New Guidelines on State-owned Assets Disposition and Foreign Capital

The Chinese government prefers multinational manufacturers, rather than those in the financial industry, to take over these auctioned assets and bring in fresh managerial ideas, advanced technologies and funds. This reflects the traditional manufacturing-oriented philosophy of the Chinese authorities in treating foreign investment. However, these new guidelines have paved a way for foreign investors to step into assets restructuring and disposition via AMCs.

Types of Assets Involved

According to the Provisional Rules, the assets to be restructured or disposed of by AMCs fall into three categories: the equity held by AMCs in the borrowers (when a borrower converts his bank loans into shares for an AMC which then becomes the shareholder of such borrower); the tangible assets possessed by AMCs which a borrower has used to pay off his bank loans; and the creditor's rights of AMCs towards the borrowers.

In the case of the AMC's acquisition of distressed state-owned assets in the form of equity, foreign investors may face investment restrictions depending on the type of industry that the equity is from. The Provisional Rules prohibit foreign investors bypassing the investment restrictions by taking over large distressed state-owned assets in restricted industries. The Provisional Rules even specifically prohibit three major areas from being sold to foreign investors: culture (such as film, TV broadcasting and publishing), finance and insurance. This may discourage some foreign investors eager to have access to such industries in China.

Asset Restructuring and Disposition Methods

As stipulated by the Provisional Rules, AMCs can adopt two ways to absorb foreign capital: asset transfers and capital injections. In the former case, AMCs can conduct the transfer of their equity, tangible assets or creditor's rights, while in the latter case AMCs may establish joint ventures with foreign investors by injecting their equity or tangible assets. In addition, an AMC may transfer its tangible assets through agreements, bidding and auction, but an AMC can only sell or transfer its equity or creditor's rights in non-listed companies directly to foreign investors, or sell or transfer them after restructuring. Though it is not clearly specified in the Provisional Rules, it can be logically presumed that the sale or transfer of the equity or creditor's rights in non-listed companies can only be conducted through direct agreements.

Foreign Exchange Control

With regard to purchasing NPLs through AMCs, the major obstacle lies in foreign exchange control. In China, the government strictly controls foreign debts and foreign security arrangements between domestic companies and foreign creditors. An annual quota system is adopted in this respect. Meanwhile, the transfer of loans to foreign investors is subject to foreign debts control through the State Administration of Foreign Exchange (SAFE).² The Provisional Rules do not address the question of foreign exchange. Therefore, questions are raised if the loans sold are dominated in Rmb or if domestic assets or companies secure the loans. This requires further clarification or regulation from the SAFE or the relevant authorities.

Asset Evaluation

Before the Provisional Rules, the MOF had a special task force to evaluate state-owned assets, and basically state-owned assets could not be sold at a discount. According to the Provisional Rules, the AMC may decide the price of an assets transaction at its own discretion. The Provisional Rules provide the possibility for selling state-owned assets at a discount. Moreover, international conventions and practice shall be followed in evaluation of the assets. Still, the evaluation by a competent agency is required. The question is whether only a domestic valuation agency, or a state-owned valuation agency in particular, is qualified for the evaluation on a basis acceptable to both AMCs and foreign investors.

Conclusion

The coming auction concerns only a small percentage of all non-performing state-owned assets under the management of AMCs, but it will set a standard for AMCs' future utilization of foreign capital for assets disposition. It is anticipated that the problems arising from the auction will be considered by the government in the future documents. In order to absorb foreign capital for the non-performing assets of the state-owned banks, the Chinese government will find more flexible ways in this field, and new rules may come into being after the current practice.

By David Dali Liu

Llinks Law Office, Shanghai

Endnotes:

1 Huarong AMC established by the Ministry of Finance is to take over bad loans from the Industrial & Commercial Bank of China. The other three AMCs include Oriental AMC from the Bank of China, Xinda AMC from the China Construction Bank, and Great Wall AMC from the Agricultural Bank of China.

2 See the Administration of Taking Out of International Commercial Loans by Organizations in China Procedures.