Over the past three decades, China has been gradually reforming its state-owned enterprises in order to boost their efficiency and profitability. During the process, significant erosion of stateowned assets (SOAs) has occurred. On October 28, 2008, the Standing Committee of the National People’s Congress passed the long-awaited Law on Enterprises’ State-Owned Assets, the Enterprise SOA Law). The Enterprise SOA Law harmonizes a series of lower-level regulations that were previously issued by the State Council and its various branches, including the State-Owned Assets Supervision and Administration Commission (SASAC) and the Ministry of Finance (MOF). The Enterprise SOA Law will come into effect on May 1, 2009.  

Before the passage of the Enterprise SOA Law, the central government issued several regulations in the absence of an overarching law governing the management of state-owned assets. In November 1991, for instance, the State Council issued the Measures for the Administration of State Asset Valuation. In March 2003, the State Council established the SASAC, which then issued a series of regulations to protect enterprises’ SOAs from being eroded or illegally transferred (the SASAC SOA Regulations). These regulations include the Interim Rules on the Supervision and Administration of the State-Owned Assets of Enterprises, the Interim Measures on the Administration of the Transfer of Enterprises’ State-Owned Property Rights, and the Interim Measures on the Administration of the Evaluation of Enterprises’ State-Owned Assets. In addition, MOF issued the Interim Measures for the Supervision and Administration of Financial Enterprises’ State-Owned Assets, which went into effect on January 1, 2008.  

The Enterprise SOA Law is the first piece of legislation to harmonize these administrative regulations with respect to enterprises’ SOAs. It attempts to centralize and streamline the provisions of the previous SOA regulations concerning the SOAs of the enterprises.  

Expansion of Application Scope

The SASAC SOA Regulations do not cover the SOAs of financial institutions. The Enterprise SOA Law, however, covers all the rights and interests that the state has as a result of its ownership, in any form, of the enterprises’ equity. In other words, the Enterprise SOA Law covers the SOAs of financial institutions as well as those of other sorts of enterprises. In addition, in its supplementary provisions, the Enterprise SOA Law provides that if any law or regulation otherwise governs financial institutions’ SOAs, such law or regulation prevails. Thus, if there are more specific rules governing the SOAs of financial institutions, the more specific rules apply. These rules may be found in a wide spectrum of laws and regulations on banking, securities, insurance, and other areas.  

Nonetheless, the Enterprise SOA Law is limited in scope because it only applies to enterprises’ SOAs, and not to the SOAs of government agencies and institutions or to state-owned natural resources. Legal experts in China have called on the legislature to make more expansive laws covering all kinds of SOAs.  

Allocation of Authority over State-Invested Enterprises  

The Enterprise SOA Law provides that the State Council and local people’s governments serve on behalf of the state as the investors of state-invested enterprises through the SASAC and local branches of the SASAC, or other government agencies as specifically delegated by the governments (the “State Investors’ Delegates”). State-invested enterprises include enterprises wholly or partially owned by the state. Wholly state-owned enterprises may be companies or other entities that do not exist in the form of companies. The Enterprise SOA Law states that the government investors will not interfere with the enterprises’ lawful daily operation.  

According to the Enterprise SOA Law, the State Council serves on behalf of the state as the investor in the large-scale state-invested enterprises that are critically important to the national economy and national security, or that involve important infrastructure facilities and natural resources. The State Council determines which state-invested enterprises are under its supervision. The other state-invested enterprises are supervised by local people’s governments.  

General Rights of the Investors’ Delegates  

For state-invested enterprises, the State Investors’ Delegates have the right to receive returns on assets, participate in critical decision-making, and select management. In particular, the State Investors’ Delegates are the sole decision-maker in wholly state-owned enterprises. As for majority state-owned companies and minority state-owned companies, the State Investors’ Delegates will exercise their voting power in equity-holder meetings.  

To ensure state-invested enterprises’ autonomy in their business operations, the Enterprise SOA Law stipulates that the State Investors’ Delegates may not interfere with the enterprises’ business activities except to perform the investors’ rights and obligations in accordance with relevant laws. However, what constitutes interference by the State Investors’ Delegates remains uncertain.  

