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SOE Reform and New Capital Market in China

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

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SOE Reform and New Capital Market in China

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    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

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