Yin Chunquan

Research Report No 166, 2006

I. To Define the Range of Functions of Central and Local Promoters

1. To define the limits of authority of government capital; 2. To promulgate rules and procedures governing transfer and sales of State-owned shares; 3. To promulgate measures governing the use of income from transfer and sales of State-owned shares, and define the direction and scope where these income can be used; 4. To unify capital budgeting form and the limits of authority of the process, and to control the activities of State-owned assets management institutions and State-owned assets management companies, in a bid to prevent losses of assets in the process of transfer of State-owned shares.

II. To Speed up Improving Related Legal Systems

China has so far promulgated "Corporation Law", "Partnership Law", "Individual Sole Proprietorship Law", "Security Investment Fund Law" and "Trust Law", and is busy revising "Corporation Law", "Security Law" and "Partnership Law" at present. In order to create a legally fair competition environment for public and nonpublic economies, there are proposals suggesting annulment of "Provisional Regulations on Private Businesses", and annexing management of private businesses into "Corporation Law", "Partnership Law" and "Individual Sole Proprietorship Law". There are also suggestions on merging foreign-funded enterprise law with corporation law.

III. To Guard against Unfair Competitions

First, with a view to problems brought about by acquisition by multinationals, China should promulgate and practice laws and regulations concerning anti-monopoly and anti-unjust practices in competition, to prevent ill-intention purchases of Chinese enterprises by foreign investors and to protect industries that are vital to the state security and lifeline of the national economy. Second, China may actively guide and standardize purchases by multinationals and to promote upgrading of industrial structure. China may also adopt preferential measures to encourage and guide multinationals to establish R&D centers in China to improve the quality and level of foreign capital absorbed.

IV. To Increase the Efficiency of Foreign Capital

To guard against low-level repeated introduction and duplicated constructions, especially in agriculture, mining and the tertiary industries where foreign investors are enthusiastic to invest. For this purpose, while setting strict controls on quality, China may introduce most needed projects that are conducive to the upgrading of technological and managerial level of enterprises through full deliberation and to the establishment of a solid foundation for increasing technological absorbing and innovating capacity of industries in China.

V. To Guard against Financial Risks in Advance

With a pattern of overall openness taking shape in China, the amount of foreign capital introduced to China’s stock and bond markets will increase gradually. As most of them are short-term capital and profit seeking, their frequent entry and exit of the markets are likely to cause fluctuation of the financial market, thus exerting negative influence on economic development. Therefore, experts suggest establishing a financial early warning system as early as possible to monitor the direction and flow of international capital, and thus to prevent and dissolve financial risks effectively.

VI. To Cultivate Large Enterprise Groups with Competitive Edge

Foreign capital inflow will have certain impact on certain industries in China, especially those monopolized industries that have long been protected in the past (such as finance, insurance, telecommunication, and tourism). Related industries should seize the opportunity to study and formulate industrial development plans and emergency measures so as to improve quality, technical, service and management level. Meanwhile, China should organize and cultivate a number of large enterprise groups with competitive edge to improve its competitiveness in the world as a whole. All trade associations should promote internal restructuring in an all-round way, to foster excellent and scrap the obsolete, to optimize resources allocation, and to enhance the international competitiveness of the industry as a whole.

VII. To Build a National Platform for Property Right Trading

Trading of property rights of enterprises should be conducted under the principle of openness, fairness and transparency, and should be determined by intermediary organs according to market supply and demand conditions at the time. In the process of trading, qualifications of all participating parties will be strictly examined; and service and supervision role of law firms and intermediary organs will be brought into full play. Experts suggest that China formulate a unified rule governing trading of property rights, rectify resources on domestic property rights trading market; standardize property rights transactions, and promote development of China’s property rights trading market.

March 2004

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