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Nation needs private capital to satisfy resource demand

By Yang Guoying (Global Times)

08:18, June 07, 2012

The Australian government recently ordered Sinosteel Corporation, a State-owned steel maker, to halt its operations in Western Australia after the cash-strapped firm failed to meet its liabilities in the construction of a new rail and port project meant to facilitate an iron ore exploration in the area.

The announcement could not have come at a worse time for Sinosteel, which has spent $1.34 billion on the project in question and is currently grappling with huge losses thanks to a recent collapse in iron ore prices. According to the company's financial reports, Sinosteel's overall debt, much of which was racked up through heavy overseas investment, accounted for 91.29 percent of its assets as of the end of September.

But Sinosteel is not the only State-owned enterprise (SOE) in the resource industry to have been stymied in its push to enter the world of foreign investment.

As the world's largest resource consumer, China is becoming more reliant on imports to meet its demands for raw materials and energy sources, which has pushed domestic resource firms to expand abroad to offset extreme fluctuations in the global commodities market.

With the country's appetite for resources growing stronger and SOEs continuing to fall flat in securing energy assets overseas, it may be time for the authorities to step in and encourage well-funded private companies to pick up the slack where government-run firms have failed to succeed. Indeed, Jiangsu Shagang Group, a private steel maker, and Xinjiang Guanghui Industry, an energy producer, are both currently turning profits from their respective overseas assets in Australia and Kazakhstan.

In SOEs, the State-owned Assets Supervision and Administration Commission (SASAC) holds majority stakes, rather than those who directly manage the company's business operations. Under this share holding system, it is the SASAC who will dictate SOEs' plans for overseas acquisition, usually with more focus on complying with government policy than realizing a profit or maximizing the company's gains.

Conversely, of course, in China's private enterprises, the major decision makers are usually highly invested in the success of the company and will have more incentives to draft profit-driven plans for overseas investment.

Also, private companies are somewhat less sensitive to unrest abroad. Private companies, seen as a-political and merely concerned with business, could stand a better chance of avoiding the dangers posed by instability or sudden regime changes in resource-rich regions such as the Middle East.

To ensure the development of China's resource industry, the nation's regulators need give private resource companies, which currently face limits on the amount of money they can invest outside of the country, more leeway when it comes to acquiring assets overseas.


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