New Rules Complicate Foreign Investment in SOE's 

The State Economic and Trade Commission (SETC) published new rules on investing in unlisted State-owned enterprises (SOE'S), but they do not simplify foreign investment, says King & Wood lawyer Mark Schaub. The new rules will come into effect on Jan 1st 2003.

Under new rules the SOE has to apply with the local SETC for approval of all reorganization projects. It is however not clear if this means that the SETC approval replaces the MOFTEC approval that is currently required. That would mean it is an additional requirement, and therefore an extra hurdle for foreign investors to take.

The rules also enlarge the scope of power of SETC to include review and approval of the transfer contract, which was previously only done by MOFTEC or its local branches. It is clear that SETC stresses protection of SOE's and MOFTEC focuses more on encouraging foreign investment. These two goals may be diverging under the new rules. People close to MOFTEC say officials at the ministry are enraged by the new SETC-rules, who go directly against the MOFTEC policy of economic openness. The new rules also state that all transactions involving net assets of more than US$30 million will have to be approved centrally by SETC, say various media. This is strange, since the State Council has been liberalizing approval procedures already in 1999 and delegated approval responsibilities to local authorities.

If a controlling interest of a SOE, or most or all its business asset, are sold off to foreign investor, the latter will have to provide a settlement plan for employees. The employees representative meeting must approve this plan. Furthermore economic compensation has to be paid to redundant employees and social insurance of the employees must be transferred to social insurance organizations. Last but not least employees shall enjoy priority in relation to proceeds from selling the assets or enquity of the SOE. All these rules to benefits employees will surely increase the investment cost for interested foreign investors. 

All in all new rules seems to indicate that authorities are accepting that foreign investment is needed and will play a major role in restructuring the SOE's. Government also needs the money for its ailing national security fund. But this positive note does not take away the negative aspects. Increase approval requirements, and protection of employees will make details more expensive and less attractive to foreign investors.

Source: www.chinabiz.org, November 2002

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