SOE Reform and New Capital Market in China

1
SOE Reform and New Capital Market in China

• Mr. Zhou Hongli,
• Minister-Councilor,
• Embassy of China
• March 31, 2003

2
New Policies, New Opportunities

• 2002, Qualified Foreign Institutional Investor
  (QFII) System
• - paves way for foreign capital to enter into
  
• Chinese capital market
• 2003, Regulation on Foreign Investors
• Acquisition of Domestic Companies
• - taking effect Apr. 12,
• - open door to foreign merging and
  acquisition.

3
Background

• Second year since Chinas WTO accession
• Further opening up to outside
• SOE transformation stepping into new
• phase

4
Policy Objectives

• 1. Promote and normalize foreign investment
• 2. Introducing advanced foreign technology and
• management
• 3. Enhance foreign capital utilization
  effectiveness
• 4. Rational allocation of resources
• 5. Employment improvement
• 6. Fair trading and national economic security

5
Current modes of foreign acquisition of Chinas
SOEs

• 1. Modes of assets acquisition
• a. total acquisition
• -foreign investor buys whole assets of SOEs
  and make it a wholly foreign-owned company.
• - This is the main way of acquisition of SMEs

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• b. Acquisition after JV
• foreign investor sets up a JV with a
  Chinese SOE,
• later buys over the SOE assets
• c. Acquisition after joint-stock
• - foreign investor and a SOE set up a share
  holding
• limited, along with other share holders
• -foreign investor acquires shares by
  contributing cash,
• -SOE takes up shares by contributing
  partial assets,
• -others take up shares by contributing
  symbolic assets.
• - foreign investor exchanges shares for
  SOEs
• rest assets.

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• d. Acquisition after bankruptcy
• foreign investors acquire mal-performing
• SOEs upon their bankruptcy.
• e. Acquisition under consecutive mortgage
• foreign investor mortgages an acquired
• SOE for a bank loan to acquire next SOE
• and mortgages again for more acquisitions.

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2. Modes of shares acquisition

• a. Acquisition by increasing capital and gaining
  majority
• shares
• first JV btw a foreign investor and a SOE.
• when JV grows, foreign side demands
  increasing
• capital and shares, thus gaining more shares
  
• and finally come to majority holding.
• b. Acquisition by buying non-circulated corporate
  shares
• thus changes shared capital structure and
  gains control.

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• c. Acquisition by buying overseas listed SOEs B
  shares
• thus changes shared capital structure and
  gains control
• d. Acquisition by JV and holding majority shares
• one-time buying a SOEs shares in name of
  JV
• thus gain control of the SOE.
• e. Majority share by JV restructuring
• first JV, later make it a share holding
  limited, foreign
• side buys more SOEs shares to become
  majority
• owner.

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Why MA encouraged in SOE Transformation

• 1.Providing effective exits to state owned
  shares.
• - state assets already accumulated to large
  quantities,
• - now exposed to open competition under
  market economy
• - an urgent task to find exits
• - foreign acquisition of SOEs effective
  way to exit
• 2.Improve governance mechanism of domestic
  enterprises
• introduce foreign advanced management
• .3.Enhance international business capability of
  domestic
• enterprises
• -foreign investors bring along advanced
  technologies and
• management to share with

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Main Contents of the Regulation 2003

• Requirements on foreign investors
• Procedures
• Modes of assets acquisition and shares
  acquisition
• Examination and approval by Ministry of
• Commerce
• Registration by State Administration of Industry
  
• and Commerce
• Assets Assessment

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7. Principles of MA

• In accordance with Chinas Industrial Development
  Policy Guidance Directory
• No intention of monopoly
• No less than 25 of registered capital
• Limitation on total invested capital
• Special circumstances for exemptions

The End