Can China Turn Garbage Into Gold?

Beijing Capital, one of the largest diversified conglomerates owned by the Beijing city government, bought New Zealand’s largest waste management company this month for almost US$1 billion. This follows on Hong Kong-based Cheung Kong buying New Zealand’s second largest waste management company for US$400 million.

For Beijing Capital, which is very domestically focused and has a reputation for being conservative, this is a bold move. Even though Li Keqiang, China’s Premier, announced in his 2014 work plan that his goal for outbound investment by Chinese enterprises was US$99 billion, and large Chinese enterprises would want to be seen to support his goal, this is a big step. Outside of basic materials – oil, gas, mining, chemicals, etc – there have been few examples of state-owned enterprises making an acquisition as large as this.

What could be the drivers behind the acquisition? Certainly, China’s waste management industry standards will continue to rise over time and New Zealand’s policies and practices offer things that Beijing Capital could apply in its domestic waste management operations. But surely these lessons could have been learned without spending US$1 billion? Perhaps they really are seeking to role model the outbound investment the government is seeking and this is the first step in a multi-country expansion?

Or perhaps it is preparation for another of the central government’s flagship policies, the “marketization” of more state-owned enterprises. Our conversations with leaders of state-owned enterprises, especially those owned at the city level, have focused very much on their preparations for this change. They anticipate greater independence of action along with possibly some forced industry consolidation. They also anticipate the state reducing its ownership stake, selling to private Chinese or international investors.

State-owned enterprise leaders are considering how this will change their governance: Will the board composition and operation be changed? Will management’s freedom to appoint, promote and fire executives be changed? They are also considering what they can do to make themselves more attractive to private capital, domestic or foreign.

It is just possible that in this instance, the leadership of Beijing Capital believes that owning a quality foreign asset will make them a more attractive investment for foreign capital. We will see.