What is a State-owned Asset?

Chinese regulations distinguish three categories of state-owned assets:

  1. Natural resources and land in the public domain (rivers, forests, land, minerals, etc.);
  2. Public-use assets, i.e. all assets used by government and other public agencies (hospitals, army, universities, etc.); and
  3. Assets for industrial, commercial or financial use operated by enterprises in which the Chinese State has a participation.

For the purposes of this publication, the term “State-owned assets” will refer exclusively to the third category of assets mentioned above.

Which assets are considered as State-owned?

  • Any equity participation held in any company by the central government, a local government or any of their branches (administrations, hospitals, universities, institutes, etc.) (the “State”). Such companies are commonly referred to as “State-Owned Enterprises”; and
  • Any tangible asset (buildings, equipment, etc.) or intangible asset (land use rights, intellectual property, etc.) owned by a State-Owned Enterprise. This definition means that any interest held by a State-Owned Enterprise in a third party company is classified as a State-owned asset.

It is therefore a very broad definition, knowing moreover that in case of doubt SASAC (see below) has full discretion and authority to determine whether a particular asset, property or right qualifies as a State-owned asset.

Which authority is in charge of supervising State-owned assets?

The State-owned Assets Supervision and Administration Commission (SASAC) is the administration responsible for ensuring, in the name and on behalf of central and local governments, the proper management of State-owned Assets.

In this capacity, SASAC represents the State in the decision-making bodies of State-Owned Enterprises: general assembly of shareholders and/or boards of directors.

SASAC is directly placed under the supervision of the State Council*. Like other Chinese administrations, it is organised around central departments based in Beijing and local offices at various territorial levels (mainly at the provincial and municipal levels).

Note:(*) The State Council is the main executive organ of the Chinese government, notably including the Prime Minister and Vice-Prime Ministers.

How can State-owned Assets be transferred?

The procedures for the transfer of State-owned Assets vary depending on the nature of the asset in question, namely:

  • An equity participation by the State in a State-owned Enterprise (“Target Equity”); or
  • An asset held by a State-owned Enterprise (“Target Asset*”) .

These procedures aim to organise the transfer of State-owned Assets in a transparent manner and in the best interest of the State, and to avoid the appropriation of State-owned Assets for the benefit of particular interests.

Note:(*) The transfer by a State-Owned Enterprise of its participation in a third-party company may, in certain cases, follow the regime applicable to the transfer of Target Equity (and not that specific to Target Assets), in particular when the State-owned Enterprise is wholly owned or controlled by the State.

 

What are the procedures applicable to the transfer of a Target Equity?

The transfer of any Target Equity must take place according to the procedures:
  1. The transfer of the Target Equity must be approved by SASAC and, where applicable, by the local government if this transfer leads to the State losing control of the State-Owned Enterprise;
  2. An audit of the accounts of the State-Owned Enterprise must be conducted by an accounting firm licensed to practice in China;
  3. The value of the Target Equity must be assessed by an Appraisal Institution** based on the above-mentioned audit. The choice of the Appraisal Institution is at the discretion of the State-Owned Enterprise *** ;
  4. The purchase price of the Target Equity must be set by the SASAC, taking into account the recommendation made by the Appraisal Institution. In practice, except in exceptional cases, SASAC’s policy is to validate the value proposed by the Appraisal Institution;
  5. The Target Equity must be offered for sale through an exchange specially reserved for the transfer of equity in State-owned Enterprises. This exchange is in charge of organizing and supervising the sale:
  • the advertising of the transfer in order to obtain solicitations of interest from potential purchasers; and
  • the procedures leading to the conclusion of the transfer, bearing in mind that the applicable time limits (in particular for submitting an offer) and the terms of payment for the purchase price (in particular the obligation to pay a deposit) vary according to the rules of each exchange. However, regardless of the exchange, the transfer cannot be carried-out at a price lower than that set by SASAC. The organisation of an auction is mandatory in the event that several candidates declare their interest in acquiring the Target Equity.
If, at the end of this procedure, the Target Equity is sold to a foreign investor, the sale will only be effective after completion of the procedures for registration of foreign investments in China****. Note: (*) The generally applicable procedure is presented here, bearing in mind that special cases may exist, particularly in relation to the sector in which the State-Owned enterprise whose shareholding is being sold operates. (**) An Appraisal Institution is an accounting and financial firm specially authorized by the Ministry of Finance to carry out the valuation of State-owned Assets.  

What are the procedures applicable to the transfer of a Target Asset*?

The transfer of any Target Asset must take place according to the procedures:

  1. The transfer of the Target Asset must be approved by the competent organs of the State-Owned Enterprise;
  2. The value of the Target Asset must be assessed by an Appraisal Institution on the basis of the audited accounts of the State-Owned Enterprise;
  3. The purchase price of the Target Asset must be agreed between the State-Owned Enterprise and the prospective purchaser, provided that such price shall not be more than 10% less than the value recommended by the Appraisal Institution;
  4. The purchase price, as well as the other terms and conditions of the sale, must be registered with SASAC;
  5. The transfer of the Target Asset takes place through the conclusion of a sale contract between the State-Owned Enterprise and the purchaser. Depending on the nature of the Target Asset, the completion of the transfer may be subject to the fulfilment of certain formalities or procedures. In particular, the sale by a State-Owned Enterprise to a foreign investor of its interest in a third-party company requires compliance with the procedures for the registration of foreign investments.

Note:

(*) The generally applicable procedures are presented here, bearing in mind that special cases may exist, in particular due to the nature or importance of the assets transferred (which may require approval of the transfer by the SASAC, or even by the local government).