NEW YORK (The Deal) -- Beer, retailing, food and beverages.

There are stranger combinations, but this one hadn't been working for Snow Beer brewer China Resources Enterprise, whose share price had limped along as investors fretted about what it would take to turn around the performance of its ailing supermarkets.

That was until 52% shareholder China Resources (Holdings) on April 21 agreed to buy back its non-brewing assets for HK$28 billion ($3.6 billion) and to purchase up to 10% of its capital, sending China Resources Enterprise's shares up 57%.

The deal presented a new twist on the reforms planned for China's sprawling state-owned enterprises that are exercising investors and advisers and have helped push Chinese stock indices to seven-year highs. Privatizations via initial public offerings or share placements will play a part, but they will be among an array of tools that the state will use to improve its companies' performance.

"There were strategic steps that China Resources needed to take to turn those businesses around, including e-commerce investment, but it wasn't appropriate to do that within a listed company," a source said of the China Resources Enterprise deal. "Market reality was the driver of the deal but the themes -- unlocking value, making the structure simpler and more transparent -- tell a similar story to other SOE reforms."

China has been tweaking the structures of its state-owned enterprises for about 30 years, about halving their number to an estimated 155,000, from about 300,000 in 1994, according to KPMG LLP.

The last concerted round of reforms around the turn of the millennium didn't always end happily, with resultant minority stake IPOs in SOE subsidiaries often failing to improve companies' profitability and leaving newcomer investors frustrated at their lack of say. And the reforms haven't always made SOEs more fleet of foot.

"What has happened in some of the earlier [reform] rounds is the creation of fewer, much larger players. That has the benefit of giving them more market power but they have in some areas become a drag on the economy," said Edward Radcliffe, co-founder and partner at investment bank Vermilion Partners Ltd., which advises international companies on their China strategy.

"Stimulating creativity and dynamism is particularly important in the rebalancing of the economy toward consumption-led growth," which is a key part of China's current five-year plan, he said.  

"Giant companies are not normally known for being innovative in any part of the world," Radcliffe said.

As always with China, there is also a political agenda. President Xi Jinping's has purged some of the powerful families ensconced within China's largest SOEs, where entrenched interests are deemed to have held back progress and nurtured unhealthy patronage networks between bureaucrats and business figures

The latest reform push also comes as Chinese growth slows and the labor market continues to tighten. And it meshes with the nation's broader economic objectives to encourage consolidation to improve companies' efficiency and to advance Chinese technological know-how.

"The SOE reforms are part of government's agenda to bring China to the next level. They've seen that some SOEs are unsustainable and want to unload them, and they have also seen that real improvement and growth can only be achieved by allowing more competition," said Ulrike Glueck, Shanghai managing partner at law firm CMS.

The reforms crystallized with a November 2013 declaration by Xi Jinping's new government that the state will gradually withdraw from industry sectors where there is a healthy, competitive environment, without defining those sectors or specifying what remains out of bounds.

They gained pace in April 2014 when the State Council listed 80 infrastructure projects, in sectors including clean energy, coal, gas, transportation and health care that it plans to open to private capital.

And they accelerated further with a July 2014 pilot program by the state-owned Assets Supervision and Administration Commission to reform six centrally owned companies. Of the six, it selected China National Pharmaceutical Group, or Sinopharm, and China National Building Materials Group for a so-called mixed-ownership program.

Observers noted that the exclusion of the other four companies from the program demonstrated that the reforms didn't equate to across-the-board privatizations.

The reform efforts also align with a liberalization last year of investment rules in the financial sector, which set the Chinese insurance industry up to participate in ownership changes among SOEs.

Among China's biggest, centrally owned SOEs the ball has started rolling.

