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Experts: State-asset sale fever should cool down
( 2003-09-21 15:26) (China Daily)

Amid a selling frenzy of State firms by local governments, experts at the World Bank suggest that proceeds from SOE ownership transformation should be used to fund pension liabilities or reduce State debt instead of paying operating expenses.

Central government departments - especially the State-owned Assets Supervision and Administration Commission (SASAC), the Ministry of Finance, large banks, the China Banking Regulatory Commission, and the National Social Security Fund - should liaise with local counterparts on how to control "localization of benefits and nationalization of liabilities," the bank said in a recent report.

With laws to standardize transactions of State assets still in the pipeline, many local governments are eager to sell their State assets and keep most of the proceeds in their own pockets, while the nation's social security funds are short of billions of yuan.

Zhang Chunlin, renowned World Bank expert on SOE management, noted that avoiding additional accretions of national liabilities should be a major concern apart from the drain of State assets in the SOE reform.

Central China's Hunan Province announced earlier this month that it intends to sell all the State shares in its listed companies at a trade fair in Shenzhen next month.

Also joining the fray are municipalities and provinces, such as Shanghai, Tianjin, Henan and Shandong provinces. Northwestern China's Shaanxi Province is a pioneer - at the beginning of this year, it listed 50 billion yuan (US$6 billion) of State assets for sale.

Such big sales have aroused concern from both officials and experts.

Since SASAC has not yet established local branches, provincial governments and relative regulatory bodies are still entitled to dispose of State assets within their jurisdiction.

Experts say before a more comprehensive legal and regulatory framework is established, it would be hasty for some local governments to sell State holdings on a large scale.

Even in selling State assets, different firms should follow different modes, said the World Bank report, which was compiled by Zhang and his colleague Gao Weiyan.

The report suggests the government dispose all small- and medium-sized SOEs.

"Small- and medium-sized SOEs should not be included in China's SOE portfolio anymore because they tend to be loss-makers; to diminish rather than enhance State capital; and to cumulatively pose significant liability risks," the report said.

Zhang suggests that the sale of small SOEs and their valuation should focus on the transfer of real estate or access to real estate such as land use rights and leaseholds. "If at all possible, small SOEs should be sold simply for the highest price through a public auction," the report said.

However, for the great majority of medium-and-large SOEs, a "trade sale" to a dominant shareholder such as a strategic investor should be the preferred method for ownership transfer.

The use of IPOs should be limited to large, well-known, and well-run SOEs, whose public offerings would contribute to capital market development and where protections for minority shareholders are adequate.

The report noted that closed processes such as MBOs (management buyout) MEBOs (management and employee buyout) should be avoided, except perhaps in the case of small SOEs that are particularly dependent on the scientific/technical skills of enterprise staff.

Mixed sales, such as a trade sale plus an IPO, are a good way to combine the best features of different methods.

For practical reasons, however, mixed sales should be limited to medium-and-large SOEs able to attract strategic investors.

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