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China will lift the ban on the management of large-scale state-owned enterprises (SOE) owning company shares, it was announced yesterday.

However, executive shareholders will not be able to hold controlling stakes in the company.

The State-owned Assets Supervision and Administration Commission (SASAC) of the State Council announced the decision yesterday, saying that the rule was aimed at encouraging executives to manage enterprises more effectively and efficiently.

In April 2005, the Ministry of Finance issued a ruling forbidding the management rung of large-scale SOEs from owning shares to prevent them from buying out the enterprises. The ban was aimed at containing the losses of State-owned assets.

However, with the passing of a new law on January 1 which permits listed companies to reward existing management with bonus shares, the ruling no longer seemed relevant.

"The new rule is aimed at motivating executives to better manage State-owned assets", an officer from SASAC said. "It also shows the government's resolution to deepen SOE reforms."

But experts doubt the effectiveness of the new rule.

"Most large-scale SOEs profit from monopolizing markets instead of improving management efficiency," said Guan Weili, a former officer from the SASAC.

To quell this and other similar concerns, the SASAC also issued detailed guidelines including banning executives who plan to buy shares from being involved in major proceedings like drafting reform plans and fixing prices of State-owned assets. Further, executives must furnish valid certificates for their sources of capital.

"The SASAC will watch executives closely," an official from the SASAC said.

"Only those who win their positions through competition instead of by government appointment, or who have made major contributions to the companies can hold shares in SOEs. Executives who are deemed to have been directly accountable for the decline of their companies' performance cannot hold shares of the companies."

The loss of State-owned assets and the reform of SOEs have been major topics of public debate in recent years.

"The rule could be seen as a response to public debate and a detailed guideline for how SOEs should conduct their ongoing reforms," Li Shuguang, member of the drafting committee on the State-own Assets Law and professor from China University of Political Science and Law, said.

Li pointed out that the rule was more focused on 2,500 large SOEs, because China permitted small and medium-sized SOEs to go the management buy-out route last year.

Earlier in January, the China Securities Regulatory Commission issued measures to encourage public company managers to better run their companies by offering bonus shares as rewards.

This means that directors, supervisors, top-level managers, and key technology experts in a listed company can be rewarded with shares in the company if they contribute to an increase in company profit. 

(China Daily January 23, 2006)