Along with the China Resources Enterprise deal, in the past few months Citic Group injected $37 billion of assets into the Hong Kong-listed Citic Ltd., which later agreed to sell a 20% stake to Japan's Itochu and Thailand's Charoen Pokphand Group; China Petroleum & Chemical (SNP), or Sinopec, sold a 30% stake in its petrol retailing unit Sinopec Marketing to a consortium of 25 investors for 107 billion renminbi ($17.2 billion); and rolling stock manufacturers CSR and CNR in April received government clearance to merge to create CRRC.

The Chinese government has reportedly considered various potential oil sector mergers, including the creation of a "super-major" though the fusion of China National Petroleum, the parent of PetroChina (PTR), with China Petrochemical, the company behind Sinopec.

The prospect of that combination was rebuffed by both companies late last month, and The Wall Street Journal reported on May 4 that oil industry executives and even government advisers were "pushing back" against proposals for oil mega-mergers.

And in an encouraging sign for foreign investors, late last month local news outlets reported that investors including Switzerland's UBS (UBS), Singapore's Temasek Holdings Pte and France's BNP Paribas are poised to buy a 10% stake in Postal Savings Bank of China, a unit of government-owned China Post Group, ahead of a potential $25 billion IPO next year. It is unclear if a deal has been finalized.

But anyone expecting a foreign-investor free-for-all among centrally owned SOEs will be disappointed. Strategic sectors such as power and telecoms are widely presumed to remain largely off-limit, and advisers suggest would-be acquirers cast their net wider.

"The general perception is that the next step of privatizations will probably be at the provincial or local level," Glueck said.

Indeed, the vast majority of China's 155,000 SOEs are owned by provincial or municipal governments, and reform efforts in these tiers include plans by 20 provinces to privatize up to 70% of SOEs by 2017.

Cash-rich U.S. industrial companies are seen likely to play a role, including Danaher (DHR), which didn't respond to a request for comment.

Ernst & Young LLP's Bob Partridge, the firm's Greater China transaction advisory services leader, predicted that there will be opportunities for foreign investors among regional banks, and credit unions, infrastructure-related businesses, including road construction and high-speed rail, and "lower-tier" suppliers to the aviation sector.

Still, he warned: "The companies that will be doing this in the next wave are not the crown jewels but ones that have been in some cases under-performing but in more average cases moderately performing and in markets that have been under pressure."

Partridge also suggested that the regions on offer may not always align with investors' preferences.

China is, for example, making great efforts to accelerate growth in undeveloped western provinces, and foreign investment in that region is perceived to be more welcome.

"If you are a foreign investor looking to partner in China, do you really want to make your initial stand in one of the smaller provinces?" Partridge asked.

China's SOE reforms are more about creating companies that can hold their own on the world stage than about opening up their corporate sector to foreign capital, analysts say.

Outbound acquisitions are a critical part of this effort, and Chinese outbound deal making gained a major fillip last year when the government raised the National Development and Reform Commission approval thresholds for overseas transactions to $1 billion from $300 million for the resources sector and $100 million for other industries.

Below the central government-owned tier of SOEs, which have been aggressive overseas acquirers, Shanghai government-owned Bright Food (Group) is a good example of an SOE striking overseas deals to bring home brands, know how and in some cases products it would be too water-intensive to produce at home.

In October, it agreed to acquire Italian olive oil producer Salov as part of a concerted push to build a portfolio of foreign food companies, and, it said at the time, "to direct Chinese people's habits towards a healthy nutrition lifestyle, such as the Mediterranean diet."

And in May last year it agreed on a $2.5 billion deal to buy Apax Partners' 56% stake in Israel's largest food maker Tnuva Food Industries.

Bright Food's subsidiary Bright Dairy Food has been suspended from Shanghai trading since March 7 amid reports that Shanghai is contemplating a merger of Bright Dairy that would involve SOE peer Shanghai Liangyou Group.

There are some encouraging developments afoot for inbound acquirers.

Freshfields Bruckhaus Derringer partner Alan Wang noted that a proposed new foreign investment law could be even more significant than the multi-faceted SOE reforms.

