There are doubts over whether the jewel of the Chinese state-owned airlines, Air China, will be allowed to follow flotations at China Southern and China Eastern in two years' time. David Knibb reports. Whether Air China will sell and list shares overseas after China Southern and China Eastern depends upon who you ask. All the public statements suggest everything has been decided and, barring some disaster, Air China will follow its Guangzhou and Shanghai colleagues into the market. But privately, veteran China watchers are sceptical. They suspect much still remains to be decided, and how it is decided depends on whether one adopts the bright or dark view of China's future.

For at least three years the official line has been that Air China will follow China Southern and China Eastern in becoming first an enterprise group and then a shareholding company, which will partly privatise as it sells and lists shares abroad.

The first step is complete. Air China became an enterprise group in December 1993, only three months after comparable ceremonies launched enterprise groups at China Eastern and China Southern. Like its counterparts, Air China Enterprise Group is a fairly autonomous holding company for the airline, its interests in an aircraft maintenance venture, flight catering, and a range of other businesses.

Yin Wenlong, who became Air China's president that same year, says a shareholding company is still planned. A year ago he confirmed that Air China would form a shareholding company and receive approval to sell and list shares overseas, but stressed there was a need to restructure it first.

Near the end of last year, unnamed Beijing officials quoted in China's English language daily said 'other Chinese airlines' would be allowed to follow suit if China Southern and China Eastern succeeded in raising funds in foreign security markets. And according to Zhang Jianming, Air China's director of international affairs, there is no question about Air China's plans. 'It's already decided. The CAAC has given no formal approval, but the intent is clear.'

Zhang sees nothing sinister about scheduling Air China after the partial privatisation of China Southern and China Eastern. Air China is simply 'too important to take the risk' of being first, explains Zhang. Hence, the plan has always been for China Southern to be the test case, followed by China Eastern, and then about two years later by Air China. That is the only reason Air China has not applied yet for approval to sell and list shares.

Why, then, is there any doubt? Of course, there is uncertainty in the market, but the combined wisdom of China Southern's and China Eastern's privatisation departments; their underwriters, Goldman Sachs and Morgan Stanley; and China's Securities Regulatory Commission ought to be enough to avoid any market embarrassment that might subsequently undermine Air China's chances.

The doubts are actually not about the market, but about Beijing. 'Air China is much more like a state carrier than either China Southern or China Eastern,' explains Eisha Cheng, Hong Kong based airline analyst for Lehman Brothers. 'The latter two are recognised as more independent and profit seeking, while Air China is seen as a representative of the state. It may sell shares someday, but it will be a long time.'

A Hong Kong aviation specialist with clients on both sides of the border echoes this caution. 'Air China is closer to the CAAC than any other airline,' he says and adds that he is very dubious that Air China would be allowed to sell or list shares overseas.

A public affairs analyst who speaks and reads Chinese and has been watching China for years from his Hong Kong base warns against relying too much on quotes from unnamed officials in China's English language daily. The paper is written for foreign consumption with articles that are often 'trial balloons,' he warns. Hard information comes when 'some top official is quoted by name in the [Chinese language] People's Daily, usually at a ceremony staged for the announcement.'

That same analyst shares the scepticism about Air China's sale. 'Air China is still the flag carrier. It wears the official hat. It's okay for entities outside of Beijing to seek foreign investors. China Southern and China Eastern are simply airline examples of this. It's been happening in other industries as well.'

He believes that after so many years of Communist rule, it would be difficult for Beijing to relinquish power over its flag carrier. Until the atmosphere in the higher echelons changes, China's rulers would be very uneasy about giving foreigners any measure of ownership or control, he adds. 'Under - cutting the central power base in this way would cause trouble.'