In addition, the Enterprise SOA Law allows state-invested enterprises to enjoy equity-holders’ rights and interests in the enterprises in which they invest, including receiving returns on capital, participating in critical decision-making, and selecting management.

Selection and Evaluation of Management  

The right of the State Investors’ Delegates to select management varies in different types of stateinvested enterprises. For wholly state-owned enterprises that have no board of directors, the State Investors’ Delegates may directly appoint or remove all of the senior management. In contrast, in wholly state-owned enterprises that are companies having both a board of directors and a board of supervisors, the State Investors’ Delegates may determine the members of these boards, and the board of directors will in turn appoint or remove the senior management. For companies that are partially owned by the state, the State Investors’ Delegates may propose candidates for directors and supervisors at equity holders’ meetings.  

Under the Enterprise SOA Law, the State Investors’ Delegates determine the compensation of the senior management they appoint in accordance with the relevant provisions of the state.  

Matters that Require Special Approval  

The Enterprise SOA Law provides that certain important matters of wholly state-owned enterprises must be approved by the State Investors’ Delegates. Such matters include mergers, spin-offs, increases or decreases in registered capital, issuance of bonds, profit distribution, wind-ups and bankruptcy filings. As for companies partially owned by the state, such matters will be determined by the shareholders, or, as the case may be, by the board of directors.  

Moreover, for certain key state-controlled enterprises, the State Investors’ Delegates must seek approval from the corresponding people’s governments before making any decisions on certain important matters in accordance with the Enterprise SOA Laws and relevant regulations. The State Council determines which companies count as key state-controlled enterprises.  

Transformations of wholly state-owned enterprises must be approved by the State Investors’ Delegates. Such transformations include (1) a wholly state-owned enterprise that was not a company becoming a wholly state-owned company, and (2) a wholly state-owned enterprise becoming a partially state-owned company. In order for a majority state-owned company to transform into a minority state-owned company, it must obtain approval of the equity holders. Again, transformations of certain key state-controlled enterprises must be approved by corresponding people’s governments.  

To protect the employees’ rights and interest, the Enterprise SOA Law provides that if a transformation involves reallocation of employees, the enterprise or company must prepare a reallocation plan for examination and approval by the employees or their representatives.  

The Enterprise SOA Law has provisions to control related party transactions to prevent erosion of the state’s interest. Related parties are the directors, supervisors, senior management of the relevant state-invested enterprises, their relatives, and the enterprises owned or controlled by these persons. For wholly state-owned enterprises, the law provides that without the consent of the State Investors’ Delegates, they may not effect asset transfers with or borrowing from related parties, provide security for related parties, establish a joint venture with related parties, or invest in a related party.  

If wholly state-owned enterprises or state-controlled companies intend to conduct a merger, spin-off, transformation, transfer of material assets, investment using non-monetary assets, or liquidation, they must hire a qualified valuation firm to independently valuate the relevant assets.  

As for transfers of SOAs, the State Investors’ Delegates make decisions on such transfers. If they decide to transfer all or part of the enterprise’s SOAs and this causes the state to lose its position as a controlling equity holder, the State Investor’s Delegates must seek approval from corresponding people’s governments.  

The Enterprise SOA Law reiterates that the transfer of SOAs must be conducted through lawfully established venues of property rights exchanges. If there are more than two potential transferees, the transfer must be made through a public bidding process. Transfer by agreement is only allowed if it falls under specific regulations. The Enterprise SOA Law confirms that state-invested enterprises may transfer SOAs to related parties, but these related parties must compete with other potential transferees on level ground. Transfers of SOAs to foreign investors must comply with the relevant regulations and may not jeopardize national security or public interest.  


The Enterprise SOA Law is an important first step toward building a well-rounded legal system to protect SOAs in China. However, as some drafters have pointed out, it is a framework legislation that needs further development in the future. In addition, Chinese legal experts anticipate that in the future, the government will enact a more comprehensive law to cover all SOAs. While the prevention of SOA erosion is of paramount concern to the public and to legislators, a more comprehensive SOA law should reflect the fact that the government ultimately safeguards SOAs as a representative of the people, and therefore should facilitate the value growth of SOAs to maximize social welfare and public interest.