China's economic reforms in the past two decades have shed light on a key weakness of state enterprises: They are not dynamic enough.

Relentless efforts have been made to revitalize them, from reforming the management to adopting the share-holding system.

The most recent proposed cure is the so-called "management buy-out (MBO)," a property right revamp through acquisition of all or part of the equity capital of a company by its directors and senior executives, usually with the assistance of a financial institution.

The new financial tool, like many imports from more developed economies, has been highly expected as China has finally kick-started restructure of its largely state corporate property right, which is deemed as an insurmountable step as China's economic reform gathers steam.

But in some places, the tool has been misconstrued as an expediency to sell state assets. The number of enterprises that apply for the MBO experiment has been increasing rapidly in the past two years.

Against the backdrop of drastic economic restructuring since the late 1990s, the experiment may not have drawn much attention despite its novelty as a rather new import.

The 15th National Congress of the Communist Party of China (CPC) put forward the idea that multiple methods, such as mergers, along with share-holding arrangement and sale, could be adopted to rejuvenate small state-owned enterprises.

The 16th CPC National Congress in 2002 went even further to say that the central and local governments share the owner's interest of state enterprises.

This change means that local governments would have more power in state assets management. The previous rule states that the central government manages the state assets in a unified way.

The new policy line, aimed at galvanizing the state sector, has led to a series of state assets transfer waves through various means, including MBO in some places.

The selling spree, with alleged state assets losses in the process, has cautioned the central state assets management authorities, which has the unavoidable responsibility of preventing state assets from draining away.

Then came the January 8 rules on transactions of state assets and equities in non-listed domestic enterprises.

Jointly released by the State-owned Assets Supervision and Administration Commission (SASAC) and the Ministry of Finance, the rules stipulated detailed information release and opening competition in dealing with state assets.

The transaction-centered policy is a parallel supplement to the rules on the supervision of state assets and equities management issued on June 4 last year.

Some analysts hailed the recent draft as a "ground-breaking" move. However, they may be referring to it in the light of legislation framework improvement rather than its real effectiveness in practice.

The two sets of rules are to lay down the foundation for a future state assets management law, which is believed to play a better role in safeguarding the public fortune.

Whether the rules would really work in regulating state assets acquisitions remains unclear as of right now.

Similar rules, although vague, have been implemented in recent years concerning state assets transaction and acquisition.

The true value of the state assets is hard to determine because the existing separated local markets cannot create the competition that reflects the real value. There is no unified national assets market to trade state assets. Both dealers and supervisors are not ensured. No one could afford to be accused of being responsible for "state assets losses."

In this condition, insider trading and fraud may easily lead to under quotation of state assets in the deals.

In MBOs, especially, the management tends to be financially disposed to see a lower price of the traded assets since they are the potential buyer.

The management has an advantage since they are better informed of corporate information, which facilitates insider trading.

For the state assets management authorities, it is urgent to draft a specific and comprehensive law to govern the matter.

Without any such law in place, local enterprises may devise ways to circumvent the central authorities in transferring state assets.

The recent Yutong incident is a case in point.

In 2001, a MBO plan centering on the sale of the state-owned Yutong Group in Zhengzhou of central China's Henan Province was submitted to the central state assets management authorities for approval. It was tabled, for the authorities thought the property rights division in the plan was unclear.

The Shanghai Yutong, a company formed by some of the Yutong Group managers aiming to purchase the group through MBO, filed a suit in local court in Zhengzhou last year. It said their payment to the Zhengzhou Bureau of Finance, the asset owner of Yutong, for purchasing the group had not been returned after the MBO plan failed to get permission from the central state assets authorities.

The court decided to auction off the assets of the Yutong Group. The Shanghai Yutong finally purchased the group to transform it into a private company.

The whole legal process lasted only 27 days.

Analysts doubted the purchase price was lower than the asset value of the group.

Nonetheless, part of the Yutong Group assets is listed and according to a Supreme People's Court rule, the auction of the state shares in listed companies must be publicized in three major securities newspapers, namely, the China Securities Journal, the Securities Times and the Shanghai Securities News. The auctioneer only published the bidding in a local newspaper that is largely unknown nationally.

While the transfer of the state assets involved in the MBO will still need permission by SASAC, given the court's ruling, the commission has been put in a dilemma.

If it does not give the go-ahead, it will conflict with a court ruling. If it does, it will mean their previous decision to table the plan is porous.

To avoid such embarrassment from recurring, a law is urgently needed to clarify the various complicated relations involved in state assets transfers.

(China Daily January 20, 2004)