Ban on MBO's: not what it seems - the WTO column

Shanghai stock market

(Also at Chinabiz)
When the legal clouds rise up from Beijing it is, just as in a classic Western, very hard to guess what is behind the clouds. Is it the army? Are the Indians coming? Or it is just a storm that passes over?
The latest confusing cloud was caused last week by a regulation of "management buyouts" or MBO's for state-owned companies, reported in the Chinese Media Watch of Chinabiz. The regulation applies to small and medium state-owned companies and larger ones, banks, listed companies are excluded. The first rumors already emerged at the end of last year. One conclusion from media reports could be that the transition from a planned economy to a market economy has yet again run into murky political waters. That conclusion is wrong. The most likely explanation is just the opposite: it shows that big changes in disposing of state assets are on its way.
First, the regulation itself has a rather limited scope. Most of the small and medium companies are losing to private competitors. Larger ones, banks, listed companies are excluded from this regulation. They are good for more than half of the total share of state-owned enterprises in China's economy.
The announced ban on MBO's for the larger state-owned companies is a sign that after four years of tampering the government is going to bring them on to the market, not hold back the privatization. Up to the summer of 2001 the state-owned companies could only put up one-third of their shares for trade when they listed. That part was heavily overvalued and the stock market was used as a cash machines for often badly run state-owned companies. Enthusiasm among the buyers was high despite those bad fundamentals, and demand for shares was much higher than the supply.
A research by the Ministry of Finance in 2001 suggested that the non-tradable two-third of the shares should be put on the stock market to finance the lagging social security system. Since then the Chinese stock markets have been going south and despite comforting noises from financial experts, Chinabiz already predicted that the shares would fall further earlier this month. What has gone wrong is that since that doom-year of 2001 no policy was pushed through. The two-third non-tradable shares were not put on the stock market, but the plan kept on showing up in thousand different variations, suggesting it was also not dead. Tripling the liquidity of the stock markets would have killed them for years and have diminished the overvalued shares. Not doing anything has not caused a dramatic drop, but has also not solved any problems and might have been in the end worse than just selling off those state-owned shares. Now the plans to sell the first non-tradable shares have been announced and more can be expected. The ban for the larger state-owned companies is a sign that the financial authorities want to prevent the current management from selling off key assets of their companies, before the unavoidable clash is coming. That means the coming years will be rough for both the stock markets and the state-owned companies involved. Rather than a backlash, the ban signals that another big economic leap forward is on its way.

Fons Tuinstra

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