The much-anticipated regulation will be soon released by the State Economic and Trade Commission (SETC), the body that governs the country's economic policy, following a review by the State Council, China's cabinet.

"Currently, the rules have already been finalized by us," a senior SETC official confirmed.

Laws and regulations governing foreign companies' mergers and acquisitions have been relatively nonexistent in China apart from a provision released by SETC in 1998 allowing foreign companies to acquire stakes from SOEs, but even that provision lacked measurable guidelines.

The landmark policy breakthrough would provide detailed rules that foreign multinationals have desperately been waiting for but so far have not seen until now.

According to the regulation, several of China's top 500 SOEs -- which long have been pillars of the country's economy, but now are holding up the country's economic restructure with their mounting bad loans -- will cooperate with foreign rivals in the near future.

Jiang Qiangui, vice-minister of SETC, confirmed the news, but declined to give further details.

Under the new regulation, most of the SOEs in the industrial sector will be opened to foreign companies for mergers and acquisitions, except a few that have security or national interests. And foreign partners will be allowed to take a controlling stake in the new companies.

A research report with Guotai J&A Securities claims that foreign companies would be mostly interested in sectors in which China holds a competitive advantage and which have growth potential, such as manufacturing and the service sectors.

The money from the stake sales will be used to fund the country's social security system, which is expected to support millions of retired SOE employees.

"But it is very hard to forecast the exact time for the final debut of the regulation since it concerns many other departments," the SETC official said.

The official said the regulation will set up a new benchmark for foreign companies looking to take a stake in major Chinese companies.

"It is a total new (regulation), and we hope it will set up new standards to govern all the possible transactions between Chinese SOEs, including both big names and smaller companies, and foreign companies," he said.

Under the current legal framework, direct transfers of stakes from SOEs to foreign multinationals are still not allowed because the State Council fears that giving such a go-ahead would lead to corruption and outflow of State assets.

The State Council is keen on maintaining stability, even suspending the trading of corporate shares among domestic-listed companies in the domestic investor-only A-share market and postponing the much-planned reduction of State-owned shares on the stock market. Rumours of the selldown devastated investor confidence last year and wreaked havoc on the market.

But further opening of China's insolvent SOEs relies less on restructuring of shareholding reform and more on acquisitions and mergers by foreign players. Wang Zhile, head of a central government think-tank, said the release of the new rules is a natural and inevitable result of the country's WTO accession.

"One of the advantages that WTO membership brings us is the change of game rules, and this move would be the last but best choice for the restructuring of inefficient SOEs," Wang said.

In the late 1990s, Premier Zhu Rongji vowed to turn around SOEs under a three-year timetable. Since then, the central government has adopted a series of important measures to relieve the burden of the 500 major SOEs.

A number of new measures, including the debt-to-equity swap, sale of smaller SOEs to private companies and the establishment of four large asset management companies, have been taken to reform SOEs.

The new regulations could signal the government's approval of the sale of State-held share in more than 1,000 public-listed companies -- a move that is likely to spark fear in the market.

China's four large State-owned asset management companies -- including Huarong, Great Wall, Orient and Cinda -- are already allowed to sell part of the large pool of assets they gather from the four largest State-owned banks, which is considered a major step forward by the central government for the landmark release of new regulations.

As China's financial sectors grow increasingly more open, analysts say more foreign investors are likely to prefer stake transfers over direct investment in order to maximize their investments. Peng Yan, a lawyer specializing in mergers and acquisitions, said the new regulation is just the beginning of major reform and said further clarifications and guidelines must accompany the new regulations for them to be effective.

Profit margins of the top 512 companies governed by SETC fell 18 per cent on a year-on-year basis to 66.8 billion yuan (US$8.05 billion) in the first four months of the year, according to the latest figures released by SETC last week.

It signals that the performances of the large SOEs, though they are making profits are still fragile in the wake of the stiffer competition in the market.

Among those mostly hurt are big names in a number of industries, such as petrochemical, machinery and transportations.

(China Daily June 04, 2002)