China power sector reform: The challenges ahead

A report that China will soon unveil a plan to restructure the state-run power sector led to a surge in related shares Wednesday.

Beijing intends to create three energy giants through mergers of eight companies, Bloomberg News reported. The restructuring is expected to involve five coal-fired power producers and three nuclear power firms.

The move is part of China's broad reform in energy sector to reduce the share of power generated by coal from currently over 70 percent to below 40 percent by 2030, and raise the portion of nuclear power as well as renewable energy.

Three major energy groups will be formed, according to the report.

China Huadian and China Guodian Corp., two of the biggest coal-fired power generators, may merge with China National Nuclear Corp.

China Datang and Shenhua Group may merge with China General Nuclear Power Corp.

Meanwhile, China Huaneng may merge with State Power Investment Corp.

Mergers are proposed for the unlisted parent companies, but since their Hong Kong-listed units will almost certainly be involved in the exercise, investors rushed in to buy those stocks.

Datang International Power Generation Co. (00991.HK), the listed unit of China Datang Corp., soared 15.6 percent.

China Huadian's listed unit, Huadian Power International Corp. (01071.HK), jumped 7.3 percent, while China Huaneng Group’s Huaneng Power International Inc. (00902.HK) rose 6.7 percent. CGN Power Co. (01816.HK), the listed unit of China General Nuclear Power Group, gained 2.6 percent.

Under the government's master plan to reduce the reliance on heavily polluting coal-fired power plants and replace it largely with nuclear power, traditional power firms are expected to see contraction. To cushion against the financial and social impact (such as unemployment), merging coal-fired power firms with nuclear power firms seem to be a good idea.

Nevertheless, implementation could be difficult. For instance, setting the prices for mergers is one of the daunting tasks.

Dimmed prospects of traditional power firms have kept their shares under pressure, resulting in them trade at around 0.6 times the book value, compared with more than two times in the case of nuclear plays.

A restructure based on the current market pricing may upset shareholders of traditional power firms. But if nuclear firms are asked to pay higher prices to acquire coal-powered plants, they wouldn’t easily agree either, given the overcapacity and expected profit decline.

This article appeared in the Hong Kong Economic Journal on May 10

Translation by Julie Zhu

[Chinese version 中文版]

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