China unveils stock ownership plan for state enterprise employees

The mainland will allow minority ownership in some state-owned enterprises for people who actually work there, in a partial privatisation plan of its bloated state industrial behemoth.

Borrowing a few pages from the old playbooks of Margaret Thatcher in the 1980s, the government has officially given the go-ahead for employee stock ownership plans at state-owned enterprises with a few key caveats: no more than 30 per cent of equity in each company should be offered to employees and no individual should own more than 1 per cent.

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The State-owned Assets Supervision and Administration Commission is likely to approve about 10 state enterprises under the central government’s control and a handful of state firms in the hands of local governments, to start employee ownership plans this year.

Beijing will review the details in late 2018 to decide whether to roll out the scheme on a broad basis.

It is so far one of the most concrete solutions to revitalise the inefficient state sector. According to numbers published by the Finance Ministry, the combined equity of SOEs outside the financial sector was 42.4 trillion yuan (HK$49.58 trillion) by the end of June. But their gross profit was just 1.1 trillion yuan in the first half. The return on equity, which measures how well shareholder money is used, was no better than lending interest rates charged by banks.

Nevertheless, privatising state businesses can be an ideologically tricky and practically messy, partly because the Communist Party believes a key source of its ruling power lies in control over key industrial assets. The government is also sensitive to losses in state assets and is reluctant to sell them below their paper value.

But the plan would for now exclude state firms in strategic sectors such as resources – the most sought-after assets will still be off-limits to employees, Xinhua quoted Bai Yingzi, the SOE reform bureau chief within the commission, as saying.

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“It took three years to make and publish the document, reflecting huge conflict and controversy over the issue,” said Zhou Fangsheng, a former senior official with the commission who was heavily involved in drafting SOE reform plans. “But it’s much better than doing nothing.”

Only enterprises in competitive industries such as steel will be allowed to take part initially. Employees should pay cash to buy stocks at a price not lower than net asset value per share, which refers to the company’s total assets minus total liabilities, divided by the number of shares outstanding. Buyers will face a minimum 36-month lock-up period before the stocks can be traded.

Jonas Short, the head of the Beijing office for North Square Blue Oak, a British investment bank, wrote in a note: “While the scale of this reform is not very bold, it is at least a further step in the right direction.”

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