At a celebration on the 10th anniversary of the establishment of Institute of Finance and Banking with Chinese Academy of Social Sciences, Zhou Xiaochuan, China's central bank governor, said that the government is collecting opinions and ideas on a potential employee stock ownership plan (ESOP).

China's central bank governor Zhou Xiaochuan delivers a speech at a celebration on the 10th anniversary of the establishment of Institute of Finance and Banking with Chinese Academy of Social Sciences Wednesday in Beijing. [Sina.com]

"We need the ESOP to develop China's socialist market economy," Zhou said.

Use of ESOPs as a method to ease the conflict between labor and capital is common in developed countries. In China, relations between labor and capital have changed a lot since the country's Reform and Opening-up in the late 1970s. Allowing ordinary laborers to enjoy the profits brought by the economic development is crucial to address the consideration of fairness and equity in distribution of resources.

The idea of an ESOP in China first appeared in 1980s, but it faced setbacks due to widespread fraud and embezzlement of funds. However, this time the environment has changed. First, transparency has greatly increased. Online watchdogs will deter fraudulent practices, such as mingling the senior executives' names with those of ordinary workers. Secondly, independent agencies were rare at that time, but now third-party agencies can provide long-term services, eliminating the practice of giving internal favors. Third, overvalued initial price offerings often tempted senior managers to seek loopholes in the policy at that time, but now, IPOs are more standardized.

According to Zhou, the government has paid lots of attention to the realization of public ownership since the Third Plenary Session of the 11th Central Committee of Communist Party of China in 2003. The practice of public ownership should be innovated and adapted to the current situation. Two points have been highlighted in policies addressing this issue: first, income from property should be included in figures for income distribution. Second, production factors should be distributed according to contributions. These points have laid the foundation for ESOP.

Zhou also said that ESOP reflects employees' interests and rights in companies and their participation in the company's administration. It is important to establish a modern corporation management structure, he added.

As to how ESOPs would be implemented, Zhou said that one way is for employees to be able to buy the stock with their salaries and bonuses. Although in theory this is reliable, more research is needed as to the role of the entrusted financial agencies. Another way is to provide stock options to employees, but accounting loopholes must be controlled if this method is used. Only after the accounting principles have been redefined or changed through practice would stock options work better.

Zhou also replied to concerns of stock price manipulation, saying that an ESOP is dispersed ownership. It is highly unlikely that the price can be manipulated after the policy is implemented, he said.

This post was first published in Chinese and translated by Li Shen.

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