The Chinese government is likely to allow the sale of government stakes in publicly traded state-controlled enterprises to foreign companies, a senior regulator said Thursday, signaling what could be the next big step in China's movement toward a market economy.
Wang Jianxi, assistant chairman for international policy, futures trading and accounting at the China Securities Regulatory Commission, also said in an interview with New York Times that China would give permission to multinational corporations to sell shares in their Chinese operations to Chinese citizens.
Taken together, the two measures outlined by Mr. Wang would draw China more into the global economy and give the country's securities markets a considerably greater role in bringing Western investment and management practices to businesses.
As China's leaders prepare for the 16th Communist Party Congress early in November, when many current leaders are expected to retire, high-level expressions of interest in international investment like Mr. Wang's are also a sign that this country remains committed to a market-directed economy.
Dennis Zhu, managing director of investment banking in China for J. P. Morgan Chase, said that while there was little interest yet by multinationals in selling stock in China, the sale of government stakes in state-controlled enterprises would have "tremendous" effects. Although the government had given no hint until today that it was ready for such sales, foreign companies have been evaluating many state-controlled enterprises anyway, he said.
"Based on the inquiries, we've got, you will see quite wide interest," Mr. Zhu added.
While some of China's largest state-controlled enterprises are traded on stock exchanges in New York and Hong Kong, where foreigners can buy shares, more than 1,000 are traded only on the A-share stock markets in Shanghai and Shenzhen, in which foreigners are not allowed to invest. These include large companies like Baoshan Iron and Steel, Xugong Science and Technology and Shanghai Automotive.
The total value of the shares in these businesses is about $450 billion. A third of the shares, or $150 billion worth, is held by Chinese citizens and can be traded. The government holds the remaining two-thirds, worth some $300 billion, which are designated "nontradable."
Mr. Wang said today that the government was "likely" to allow the sale of such stakes instead to the Chinese subsidiaries and to joint ventures of international companies.
China's State Council - effectively the nation's cabinet and the highest level of the government, though subject to being superseded by the Communist Party leadership - now bans foreign companies and individuals from owning stakes in Chinese companies traded on the A-share markets. The authorities are still reviewing whether to lift the ban but are likely to do so, Mr. Wang said.
"We should allow the foreign-funded companies here to acquire nontradable, state-owned shares," he said.
The securities commission fills the roles here that the Securities and Exchange Commission and the Commodity Futures Trading Commission together serve in the United States.
China is expected to sell only minority stakes in the publicly traded state-controlled enterprises to foreigners, and would most likely require that the stakes be held for long periods as strategic investments, although the rules for any such sales have not yet been drafted.
It already allows foreign companies to buy stakes in state-owned enterprises that are not publicly traded, or that are traded on the very small B-share markets, which are open to foreign investors. But many state-owned enterprises that are not listed on exchanges have not issued shares because they are either small or, in many cases, virtually bankrupt - making them unattractive to investors.
A few are in good shape, however, and Shenzhen's municipal government coincidentally announced on Wednesday that it would sell stakes in five local nontraded companies by tender to international investors.
While there are some struggling state-controlled enterprises on the Shanghai and Shenzhen exchanges, the exchanges also list many of the country's healthiest enterprises. With China's economy growing at 7 percent a year, these businesses, often with nationally known brand names and excellent distribution networks, have drawn hungry looks from executives of multinational corporations.
Investment bankers and economists said that the toughest part of selling nontradable shares could lie in deciding how much to charge for them. The A shares in Chinese companies typically sell at a steep multiple to corporate earnings, in part because of the scarcity created by the government's ownership of two-thirds of the shares. Foreign investors may balk at paying such a premium, but if they are offered a discount, then the Chinese investors might object.
Selling nontradable shares to foreign investors could also depress China's domestic markets, though not as much as a direct sale of extra shares on those markets. Western experts say that some foreign businesses have managed to buy a small number of A shares by supplying the money to individual Chinese or companies who then buy the shares. This source of investment, while apparently modest, could dry up if foreign enterprises are allowed to acquire shares directly from the government.
Mr. Zhu said that the government might also be reluctant to sell shares in companies in strategic sectors, like energy, even if these companies were especially attractive to foreign investors.
The Chinese officials' willingness to let multinational companies sell stock here also shows a philosophical change by financial regulators, even if the multinationals are not actually lining up to do so. Until the last year or two, regulators here mostly thought that domestic savings should be invested in domestic enterprises.
Mr. Wang said that multinationals should be interested in selling stock in China in their Chinese operations because this would allow them to raise money in the local currency, the renminbi, instead of exposing themselves to the exchange-rate risks inherent in financing domestic operations with fully tradable foreign currencies.
He added that a consumer goods multinational with a listing here would also receive widespread media coverage that would serve as free advertising, saying he hoped that the first foreign company would list on a Chinese market by the end of the year.
But Pauline Dan, director of I.G. Investment Management (Hong Kong), a large fund management business, said that foreign companies would be wary of going to the trouble and the risk of listing in China.
"They do not want to expose to competitors their operations and the profit margins they're earning in China," she said.
(China Daily August 31, 2002)
