Mr. LI Rongrong, director of State-owned Assets Supervision and Administration Commission of the State Council (SASAC), required, at the recent meeting of central enterprise principals, seven tasks of central enterprise reform and development to be well accomplished in the second half year. He also emphasized on the three key tasks of SASAC. Experts told the press that through analyzing the important information revealed by Mr. Li, it is clear that SASAC will speed up central enterprises’ integration into capital market.

Reorganization process will be sped up

Mr. Li Rongrong emphasized at the meeting that the reorganization and adjustment of central government should be actively promoted, and the enterprise system reform and property rights transfer should be standardized. He said, according to the requirements of the State Council, SASAC was establishing the measures of state-owned assets adjustment and state-owned enterprise reorganization, which were to be implemented next year. He also confirmed that main businesses of most central enterprises had been determined after research and argumentation. SASAC was also studying and establishing the guidelines for the economic layout and strategic restructure of central enterprises at 21 key business segments, which was waiting for further improvement.

According to the latest reorganization report of SASAC, central enterprises have adjusted from 196 at the establishment of SASAC to the current 169. An analyst from Shenyin Wanguo institute told the press that viewed from the current situation, there is still a large distance to the set goal of “cultivating and developing 30 -50 large enterprise groups with international capacity “. And in the process of fulfilling it, a number of complex jobs have to be done, among which restructuring and listing is the topic of the greatest concern in the capital market. The second batch of pilot programs were all passed, which showed that the SASAC had sped up state-owned enterprises’ integration into capital markets, and was actively promoting the share reform and creating chances for the overall listing of central enterprises.

Mr. Xu Lingfeng from Guotai Junan Securities said that from director Li's speech, we could see that the central enterprises reorganization would be accelerated. Main businesses of each central enterprise had been clear, and non-main business was to be stripped. Since last year, the number of central enterprises directly under SASAC had been declining, mainly due to the merger of enterprises operating similar main businesses. Main businesses of central enterprises would be further concentrated for the future, the industry status of them would be rising and the large blue chip status of central enterprises in stock markets would be further raised.

Equity incentive is determined

How to directly link the interests of companies with individual benefits of the administrators in these companies is always a problem of company management. And the administrators’ equity incentive system in the non-tradable share reform process may be a good solution to the above problem.

Mr. Li Rongrong pointed out at the meeting that state-owned equity incentive would start from overseas listed companies, followed by the enterprises listed in domestic market, and finally other enterprises. State-owned enterprises managers were allowed to hold the stock of incremental part of their listed companies with no amount limit. SCSAC was making efforts to study out and publish a long-term incentive approach for central enterprises’ responsible persons, and actively and steadily introduced incentives that are effective in market economy such as stock option incentive.

In this regard, Mr. Xu Lingfeng believed, after a series of analysis, that equity incentive of state-owned enterprises had always been a policy blind spot and the MBO of administrators in state-owned enterprises was once suspended. This was the first time in Mr. Li Rongrong’s speech that the stock option incentive was clearly and openly allowed to be applied to central enterprises operators. However, he also pointed out that the equity incentive plan still should not use stock shares, the purpose of which is mainly to prevent administrators from making use of their internal controller status and purchasing state-owned shares at low cost. Incremental stock might be used in the implementing of equity incentive plan. And the sources of incremental shares could be combined with derivative products such as warrants issuing plans, with the help of option incentive.

Investment direction is more clear

Mr. Li Rongrong revealed that with the bankruptcy, liquidation or trusteeship of a number of securities companies, damages of different degrees would occur. Most enterprises would suffer losses in equity investments. The total trading volume and contract positions of central enterprises, who invested in futures (right) and derivatives, were rather huge, therefore, there might be a big hidden danger within these enterprises. He asked enterprises at home to only be engaged in futures investment whose types matched their main businesses and whose size suited their merchandise on hand at the same time; and enterprises abroad to engage in the hedging futures business when they were approved by related departments of national government.

“It can be concluded that the government has determined a clear direction for the securities and futures investment of central enterprises. The clear up of trust management business in these enterprises has been carried out during the past few years. And in the future, Central enterprises’ investment in stocks will be through their affiliated finance companies, investment companies and other specialized bodies. Compared to the original trust management approach, current one introduces an intermediate link, and the investment risks therefore are controlled by professional investment organizations subordinate to central enterprises.

The issues of stock market reform and the reform of state-owned enterprises are inseparable concepts. The solution to equity division is essentially to put the relation between state-owned enterprises and capital market in order. Therefore, equity division reform will not achieve the desired results unless it is linked to speeding up of the reform of state-owned enterprises. There is one thing that can be affirmed, that is, the future stock market development and the progress of the reform of state-owned enterprises will remain closely linked”, said Mr. Xu Lingfeng.