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  Effects of tighter State asset protection

State enterprises remain the most important component of the Chinese economic system.

Preservation and increase in value of State assets has been a challenging task undertaken by the Chinese Government since the beginning of the reform of the Chinese economy from planned economy to market economy and the participation of State-owned enterprises (SOEs) in market competition approximately two decades ago.

The recent launch of the Provisional Rules on Supervision and Management of State Assets in Enterprises by the State Council is another step taken in affirming the government's efforts in this area.

Under the Provisional Rules, which took immediate effect from their issuance at the end of May, the State assets supervision and administration authorities at both the central and regional levels became authorized to represent the government in performing the functions as the investor in non-financial SOEs, including the wholly state-owned enterprises and the companies in which the state holds controlling or minority interest.

The main responsibilities of the supervision authorities stipulated under the Provisional Rules include protecting state assets in the capacity of an investor, guiding and promoting SOE reform and restructuring, supervising SOEs through appointment to the supervisory committees of SOEs, appointing, removing and evaluating the managerial personnel of SOEs and monitoring and supervising the preservation and value appreciation of state assets.

While the supervision authorities are given the decision-making power, subject to local government approval in certain significant cases, over important issues such as separation, merger, bankruptcy, dissolution, change in registered capital, corporate bond issuance, equity transfer involving SOEs, the Provisional Rules require that important matters in the subsidiaries of SOEs be decided by the supervision authorities, and that local government approval be obtained if all State equity in a SOE is transferred or the transfer of a portion of the State equity in a SOE results in the State losing controlling interest in that SOE. In addition, the Provisional Rules also advocate the strengthening of the supervision and management of State assets ownership transactions, disposal of major assets, financial situation, internal supervision and risk control.

The strengthened control over the management of State assets and SOEs will undoubtedly promote the development and growth of the State economy and the realization of the preservation and value appreciation of State assets. It may, however, to a certain extent increase the difficulties in gaining approvals as well as completing the formalities when acquiring State assets or shares in SOEs by other domestic or foreign investors.

Further, the Provisional Rules announce the entitlement of SOEs in operational autonomy and clearly disapprove any undue interference by the supervision authorities with SOEs' business activities. The powers that the supervision authorities have as investor in the appointment and removal of key personnel to SOEs and in the supervision and management of major corporate matters may reduce the autonomy SOEs enjoy in running their businesses and create inconvenience to the other investors in SOEs.

*Sharon Zhang is an associate of Coudert Brothers Hong Kong office and a member of the China practice group.

(HK Edition 07/09/2003 page7)


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