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China's State asset watchdog announced late on Friday that the State would maintain controlling positions in some crucial State-owned enterprises (SOEs) while engaging in share structure reform.

According to a guidance circular issued by the State-owned Assets Supervision and Administration Commission (SASAC), SOEs in sectors vital to the national economy or national security should keep a controlling stake under the share restructure reform.

Companies with a significant influence on the business of State shareholders' should set an adequate minimum level of State shares based on the needs of the firms.

The guidance was given to send a clear signal to the market that although all the shares are entitled to float after share structure reform, State shareholders will still keep their controlling position in certain sectors and will not be put on the market immediately, the guidance said.

This is also to dismiss market concern over dramatic share price falls due to an increased number of tradable shares, it said.

"This is good guidance," said Yi Xianrong, a senior researcher in finance at the Chinese Academy of Social Sciences.

The theme of the ongoing share structure reform is to protect all shareholders, including small investors and State shareholders. The national interest must be preserved, he said.

If all the stocks are to be traded on the market after the reform, irrational price fluctuation will cause great losses to State assets, he added.

In the long term, the SOEs should open enough shares to private forces, especially in sectors having no great influence on the national economy, Yi said.

Too much State control will lead to the creation of national monopolies and the SOEs will then become inefficient and less competitive, he explained.

The guidance also said that within a certain period of time after the completion of the share floating reform, State shareholders can buy back shares from the market to strengthen their positions.

This is also to guarantee the success of the strategic structure adjustment of the national economy, it said.

This move was also authorized by an announcement from the market watchdog China Securities Regulatory Commission (CSRC) on Thursday.

CSRC issued a circular allowing original non-tradable shareholders and listed firms to buy tradable shares after all the listed firm's shares are floated.

The listed firms are also allowed to do so but are obliged to write off the repurchased stocks.

"This is to avoid irrational price fluctuations, take care of investors' interests and maintain the listed firms' image," said the circular.

Allowing controlling shareholders to buy stock from the market will help protect the real value of the companies' shares and maintain market stability, said Dong Chen, a senior analyst from China Securities.

This move will encourage SOEs to take part in non-tradable share sale reform because, at the moment, many big SOEs are unwilling to participate in the reform, fearing their market value could vaporize due to irrational price fluctuations, he said.

(China Daily June 18, 2005)