China is likely to issue a detailed regulation on management buyouts (MBO) in small and medium-sized State enterprises within the first quarter to improve discipline in the sector.

The draft of the new regulation, which is aimed at curbing irregularities in MBOs with detailed standards and procedures, has already been completed and has been distributed to experts and relevant departments for consultation, according to Li Rongrong, minister of the State-owned Assets Supervision and Administration Commission (SASAC).

It is hoped that the rule will be published in the first quarter of this year, or some time around next month's Spring Festival, Li told reporters on the sidelines of a SASAC work conference Thursday in Beijing.

"We are not forbidding MBOs at small and medium-sized enterprises, but encouraging them to do a good job," said Li.

But he added that no MBOs would be allowed at major State-owned enterprises (SOE).

MBOs at smaller firms will only be allowed to take place under the strict supervision of local State assets management agencies and according to a clearly-defined equity rights scheme.

MBOs, in which the management of an enterprise can become owners through corporate transactions and acquisitions, have aroused a great deal of public concern during China's SOE reform, as some enterprise managers abused their power for personal gain.

The expected new regulation on MBOs will be China's first detailed regulation on this issue. Existing laws and regulations only have some guidelines or principles.

Li said 2005 will be a crucial year for the SOE reform and more breakthroughs should be made in this sector.

SASAC has also drafted a four-year plan for policy-arranged SOE bankruptcy to let more poor-performers withdraw.

"Around 2,800 SOEs will go bankrupt under the scheme in the next four years (2005-08)," he told China Daily Thursday.

The plan is still awaiting the approval of the State Council.

As for the rest, massive restructuring will take place, which will further reduce the number of SOEs in the country but will also build up more internationally competitive enterprise groups, with a more rational economic structure and higher efficiency.

Statistics indicate that the number of SOEs and State-controlled enterprises in China declined by 40 per cent from 1998 to 2003, but their profits grew by more than 20 times and net assets up by 60 per cent.

"We plan to use five years to basically complete the restructuring," said Li. But the reshuffle is not simply selling the State assets or so-called privatization.

Some problems have emerged during the SOE reforms due to legal loopholes and some State assets have been squandered, but the authorities will enhance supervision and legislation to make up for the losses and proceed with the reforms, he said.

SASAC will work with related government departments to launch a nationwide inspection on the transfer of the State assets and equity in the fourth quarter of this year.

And it is also expected to build a budget system for the management of the State-owned assets together with the Ministry of Finance this year, said SASAC Vice-Chairman Li Yizhong.

The system will clarify the liabilities of the enterprise leaders and the commission itself on the management of State assets and set relevant targets.

Some municipalities and provinces, including Beijing, Tianjin, Jilin and Hunan, have already launched special departments to implement the State assets budget.

(China Daily January 14, 2005)