Key Points:

  • Clarification of Definition of “State-Owned Assets,” and the Entities Competent to Manage Such Assets
  • Invalidation for Dishonest Transactions Leading to Loss of State-Owned Assets

On June 25, 2008 the Third Conference of the Standing Committee of the 11th National People’s Congress deliberated the Draft Law of State-Owned Assets of the People’s Republic of China and proposed significant revisions. Central purpose of the draft is to clarify both the definition of “state-owned assets,” and the entities competent to manage these assets. This latter point is particularly important because of the existing overlap of agency jurisdiction. The other proposed revisions are as follows:

  1. Following the advice of some members of the standing committee, the Conference proposed that jurisdiction of the state-owned assets be narrowed to operational state-owned assets in the management of various state-owned enterprises.
  2. An earlier draft stipulated that state and local state-owned assets supervision and administration organizations, and other agencies and organizations with government authorization, represent the state as investors and supervisors. However, the latest draft stipulates that state and local state-owned assets supervision and administration organizations represent state and local government as both investor and supervisor. If necessary, the State Council and local government would be empowered to authorize other agencies to act as state-owned assets investors.
  3. The draft proposes to prohibit board chairs of wholly state-owned and state-owned holding companies from being general manager, unless otherwise approved by the agreement of investors or in a general meeting of shareholders.
  4. Under the new provisions, where collusion is found to have occurred in any deal involving the transfer or affiliated transfer of state-owned assets and which results in the loss of the assets, the transaction will be deemed invalid.

This invalidation is needed to prevent irregularities that can often lead to the loss of state-owned assets. However, it may also create market uncertainties given that parties may become reluctant to become involved in transactions involving state-owned assets for fear of possible subsequent invalidation.

These proposed revisions are significant in their scope and, if approved, may have considerable implications for the manner in which state-owned assets are managed and supervised. It is likely that once the final regulations are introduced, supplementary specifications by the State Council or other government departments will follow to solve other problems.