The State-Owned Assets Supervision and Administration Commission of the State Council (SASAC) released a new regulation on August 14, compelling all state-owned enterprises (SOEs) supervised by the central government to keep their investments in non-core businesses to under 10 percent of their total investment as well as ensuring that their on-hand funds do not surpass 30 percent of the overall investment sum. The SASAC, currently managing 166 large SOEs, will also look into these enterprises' debts-to-assets ratios and investment shares among new projects in the context of each enterprise's yearly investment package. These four areas will serve as indicators to guide the SASAC in its reviewing process.

Statistics show the total investment from SOEs reached 1 trillion yuan (US$125.3 billion) in the course of 2004, and only 5 percent of these funds were injected into non-core businesses. However, to stimulate business expansion and diversification, some enterprises pump too much cash into non-core businesses, unaware of pre-existing loopholes and concealed management problems.

All domestic investment undertaken by SOEs, whether in the form of fixed-asset investment, equity purchases or long-term shareholding, will come under scrutiny. Given that SOEs, over the last two years, have shown themselves to be consistently unqualified in terms of the four indicators, the commission will conduct a thorough analysis, leading to some suggestions for improvement.

For projects presenting only minor problems or flaws, the relevant enterprises may be asked to tackle these problems directly or to take appropriate risk-prevention measures. However, any investment plan falling under the following conditions will automatically meet with a veto: projects not in accord with national development guidelines and industrial policies; projects that violate decision-making procedures and the management system; non-core business investment at odds with enterprise restructuring and reform or that in any way hinders the development of core businesses; projects where debts are beyond the sustainability of the investing enterprise.

According to the new regulation, SOEs are now required to stipulate investment decision-making procedures and outline a clear management system while establishing a specific administration department and reporting all such plans to the SASAC. In addition to the management systems that will govern the process from feasibility research to implementation and completion appraisals, enterprises now must also prepare back-up plans in case of any problems and set up clear regulations allocating and ascertaining relevant responsibilities.

The regulation will have little impact on general investment, but it is obvious that SASAC has decided to set stricter management examples on non-core business investment, a chief accountant of a SOE told China Business News.

"Since the examination process for non-core business investments will become more thorough, enterprises will have to be prudent, and these blind expansions will be curbed accordingly," the accountant said.

(China.org.cn by Tang Fuchun, August 18, 2006)