High-level government officials okay large-scale restructuring of state assets

　　By TAN WEI

　　The time is right to adjust the structure of China’s state sector through mergers and acquisitions (M&A), said Chen Qingtai, Deputy Director of the Development Research Center under the State Council.

　　“The reform of state-owned enterprises (SOEs) has played a key role in China’s economic restructuring plan. And now it’s imperative to adjust industrial structure and achieve industrial upgrading through M&A with SOEs,”said Chen on November 19 at an international forum on M&A.

　　Since the mid-1990s, China’s economy has become a buyers’market, characterized by intensifying market competition and the polarization of SOEs, said Chen. Some enterprises have engaged in vicious competition due to defects in the property rights and capital flow structures. They consequently have been unable to improve their competitiveness through reorganization. Chen said it is therefore vital to upgrade the nation’s industrial structure through M&A with SOEs.

　　Since the 15th National Congress of the Communist Party of China (CPC) held in September 1997, a common opinion has taken shape with regard to the state economy. It is generally agreed that the government must focus on restructuring large SOEs and give smaller companies more freedom.

　　State assets are special resources controlled by the government, and any investment made by the government aims not only to add more value to its existing assets, but to retain power over them. So as the state sector undergoes layout adjustments, state assets should be concentrated only in state-controlled industries and fields. At the same time, other types of ownership should give full play to their respective advantages in market competition. After many years of hard work, theoretical obstacles to achieving this goal have been gradually removed.

　　The State-owned Assets Supervision and Administration Commission (SASAC) of the State Council was founded after the 16th National Congress of the CPC held in November 2002. Chen said that this move created an important condition allowing SOEs to participate in M&A, making it clear that SASAC is responsible for the management of SOE property rights. This helped secure transfers while preventing the loss of state assets. Moreover, it laid a foundation for SOEs to participate in international M&A.

　　As economic reform gathers momentum, M&A is on the fast track. Transactions have increased by 70 percent annually over the past five years. Guided by the government’s promotion of M&A, some central enterprises—directly under the Central Government—have used M&A to realize“large consortiums.”Other companies have been engaging in internal restructuring and mergers.

　　From April to September this year, SASAC approved property rights and assets sales of 48 enterprises. These deals involved state capital and equity worth 22.5 billion yuan (.72 billion). These sales involved three central enterprises that injected quality assetssintostheir majority-share-holding listed companies, involving state capital and equity worth 20.5 billion yuan (.48 billion).

　　Meanwhile, qualifications for legal persons of 192 central enterprises were cancelled during the internal restructuring and mergers. Other 54 were dismissed, revoked or went bankrupt.

　　Private and foreign investors were actively involved in these deals. Of the property rights transactions of central enterprises that took place this year, about 83 percent were transferred to private companies and foreign investors.

　　After China’s entrysintosthe World Trade Organization (WTO), more foreign investors have focused their attention on the SOE restructuring, closely examining profitable and listed companies. Of the M&A cases that took place between foreign businesses and Chinese listed companies, most were directed at China’s star enterprises. SASAC predicted that as the transitional period that followed China’s WTO accession fades, more lenient policies will be adopted for foreign investors to acquire Chinese enterprises and they will enjoy wider market access.

　　Since the 1990s, economic globalization has been characterized by the rapid increase of cross-border M&A cases. Figures show that 80 percent of foreign direct investment (FDI) happens via M&A. SASAC Chairman Li Rongrong said that M&A, especially those involving large and medium-sized SOEs, is an important way for Chinese companies to enter the international market, improve management and achieve economy of scale. It is also one of the best ways for domestic enterprises to survive the increasingly tough competition.

　　Last year, China ranked first in the world in terms of FDI, but FDI through M&A accounted for only 5 percent. Zang Yueru, Director of the Macroeconomic Research Institute of the National Development and Reform Commission (NDRC), said that M&A is still nascent in China. More time is needed for domestic enterprises to become familiar with international practices.

　　Hu Jingyan, Director of the Foreign Investment Department of the Ministry of Commerce, M&A has always been a main channel of international investment. But it is underdeveloped in China mainly due to lack of workable regulations.

　　Practical, detailed laws and regulations must be created so that the development of M&A is no longer hindered in China, Hu said. The government has released a series of laws and regulations that can help foreign investors who want to be involved in SOE restructuring, including the revised Industrial Catalogue Guiding Foreign Investment (2002). The revised catalogue opened sectors such as telecommunications, gas, heating and water supply to foreign investors. It also reduced the list of restricted sectors by two-thirds and encouraged an additional 76 items. Last year, the State Council also released the Interim Provisions on the Merger of Domestic Enterprises by Foreign Investors, providing detailed regulations for foreign investors who wish to engage in M&A with SOEs.

　　Li Rongrong also said that SASAC will work out more laws and regulations related to M&A with foreign investment, offering improved legal guarantees in this regard.

　　Meanwhile, to facilitate M&A, China will establish a modern property rights system to oversee the flow of state assets and clarify rights and responsibilities, he said.