OREANDA-NEWS. Fitch Ratings says that China's planned classification of state-owned enterprises (SOEs) will help to more clearly define the companies' policy mandates and strategic priorities, and more efficiently allocate state capital and resources. The classification, which is part of ongoing reforms in the sector, will provide guidance for Fitch's assessment of SOEs' linkages with the state in its rating process.

On 13 September 2015, the Central Committee of the Communist Party of China and the State Council jointly issued guidance that emphasised the leading position of SOEs in China's economy and laid out broad directives for reform, including classification of SOEs, hybrid ownership and establishment of state capital investment or operation companies.

The document classifies SOEs into two major categories: public-service enterprises to execute strategic policy tasks and commercial enterprises to maximise economic returns.

Fitch expects public-service SOEs, which are policy vehicles with limited commercial operations, to maintain strong operational linkages with the government, which will warrant a top-down rating approach. The document indicated that these SOEs are likely to remain fully state-owned and mainly rely on government funding.

The linkages between commercial SOEs and the state will depend on which sub-category they fall into. The state is likely to gradually exit from commercial SOEs operating in fully liberalised and competitive sectors, and some of these SOEs will be allowed to fail or to be eliminated in the event of distress, as long as systemic risk remains manageable. These SOEs are more likely to have weak linkages with the state and their ratings will less likely benefit from any uplift at all.

However, not all commercial SOEs will be subject to less government support or intervention. Among the SOEs held by the central government, Fitch expects some of the 53 vice-ministerial level backbone SOEs to fall into the sub-category of commercial SOEs operating in strategic sectors with critical importance to national security and the economy, or those undertaking major specialised policy tasks in addition to commercial operations. These SOEs will remain under majority state ownership and control.

The assessment of the linkages these SOEs have with the state will depend on the degree to which their competitive, market-oriented businesses are integrated with or complementary to their strategic, policy-oriented operations, or if their competitive businesses dilute their strategic roles.

Fitch believes the government may seek to consolidate state-owned resources in one particular broad sector under one roof and therefore inject certain strategic, policy-oriented assets into commercial SOEs with complimentary sector exposure. If a particular sector is of critical strategic importance, and the asset consolidation makes the surviving SOE a dominant player, a top-down approach may be taken. This was the case of Bright Food, where the Shanghai State-owned Assets Supervision and Administration Commission (SASAC) fostered the merger between Bright Food and Shanghai Liangyou Group. The latter is responsible for managing municipal-level policy grain and edible oil reserves and the restructuring significantly strengthened Bright Food's linkage with Shanghai SASAC, resulting in a change in Fitch's rating approach from bottom-up to top-down and an upgrade in the company's rating to 'A-' from 'BBB-.'