The forms of Gaizhi in China's SOEs

How far has it progressed? 

A total of 85 percent of industrial firms existed in 1996 have been privatized, merged, liquidated or bankrupted. 

Forms of Gaizhi 

Gaizhi, or restructuring SOEs, involves 

•        Corporatization,

•        privatization: sale to private parties

•        liquidation

•        bankruptcy

•        debt-for-equity swaps

•        going public (listing) 

Note: The central issue is ownership transformation, namely reallocation of property rights

(1) Internal restructuring: Corporatisation in accordance with the Company Law or spin-off 

Corporatization: shareholders, corporate governance structure, limited liability and legal personality, a change in the formal relationship between the state and the enterprise 

Most significantly, it paves the way for ownership diversification, as the enterprise many now avail itself of a legal framework for bringing in new investors. 

整体改制, it is called. 

Corporate spin-off: divide the firm into several smaller entities; the old firm becomes the holding company. It is called 分立式改制,  a form the creditors fear the most, as the new firms walk with the good assets and capable human talents, leaving non-performing assets and debts, retirees and redundant workers.  Not favored by the CSRC when going public is concerned. 

(2) Bankruptcy and reorganization 

The old Bankruptcy Law applied only to SOEs, which rarely went bankrupt due to the government’s social stability considerations. 

Since the late 1990s, local governments and SOEs began to use or abuse the legal framework to evade debts. 

Debt-equity swap was introduced in 1999 when the four Assets Management Companies (AMCs) were established to dispose of non-performing loans of the banks. 

(3) Ownership diversification 

Bringing in new investors through initial public offering, or private placement. 

Foreign investors have been allowed to participate in both private and public companies since 2002, subject to various restrictions. 

(4) Employee shareholding 

By far the most popular form of gaizhi. Typical characteristics of a transition economy; regulatory forebearance or constructive violation of the law. 

A politically safer way as the central government requires each gaizhi plan must be approved by a conference of employee representatives. 

If the firm is converted into an LLC, the total number of employees cannot exceed 50.  For a long time, Employee shareholding cooperatives (ESCs) were used to assume the status of a single shareholder. 

In 2000, the CSRC, in a reply to an inquiry of a law firm, stated that, since ESCs were no longer recognized as “social organizations” by the Ministry of Civil Affairs, they were hence not legal persons. For this reason, the CSRC wouldn’t recognize an ESC as a shareholder (insofar as listed companies are concerned).  This has left tremendous unresolved problems. 

(5) Management Buyout (MBO) 

Started in 1999. 

2003, the Ministry of Finance called a stop to MBO. 

11 April 2005: the SASAC released the “Tentative Provisions on Transfer of State-owned Property Rights in Enterprise to the Management”, allowing MBO in small and medium sized SOEs. 

(6) Open Sale 

Sale of SMEs through auction. A popular form of privatization. 

(7) Leases 

Leasing is adopted in caws where the lessee cannot afford to buy the firm. 

(8) Joint Venture 

With domestic or foreign investors. Through assets spin-off or merger.

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