Chen Huai

Research Report No 133, 2001

At present, suggested means for the reduction of state shares mainly include sale, repurchase and auction. As proved by practice in the past, however, this problem cannot be solved completely only by present securities market players and stock market capital. A new and practical way is to let large state-owned investment companies (SICs) play the "major role" in the campaign. Here, large investment companies refer to the non-productive investment companies that focus on capital operation.

The basic practice for SICs to join the reduction of state-owned shares, to put it bluntly, is to foster "a primary-and-half market". SICs first acquire the state shares so reduced and then, in a certain form, put them into the market.

I. The Necessity

The participation of SICs in reducing state shares can help closely integrate the short-term goals of supplementing the social security fund with the long-term goals of the structural reform.

The reduction of state shares does not simply mean to "sell" part of state-owned assets, it is aimed at solving four major problems in the course of national economic development and the reform. Firstly, how to turn state-owned assets into funds to supplement the social security fund; secondly, how to promote the multi-polarized reform of the equity structure of the large and medium-sized state enterprises and to establish a standard and regulatory corporate governance system; thirdly, how to enhance the overall controlling capability of the state-owned economy; and lastly, how to regulate the securities market and put an end to the abnormal situation where state shares and corporate shares are not tradable. The crux in the reduction is how to find a way that can suit the above mentioned four policy goals at the same time.

The acquisition of state shares by SICs does not mean a simple transfer of state shares from one state shareholder to another. This is actually a process, in the form of "cashing", of realizing a redistribution of the property rights of the state-owned assets, a process of boosting the multi-polarized transformation of the equity of state-owned enterprises and advancing formation of a corporate management system, and a process of ensuring the role of the investors. Because SICs, after acquisition of shares, do not simply hold such shares and sell them at a high price at the right time, they will also act as representatives of the investors and appear as shareholders in the listed companies. This function cannot be possibly performed by any other market player.

At present, the basic pattern of the equity system of the state-owned assets in China stands like this: "The State Council exercises the right to state-owned assets on behalf of the state in a unified manner; the central and local governments administer the state-owned assets; the large enterprises, enterprise groups and holding companies are authorized to operate the state-owned assets". Within this framework, there is no problem of clearly establishing ownership in terms of system. As the state-owned assets are actually concentrated in the hands of a unitary shareholder and they dominate the entire industry or sector, enterprises are actually still under the control of local governments or competent departments, therefore, it is very difficult to separate government administration from enterprise management. Influenced by industrial and local interests, the board of directors of an enterprise cannot protect the rights and interests of the investors according to the law of market economy. Since this pattern does not meet the new requirement, it is necessary to find some kind of institution that can act as representative of the state-owned assets. Only when the investment companies without any concern for industrial or local benefits and the former state shareholders separately hold the state equities, is it possible to realize pluralistic equities of these enterprises and the goal of having investors really involved in the enterprises. The participation of SICs in the reduction of state shares actually aims to transform the structure of equities over-concentrated on a unitary shareholder and to reshuffle the board of directors of listed companies.

According to the reform guidelines set by the Fourth Plenary Session of the 15th Central Committee of China’s Communist Party, the basic functions of SICs should shift from the focus of increasing additional investment to promoting the mobility of stock assets. At the same time, the equity of state-owned assets shall be likewise transferred from the holding companies aimed at production to SICs with an aim of capital operation so as to facilitate capital flow. In the long run, SICs shall be the main holders and operators of the state-owned assets and, in a sense, representatives of property rights and the incubator of enterprise executives.

II. Implementation Plan

1. How to raise funds?

SICs have three main financial sources for acquiring state-owned shares: Firstly, borrowing money with stock as pledge. Actually they only need to raise an amount equivalent to the shortfall after value deduction of the pledged stock, and then they can acquire the reduced state shares constantly in a rolling way of purchase, pledge for loan and further purchase; secondly, the state, in the capacity of investor, provides a given amount of funds in cash or in kind to SICs as seed capital, the increase of state investment may take the form of either cash or direct allocation; and lastly, a number of investment funds are set up and managed by SICs, which are exclusively used for reduction of the state shares.

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