The law is in draft form, and if it proceeds as planned it will sweep away many complex approval requirements, for example the need for pre-approval from the State Council in industries other than those on a "negative list" of restricted sectors. That list is expected eventually to replace the current Foreign Investment Guidance Catalogue, which is one of the first ports of call for those looking to invest in China.

"With regards to foreign investment, China has always run on a system where everything is forbidden unless it is authorized but now it is switching to a negative list system -- you can do it unless it is specifically forbidden. That is a huge change," Radcliffe said. 

Now, the caveats.

The law will clamp down on foreign investment in restricted industries via a Chinese interface, drilling down more effectively to determine who actually controls a given company. It also proposes to set up a CFIUS-style national security review system on foreign investments that harm or may harm China's national security.

And the government is seen likely to continue to use antitrust powers of its Ministry of Commerce, or Mofcom, as a tool of industrial policy.

In practical terms, the easiest way for foreigners to get a look in with an SOE is to buy shares in an IPO, which is easiest if the listing vehicle is incorporated and listed outside mainland China.

Overseas incorporation of subsidiaries of Chinese SOEs is no longer common, though historic examples of so-called Red Chip SOEs include Hong Kong-incorporated and -listed China Unicom (Hong Kong), Glueck said.

With domestic state asset sales the Foreign Investment Guidance Catalogue remains, for now at least, the Bible. This lists the industries in which foreign investment is allowed or forbidden, explains where joint ventures with a local partner are the only form of permitted investment, and where Chinese shareholders must have a controlling stake

Ownership restrictions apply in industries such as telecoms, including sub-sectors like handset manufacturing and energy.

Regulations stipulate a special procedure for investments in SOEs that is designed to avoid the perception that state silver being sold on the cheap. Rules include a mandatory audit by a Chinese firm with a license to evaluate state-owned assets, the registration of that report with Sasac, the publication of the proposed transaction by an authority called the Equity Exchange Center, with an invitation to interested parties to bid.

The eventual purchase price can't be less than 90% of the price determined by the auditor.

"The idea is to avoid government assets being sold really cheap -- like Russia. This process aims to ensure publicity and transparency," Glueck said.

"In practice most foreign investors are afraid of this process as it adds uncertainty," she said.

Glueck estimates that with one bidder, a transaction can close as quickly as between six to eight weeks, with several bidders dragging the process out to three to four months.

What has also fallen by the wayside -- to the detriment of foreign investors -- is regulatory leeway for deals involving an SOE and its existing joint venture partner. These too must follow the formal bidding procedure.

"We have seen a tendency for the regulations to be more strictly followed and stipulations that grant some discretion on decisions no longer used," Glueck said.

China watchers identify this transparency crusade as a driving force in the Chinese government's economic reform efforts and one that meshes with Xi Jinping's well-documented crackdown on corruption.

That could give foreign investors more confidence in the target company but also risks making the target's management more skittish.

"It's going to place a lot of burden on the SOE management to give the perception that they are not selling their assets cheap," Partridge said.

"It has suppressed the speed at which M&A is being contemplated. There's a lot of activity but slower decision making; people are putting their finger on the trigger but they are just not going to trigger it," Partridge said.

Notwithstanding the complex and still evolving changes in China's investment landscape, price will remain a determining factor -- and major obstacle -- to foreign investment.

Sellers -- whether SOEs or private companies -- will look to China's frothy equity markets for valuation benchmarks, with the prevalent huge PE ratios deterring some buyers.

As Wang put it: "People should be cautiously excited -- the SOE reforms do present some opportunities, but on the other hand the macro-economic environment is different from a decade ago. There are pricing challenges because of the abundance of domestic capital and local PE funds, and the competitive advantage that local investors have over international ones, owing to their proximity to local regulators and a greater understanding of local market conditions."

Foreign investors "need to have a good relationship with Chinese local partners -- and the SOEs that they want to work with -- and make sure that they have something to bring to the table, whether that's technology or distribution. This would make foreign participation attractive and help them overcome pricing challenges," Wang said.

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