China: Creating a gigantic SOE by merging two together - ING

Iris Pang, Economist at ING notes that the merger of a big coal miner (with some power generation businesses) with one of the largest power generators was announced by the state-owned regulator, SASAC on 28 August 2017 and ING expects that there are more SASAC mergers to come.

Key Quotes

“We believe that the merged company will survive better. The two have overlapped business, so there will be less competition in the power generation market. And, they can cut back infrastructure investment in the overlapped areas. The merged company also faces lower costs of input (coal) and steadier supplies. The merger also creates a very big SOE in the sector, which will have greater bargaining power. The impact of this will be more obvious when it invests offshore (eg: under Belt & Road initiative).”

“The cost of the merger is a less competitive environment, which usually pushes prices up. In this case, electricity prices will probably not go up after the merger as this is pricecontrolled. However, this may not be the case for upcoming mergers in other sectors. Another cost is that the bigger SOEs may enjoy even softer budget constraints, that is, even less efficient uses of capital.”