SOE Reform and New Capital Market in China

1. SOE Reform and New Capital Market in China Mr. Zhou Hongli, Minister-Councilor, Embassy of China March 31, 2003

2. New Policies, New Opportunities 2002, Qualified Foreign Institutional Investor (QFII) System - paves way for foreign capital to enter into Chinese capital market 2003, Regulation on Foreign Investors Acquisition of Domestic Companies - taking effect Apr. 12, - open door to foreign merging and acquisition.

3. Background Second year since China�s WTO accession Further opening up to outside SOE transformation stepping into new phase

4. Policy Objectives 1. Promote and normalize foreign investment; 2. Introducing advanced foreign technology and management 3. Enhance foreign capital utilization effectiveness 4. Rational allocation of resources 5.�Employment improvement 6.�Fair trading and national economic security

5. Current modes of foreign acquisition of China�s SOEs 1. Modes of assets acquisition a. total acquisition: -foreign investor buys whole assets of SOE�s and make it a wholly foreign-owned company. - This is the main way of acquisition of SMEs

6. b. Acquisition after JV foreign investor sets up a JV with a Chinese SOE, later buys over the SOE assets c. Acquisition after joint-stock - foreign investor and a SOE set up a share holding limited, along with other share holders; -foreign investor acquires shares by contributing cash, -SOE takes up shares by contributing partial assets, -others take up shares by contributing symbolic assets. - foreign investor exchanges shares for SOE�s rest assets.

7. d. Acquisition after bankruptcy : foreign investors acquire mal-performing SOEs upon their bankruptcy. e. Acquisition under consecutive mortgage; foreign investor mortgages an acquired SOE for a bank loan to acquire next SOE and mortgages again for more acquisitions.

8. 2. Modes of shares acquisition a. Acquisition by increasing capital and gaining majority shares: first JV btw a foreign investor and a SOE. when JV grows, foreign side demands increasing capital and shares, thus gaining more shares and finally come to majority holding. b. Acquisition by buying non-circulated corporate shares: thus changes shared capital structure and gains control.

9. c. Acquisition by buying overseas listed SOE�s B shares : thus changes shared capital structure and gains control d. Acquisition by JV and holding majority shares: one-time buying a SOE�s shares in name of JV thus gain control of the SOE. e. Majority share by JV restructuring: first JV, later make it a share holding limited, foreign side buys more SOE�s shares to become majority owner.

10. Why M&A encouraged in SOE Transformation 1.Providing effective exits to state owned shares. - state assets already accumulated to large quantities, - now exposed to open competition under market economy - an urgent task to find exits - foreign acquisition of SOEs: effective way to exit 2.Improve governance mechanism of domestic enterprises introduce foreign advanced management .3.Enhance international business capability of domestic enterprises -foreign investors bring along advanced technologies and management to share with

11. Main Contents of the Regulation 2003 Requirements on foreign investors : Procedures Modes of assets acquisition and shares acquisition Examination and approval by Ministry of Commerce Registration by State Administration of Industry and Commerce Assets Assessment

12. 7. Principles of M&A: In accordance with China�s Industrial Development Policy Guidance Directory No intention of monopoly No less than 25% of registered capital Limitation on total invested capital Special circumstances for exemptions