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Private Enterprises Assist SOE Reform

A reform to set up a shareholding system for state-owned enterprises (SOEs) is under way. Private enterprises were allowed to put their capital into shareholding SOEs in a decision made by the Third Plenum of the 16th Central Committee of the Communist Party of China, held in October 2003.

The SOE reform and the private investors' participation in it demand well-prepared strategies.

Experts and high-level officials expressed their opinion on this issue.

Chen Qingtai, deputy director of the Development Research Center under the State Council, said the restructuring of SOEs will offer opportunities for development to private enterprises and access to resources that they had no access to before.

It will offer a milestone opportunity for further prosperity within the private sector.

Conditions are now ripe for many private companies to seek further growth.

Generally speaking, there are three ways for enterprises to expand: by investing revenues accumulated in the past, by setting up strategic alliances and through acquisitions.

Private companies can use any of these means. But international experiences have shown that mergers and acquisitions are a good way to expand at relatively low cost, and they are now a widely adopted business practice.

Private companies should seize the chance and select SOEs for merger and acquisition that correspond to their own development strategies. In this way, private companies will be able to get the resources they need at relatively low cost and in a relatively short time.

Although foreign investors will also be permitted to invest in SOEs, private companies should be the major players in SOE reform.

The preference for foreign investment over private domestic capital should be eliminated and the two should be treated equally in the SOE reform.

Within several years, the State-owned sector will have an optimized structure as a result of private and foreign investors buying shares in SOEs. This will improve the efficiency of resource allocation and the quality of economic growth.

Zhang Wenkui, a researcher with the Development Research Center under the State Council, said that after their development over the last two decades, private enterprises have become mature enough to participate in SOE reform.

Currently, SOEs employ about 30 million people while the private sector employs about 80 million. Private enterprises are growing robustly, and some of them are rich in capital, technology and management expertise. They are fully qualified to invest in SOEs.

The SOE reform will not be restricted to the disposal of bad assets as before. The net State assets in 150,000 SOEs are about 8 trillion yuan (US$963.9 billion). Private investors will have plenty of choices.

But there are several pitfalls that private enterprises should avoid in investing in SOEs.

First, they should estimate all costs that may be incurred in purchasing SOEs. The sum could be much larger than the price itself, when the money needed to pay for the employees' pension funds and medical care is taken into account.

Second, if private investors buy shares of SOEs in highly-monopolized sectors or in those producing basic consumer goods, they should pay special attention to the government supervision practices and be prepared to handle any policy changes.

Third, the evaluation of State assets should be conducted strictly in line with relative laws and regulations.

Finally, the gap between the corporate cultures of private enterprises and SOEs should be reduced; otherwise, it could become an obstacle to the future development of the new entity.

Ma Jiantang, deputy secretary-general of the State-owned Assets Supervision and Administration Commission under the State Council, said this year will be of high importance in SOE reform. Special attention will be paid to a number of areas in the bid to perfect the management of State assets.

First, laws and regulations governing State assets management will be improved. Detailed rules will be drafted to facilitate implementation of the changes.

Second, a mechanism for evaluating the performance of SOEs will be established.

Third, new ways of training senior management personnel for SOEs should be explored.

Fourth, supervision of State assets transactions will be enhanced. Deals involving State assets should be done with full transparency.

Fifth, the strategic restructuring of SOEs should be further promoted. Large SOE groups should be established across the country over the next five years.

Liu Dongsheng, director of the Bureau of Enterprise Reform with the State-owned Assets Supervision and Administration Commission, said building the SOEs into shareholding companies is a major way to reform the State-owned sector.

It not only involves the interests of the State but those of SOEs, employees and investors from the domestic private sector and from abroad, and will also involve complex procedures.

SOE reform has raised the efficiency of the State sector remarkably over the past several years.

According to surveys, small SOEs have seen clear improvements in economic performance since they began reforming in 2000.

And the gross profit of the country's SOEs in 2003 was 2.5 times that of 1998 before the reform was initiated, while the number of SOEs has decreased by 34 percent.

Clearly, private investors' participation in SOE reform will help spur on the already fruitful process.

Authorities will draft more policies to tackle any new problems that arise in the process.

(China Daily January 17, 2004)

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