago when Deng invited Rong Yiren to launch Citic Group, formerly known as China International Trust and Investment Corp, Beijing faced more or less the same challenges as it did with economic reform today. Rong was one of the top business tycoons from Shanghai who was later appointed one of the vice-presidents of the government and divided his time in business and politics among Shanghai, Hong Kong and Beijing.

Deng's idea to create Citic Group was to have something that never happened before and he made it very clear that he wanted the firm to have first-class international standards.

"Xiaoping told [Rong] three things: you are in charge of all decisions, you find whoever you want to hire and we will help you break and stay away from all administrative disturbance," Min Yimin, a former board member of Citic Group, said in a 2009 interview with Phoenix TV.

What happened to the group later did not disappoint Deng. It is now a steel giant, the mainland's top securities house and a major commercial bank, among others. To some extent, it is a bit like Singapore's sovereign wealth fund Temasek. But it has also been stuck and is unsure of what it can do next in the country's latest wave of economic reforms.

For Citic Group, history repeats itself 35 years on.

Since taking charge about a year ago, Premier Li Keqiang has made his top priority keeping the mainland economy growing (and to make that happen, the government must boost efficiency of its big state enterprises) and repeatedly emphasised the urgency in reforming the state sector. The message from Li and other senior officials is very clear: if not now, when?

The Citic deal gives the answer to when. It is happening right now and right here in Hong Kong, and Citic Group is picked again as a pioneer among the state enterprises to join this new round of reform.

If successful, the deal would give Hong Kong a huge boost as doubts have grown rapidly about the city's leading position as a financial centre. Competition has arisen, for example, from Shanghai's 2020 international financial centre plan, as well as from New York and London, given the economic recovery in the United States and the euro zone since the 2008 global financial crisis.

After the deal is completed, Citic Group is supposed to move its headquarters to Hong Kong. Just recently during Chief Executive Leung Chun-ying's trip to Beijing, he also requested more state firms to consider Hong Kong as the destination for their Asia-Pacific headquarters. Leung is definitely getting something that is much bigger than what he expected.

The most recent setback for Hong Kong's financial centre ambition is the decision by Alibaba, the mainland's No1 e-commerce firm, to launch its US$15 billion listing in New York.

The city lost the deal mainly due to its strong defence and unwillingness to change its regulations for just one company's special management structure. Alibaba executives have publicly raised doubts whether Hong Kong is out of fashion and stuck in its own legacy, unable to catch up with the changing times.

Bill Stacey, chairman of Hong Kong's home-grown think tank Lion Rock Institute, told the South China Morning Post that the Citic deal should definitely be considered as a move by Beijing to strengthen Hong Kong as the leading financial centre for China and the world.

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