China’s move to list one of its biggest state-run conglomerates in Hong Kong has left some investors questioning whether Beijing’s choice is about improving corporate management and welcoming foreign investors or cementing its own control. CITIC Group Corp, China’s state-run flagship investment company, is to transfer its main operating assets to its majority-owned, Hong Kong-listed industrial conglomerate CITIC Pacific Ltd. The deal, valued at $42 billion, comes just a few months after China’s Communist Party promised to promote use of free markets to bolster growth in the world’s second-biggest economy. The day after welcoming a deal that folds huge assets from steel to property companies into their firm, CITIC Pacific’s minority investors were more sceptical, sending the stock lower. CITIC Pacific plans to pay for the biggest injection of assets into a listed company in Hong Kong’s history with an unspecified combination of new shares for existing holders and cash. Rather than relinquishing control, in the short term CITIC Group could raise its stake in CITIC Pacific from 57.51 percent to close to 90 percent, according to Breakingviews calculations. While it’s unclear whether or when CITIC Group might ultimately reduce its holding, the transaction highlights the complexities that China may face in convincing markets that it can successfully open up more state-owned assets to foreign investors. “If you go to market with confusing messages, lack of clarity about structures, you can often put a big chunk of investors off side,” said Sydney-based Shane Oliver, head of investment strategy at AMP Capital, which manages $120 billion. “Then it’s much harder to retain them,” said Oliver, whose fund has exposure to Hong Kong and China shares. After rising more than 13 percent on Thursday on the back of the deal announcement, partly on short-covering, CITIC Pacific shares slid to the bottom of the pack on Friday. The stock was down 5 percent at 0801 GMT, making it the worst performer in the benchmark Hang Seng Index, up 1.1 percent. As CITIC Pacific slipped, some investors also questioned whether the new assets it is receiving will revive confidence in a company hammered in recent years after miscalculating the huge cost of developing a mine in Western Australia. In October 2008, the stock lost half its value in one day after sour bets on the direction of the Australian dollar resulted in nearly $2 billion of losses. “Early gains were driven by the excitement of the deal, people have become more down to the earth again as they need to see how well the assets will be in future,” said Ben Kwong, chief operating officer of regional brokerage KGI Asia. BIGGEST CONGLOMERATE In the deal, CITIC Group said it would transfer the assets of its main operating arm, CITIC Ltd, to the Hong Kong-listed company. CITIC Ltd made a net profit of 34 billion yuan ($5.5 billion) net profit in 2013. It had a total equity of about 225 billion yuan ($36.2 billion) at the end of 2013, while its debt level wasn’t disclosed in the Wednesday filing announcing the deal. Its array of assets stretches from gold mining in Central Asia, to oil in Kazakhstan and the Beijing Guoan Football Club. The company also makes hydropower equipment, owns China’s only platinum import and export company and biggest manganese ore miner, and oversees a small empire of office and residential property spanning Shenzhen to Dalian. About 79 percent of its 2013 profit came from the financial sector, through stakes in companies like China CITIC Bank Corp , according to estimates from Jefferies analysts. While the deal means investors in CITIC Pacific will get their first exposure to financial services assets, China’s banks have struggled of late, under the weight of mounting bad debt. “CITIC Pacific will be a stronger company through a much enlarged shareholders’ equity, broader range of businesses and deeper managerial skills,” CITIC Pacific said. “These will enhance its competitiveness and ability to capture the economic growth opportunities in China.” The company hasn’t indicated exactly how it will finance the deal. In a statement on Thursday, credit rating agency Moody’s said it “expects that CITIC Pacific will fund the acquisition mainly by equity through issuing new shares to CITIC Group.” Moody’s placed its ratings on CITIC Pacific under review for an upgrade, reflecting its expectation that “the proposed acquisition will greatly increase CITIC Pacific’s scale and enhance its credit profile.” Last November, Moody’s had cut CITIC Pacific’s rating to Ba2, two notches below investment grade, citing lingering risks associated with its Sino Iron project. SOE REFORMS How the CITIC deal fares will be closely watched by those looking for evidence that China can implement the reforms it says it wants to make. Last November China’s Communist Party said the government was prepared to advance state-owned company restructuring and promote further use of markets to bolster its economy as its slows after the blistering growth of the last decade. Beijing also said it would transform qualified government-owned conglomerates into state investment companies. In one of the first developments, Sinopec, Asia’s biggest oil refiner, said last month that it would sell up to 30 percent of its marketing arm, which owns more than 30,000 petrol stations, in a 300 billion yuan ($48.31 billion) asset restructuring. The sale may take place in the third quarter of this year, company chairman Fu Chengyu said earlier week. “It is absolutely essential that these SOEs get restructured. They represent an incredibly inefficient part of the Chinese economy,” said Singapore-based Peter Elston, head of Asia Pacific Strategy and Asset Allocation at Aberdeen Asset Management Asia. “What we seen so far really just the tip of what needs to happen. It’s encouraging to see some restructuring taking place, but an awful lot more needs to happen, before we can have the confidence to increase investment into China,” he added. Hong Kong remains the leading market for China-related companies, which have raised more than US$375 billion from equity share sales in the enclave since 1993. “Hong Kong is always a ‘testing ground’ for China’s reforms and has the ability to help Chinese companies to extend their overseas business,” K.C. Chan, Hong Kong’s acting financial secretary, told Reuters. (Reporting By Denny Thomas and Matthew Miller; Additional reporting by Umesh Desai and Michelle Chen in HONG KONG; Editing by Kenneth Maxwell)