Ultimately, it is impossible to say who is right. Different facts support each view. On the bright side, Air China is proceeding unconstrained with its restructuring. It has already split its traffic department into separate divisions responsible for passengers, cargo, and ground handling. It has reorganised its head office, cut staff, and put managers under contracts subject to review and non-renewal as a way of weeding out low performers without the unpleasantness of outright dismissals. Next, the airline plans to reorganise its crew and training departments along more functional lines. Zhang Jianming, international affairs director, predicts the restructuring will be complete by the second half of this year.

Accounting procedures have already switched to match western standards, according to Zhang, and plans are underway to form a shareholding company that may consist only of Air China, and will 'certainly not [include] all divisions of the Air China Group.' Air China is 'staying in touch' with Merrill Lynch, CS First Boston, Lehman Brothers, and other potential underwriters, according to Zhang. Overall, he says Air China 'is using this interim to prepare.'

On the dark side, it is clear that Beijing has slowed the pace of overseas share sales by state firms. In the group of 22 which had preliminary approval last year for overseas IPOs, Beijing gave final approval only to six.

What is less clear is whether that slowdown is due to weak markets or something more sinister. Conservative Communist officials have reportedly become more outspoken about the erosion of party control through declining state ownership. China is not unique, but it illustrates a common reaction among nations struggling to switch from planned to market economies. A combination of Mexico's economic woes and investor caution about emerging markets has prompted those elements that opposed reforms in the first place to argue for a return to the old ways. As a World Bank economist told the Wall Street Journal, 'The forces of protectionism are having a great time with this crisis.'

Within China, the process of market reform is floundering. This is partly due to political indecisiveness because of uncertainty over the succession following Deng Xiaoping's death. Politically, China seems to be in a holding pattern.

Once it emerges, the nation still faces deep rooted problems. Zhu Rongji, China's vice premier, warns that 49 per cent of all state enterprises are losing money. The banks have made so many non-performing loans to them that banking reforms are stalled. Yet restructuring or liquidating money-losing firms will fuel unemployment. The growing ranks of temporary and unemployed workers, already estimated at over 150 million Chinese, represent a political timebomb. Add inflation raging at 35 per cent in some cities, and it is easy to appreciate why China's leaders lack the will to make socially wrenching decisions and why arguments to slow or reverse reforms might have a growing appeal.

Even some firms approved for partial privatisation face the prospect of conservative government elements using the privatisation process to assert more control. Xian Aircraft, one of the group of 22, has reportedly threatened to scupper its IPO application rather than submit to the closer supervision insisted on by Aviation Industries of China, a government division, as a condition of its approval.

Whether Air China, as a relatively autonomous enterprise group, would face similar pressures is unclear but the pattern is fairly typical, says a Hong Kong analyst, who predicts it could take sustained pressure for Air China to convince the CAAC to approve an overseas IPO and listing.

While Beijing has clearly slowed overseas sales of state enterprises, it is less clear whether it plans to slow the overall privatisation process. In the first several months of this year, Beijing approved initial public offerings on the Shanghai and Shenzhen exchanges for 11 state-owned firms offering $393 million dollars in shares.

These are priced lower than the IPOs planned overseas, which must reap higher rewards simply to justify heftier preparation costs, but they do demonstrate a continuing interest in privatisation.

One option is to dismiss China's nay-sayers as victims of the phobia infecting Hong Kong, the breeding-ground for sceptics who interpret everything Chinese pessimistically. Yet, the signals are too mixed to dismiss them out of hand.

By the time the British flag comes down in Hong Kong, the part privatisation of China Southern and China Eastern will be history, questions about Deng Xiaoping's successor may be resolved, and Air China will make its final application for an overseas IPO and listing. Whether or not Beijing will approve it will depend on the state of China's political reforms.

By the time the British flag comes down in Hong Kong, the part privatisation of China Southern and China Eastern will be history, questions about Deng Xiaoping's successor may be resolved, and Air China will make its final application for an overseas IPO and listing. Whether or not Beijing will approve it will depend on the state of China's political reforms.

Source: Airline Business