China’s Kweichow Moutai is bailing out a state-owned highway firm —

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Fiery grain liquor and highway maintenance are strange bedfellows. But the unusual matchup is precisely what the Chinese government has orchestrated by tapping booze maker Kweichow Moutai to rescue a state-owned highway operator through a massive bond issuance.

The state-owned parent of China’s most valuable listed company, which is based in the impoverished southwestern province of Guizhou, plans to issue up to 15 billion yuan ($2.2 billion) in bonds to help Guizhou Expressway pay off its debts, with proceeds from the bond sale going towards buying a stake in the highway operator. The company’s shares plunged by almost 7% this week after the company filed documents to the bourse for approval.

As the world’s biggest liquor maker by market value, Kweichow Moutai has leapfrogged other international alcohol firms like Britain’s Diageo and and Belgium’s AB InBev, even though few people outside China have heard of the brand until recently. Fewer still have acquired a taste for its pricey, colorless, burn-in-your-throat liquor. Kweichow Moutai is the biggest constituent (pdf) of the MSCI China stock index, the first index to allow a broad base of foreign investors to buy into the Chinese stock market, and is heavily traded in the stock exchange linkage between Hong Kong and Shanghai. But tapping a publicly listed company to bail out a state-owned enterprise may not augur well for its shareholders.

Because Kweichow Moutai is hugely profitable, it’s under constant pressure from the highly indebted provincial government of Guizhou to “make contributions,” said Zhigang Tao, a professor of economics at the University of Hong Kong.  “While this kind of multi-tasking effort is good for the province and some of its money-losing business, it is bad news for the shareholders of Moutai” unless the company rewarded in kind by the government with perks like greater monopoly power, licensing rights, and market access.

“As one of the most, if not the most [valuable] SOEs in China, the government has gotten into a habit of relying on largess from Moutai,” said Victor Shih, an expert on China’s political economy and a professor at University of California, San Diego. “Last year, Moutai had to transfer 4% of its shares to the Guizhou government at no cost. For senior managers in Moutai, however, helping the government may well have an impact on their careers especially after the share transfer which made both the local and central governments major shareholders of the company.”

Arrangements like these are also reminders that China’s private companies, besides being guided by profits, must also exist to serve the Communist Party. As Tao has previously written (paywall), state-owned companies “are the favorite kids of the socialist government of China,” while private firms are the “so-called adopted kids facing systematic discriminations and substantial constraints in business entries and subsequent operations.”

Though the Guizhou government will implicitly owe Moutai a favor, in the short run the firm’s shareholders have little to gain, said Aris Stouraitis, a professor at the Hong Kong Baptist University’s department of finance and decision sciences. “Most likely it is bad for shareholders, even in the long run. This favor that the market might expect might not materialize.”

Stouraitis also pointed that it’s not unusual for companies within the same corporate group to lend money to each other, in what is known as an intra-group loan. While Kweichow Moutai and Guizhou Expressway don’t share a corporate umbrella, both have the state as a controlling shareholder, making Moutai’s bond issuance somewhat akin to an intra-group loan. And as with any loans, there is a risk of default, of which, said Stouraitis, there are many cases.

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