This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 18, 2017).
BEIJING -- What was billed as a showcase for China's state-sector reform is threatening to instead mire Beijing in embarrassment.
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Only hours after state-controlled China Unicom disclosed a plan to sell $11.7 billion in shares to a group of companies including internet giants Alibaba Group Holding Ltd. and Tencent Holdings Ltd., the wireless carrier withdrew the plan from the Shanghai Stock Exchange without explanation late Wednesday.
Early Thursday, China Unicom, citing "technical reasons," said it would file a revised plan in three trading days; it didn't elaborate.
According to officials with knowledge of the matter, the abrupt withdrawal was because certain terms in the China Unicom plan ran afoul of recently amended securities rules. China Unicom couldn't immediately be reached for comment.
In a deal that has come to symbolize a government initiative aimed at letting state companies raise private capital to help their balance sheets and fund expansions, the snafu underscores the enormous difficulty in revamping China's brand of state capitalism. While the leadership has stated its desire to channel more private capital in sectors long monopolized by inefficient state firms, like telecommunications, it has also set out to strengthen Communist Party control over the companies and prevent any losses of state assets.
Government-directed mergers in the state sector, for instance, have created ever larger state giants. In China Unicom's case, there are questions about some investors' commitment to a deal largely driven by the government as opposed to market forces. Even publicly traded firms controlled by the state are required to set up party committees that outrank corporate boards.
The upshot: The state is increasing, rather than decreasing, its role in the economy. "We're not moving ahead but going backward in terms of reform," said Christopher Lee, a managing director at S&P Global Ratings
The leadership picked China Unicom as a trial case for its mixed-ownership experiment that has been making only limited progress since its launch two years ago. Officials viewed the company as appealing to private companies because it is one of only three players in a lucrative sector. China Unicom made 2.4 billion yuan ($359 million) in net profits in the first half of this year, up 68.9% from a year earlier.
But the process has been littered with flubs and reversals. According to the officials familiar with the matter, the state-owned Assets Supervision and Administration Commission initially came up with a rather modest plan to dilute the share held by the state in China Unicom. The leadership called that plan "too conservative," one of the people said.
Together with other agencies including the Ministry of Industry and Information Technology, the state-assets commission then accelerated efforts to make China Unicom farm out more stakes to outside investors, according to the officials.
The plan released by the company Wednesday showed that investors including Alibaba, Tencent, Baidu Inc. and China Life Insurance Co. would buy about 10.9 billion shares, or 35.2%, of China Unicom. The purchase price was set at 6.83 yuan a share. The company's employees would also get to purchase about 850 million shares at 3.79 yuan apiece, according to the Wednesday presentation by China Unicom.
But even as key government agencies including the state-assets commission and the nation's top economic planner signed off on the plan, some details in it failed to meet new requirements set by China's top securities regulator.
Specifically, according to the people with knowledge of the situation, new shares issued by a listed company are capped at 20% of the company's existing shares outstanding under rules introduced in February. The amount of shares China Unicom proposed to sell as part of the mixed-ownership plan exceeded 40% of its shares outstanding. Meanwhile, the people say, China Unicom set the price at which it planned to sell the shares to the investors lower than required under the new securities regulations, which stipulate it should be based on the most recent trading.
It is unclear if China Unicom or its regulators involved the China Securities Regulatory Commission while drafting the plan, or why the plan didn't reflect the new rules.
"It's a bit embarrassing that you had to withdraw a plan shortly after it's filed and after you had spent so much time putting it together," a policy adviser involved in state-company reform said. "At least it shows there is a lack of communication of sort."
Confusion also surrounded which firms will ultimately invest in China Unicom. Companies including Tencent, Baidu and Didi Chuxing have publicly confirmed their participation in the deal. However, CRRC Corp., a giant rail-equipment manufacturer, denied that it would invest in China Unicom despite the carrier's official presentation listing it as an investor.
The withdrawal of the plan by China Unicom caused several companies listed as new investors to suspend their shares. Retailer Suning Commerce Group, Guangzhou Eastone Century, a telecom-equipment maker, and ChinaNetCenter, an internet service provider, said after halting shares Thursday that they won't resume trading until China Unicom releases its revised plan.
Still, some analysts expect the plan, once tweaked, to eventually go through, citing the leadership's need to display its resolve to revamp the bloated state sector ahead of a major power transition later this year.
"In the end, I expect the securities regulator may have to set more flexible rules to help the reforms," said Zhu Chaoping, China economist at UOB Kay Hian Holdings, a Singapore investment bank.
--Yang Jie, Alyssa Abkowitz and Dan Strumpf contributed to this article.
Write to Lingling Wei at firstname.lastname@example.org
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August 18, 2017 02:47 ET (06:47 GMT)