Before allowing foreign investors to purchase shares in their businesses key equipment manufacturers in China must first consult with Central Government, the State Council said Thursday.

 

The decision is a concession to domestic critics who complain the country has been selling off strategic companies too cheaply.

 

The move could hinder one of the latest such deals in which US private equity firm Carlyle Group wishes to buy into a top domestic manufacturer of construction gear.

 

In the new rules, the first of their kind, the State Council or Cabinet detailed China's plans to develop its industries involved in the manufacture of equipment such as electricity generators, ethylene production facilities, high-end steel production lines, railway rolling stock and precision tools.

 

According to the State Council statement which was published in domestic newspapers: "We will develop a group of major equipment manufacturing conglomerates with relatively strong competitiveness by 2010."

 

The rules imply the government plans to take a more active approach in restructuring the equipment manufacturing sector, encouraging mergers and tie-ups to form large national companies. It has already attempted to do this, with mixed success, in other industries such as steel.

 

"Large-sized and backbone equipment producers must seek the opinion of the State Council's departments if they want to sell stakes to foreign investors," the statement said.

 

In October 2005 top equipment maker Xuzhou Construction Machinery Group agreed to sell 85 percent of its Xugong Group Construction Machinery Co. to Carlyle for US$375 million. Regulators have yet to approve the deal.

 

Officials and academics this year have criticized such sales suggesting foreigners aim to control key industries and that some State firms were not getting adequate prices when selling stakes to foreigners.

 

The government has generally reacted by reaffirming the need for an open economy and not by making concessions to critics.

 

Earlier this month Sany Corp., Xuzhou's smaller domestic rival, said it wanted to take control of Xugong by paying at least 30 percent or even more than the Carlyle offer. But Sany has not so far made a concrete bid and both Xugong and Carlyle say they remain committed to their deal.

 

"China's equipment industry has problems including poor innovation, reliance on foreign technology, improper structure and weak international competitiveness," the State Council said in the statement.

 

"Boosting the equipment sector is a strategic aim for our country as it develops a sustainable economy," it adds.

 

Shenzhen-based economist Liu Xianfa, of the China Development Institution, said he expected the government's efforts were to focus on traditional industrial bases such as northeastern China, Tianjin and Shanghai.

 

"China still lags behind in higher technology fields such as numerically controlled equipment and that stands in the way of building a more advanced economy," he said.

 

(Shenzhen Daily June 30, 2006)