The newly established State Property Regulatory and Management Commission (SPRMC) appointed 18 department directors recently, including those for enterprise transformation, property rights, policies, rules and regulations. The Commission’s leadership has now taken shape. Since its formal establishment, SPRMC has kept a low profile while carrying out its reorganization. But now it will bear the responsibilities of supervising and managing state-owned assets as well as preserving and increasing the value of the assets.

What are China’s state-owned assets worth? The official estimate is RMB 109 trillion, of which 33% is commercial capital. Currently 9,000 enterprises are directly owned by the state, and this will be reduced to 1,200. These remaining companies will be those related to national security.

This decrease in state assets will be achieved by privatization. It is completely different from the previous process of “reduction in State held shares”. After the transfer of state-owned stock rights began, some potential purchasers have kept an eye on potential state assets sales, in the hope of taking part in the coming merger frenzy.

Therefore, large funds on the Chinese stock exchanges are available for the market. Meanwhile, against a background of low interest rates worldwide, overseas funds are likely to flow into China in the latter half of this year. Qualified foreign institutional investors (QFII) will bring additional foreign capital into China’s A share market.

Currently, overseas capital on China’s capital market mainly comes from listed companies in Hong Kong and foreign investment. Domestically, there are three sources – non state-owned enterprises; some Chinese enterprises; and management buyout. Some concerns have been expressed about this latter mechanism. Since the latter half of 2002, management buyouts have taken place in six listed companies, including Guangdong Medi, Shenzhen Fangda and Shandong Shengli. Some believe that the purchasers bought stocks at prices lower than the book value. Therefore, in order to avoid this possibility,experts suggest the country adopts two strict measures. Firstly, the purchase must be endorsed by local as well as state government. Secondly, the purchase must be audited strictly and information should be published without delay.

China will strengthen its management of state owned assets this year. In Shanghai for example, the Municipal Government has worked out a “Three-Contract” strategy – that is, to contract the level where state-owned assets operate, to contract the management of state-owned assets and to contract the proportion of stock rights owned by the state. The capital released from state ownership will be re-distributed into new industries, such as the high-tech sector, releasing over RMB 570 billion of state-owned assets in Shanghai.

This transformation is unprecedented. However, there is the sensitive question of how to price state-owned assets, as well as how to price effectively. According to experts, pricing of assets should be based on market conditions, with market value, book value, economic added value, dividend income, and cash flow taken into account.

At present, there are more than 1,200 listed companies on China’s stock market, of which over 70% are held by the state. Transference of stock rights is a large market and is very attractive. Foreign capital and “red chips” in Hong Kong may buy into mainland enterprises and capital of A shares may increase greatly. Concerns have been expressed as to whether stock prices will be overestimated, or whether the purchasers can raise funds on the A share market in the future. One typical case was the recent purchase of Jinhua (with a price/earning ratio of 30) by China Resources Enterprises (with a price/earning ratio of eight). China Resources announced that once it concentrated all textile assets of Jinhua the latter would become a capital-raising tool. China Resources finally purchased Jinhua at a price/earning ratio of 35. In other words, it seems the purchasing price paid by China Resources is just a ticket for the company to enter the A share market.