Ministry signals halt to MBOs

04/02/2003
China Daily

The Ministry of Finance is expected to halt management buy-outs (MBOs), according to a document issued by the ministry.

MBOs, viewed by some experts as an efficient way for the State to exit from business, have been popular in recent times but there have been concerns of asset undervaluation and State losses.

"Due to the lack of relevant rules and regulations, it's not the right time to continue with MBOs," said the document.

The ministry's decision is "for the sake of preventing people from gaining personal interests through new transactions," according to the document.

Cases of selling State assets at unreasonably low prices have been reported in past years due to loose controls; under-the-table or insider deals; and lack of market experience, experts said.

The ministry refused to comment on the reports.

Liu Jipeng, a power industry expert from the Capital University of Economics and Business, said the ministry's move is "a timely decision," as MBOs are not suitable for China's listed companies.

It is a difficult time to decide how to price the shares for MBOs, said Liu. The Chinese capital market has not developed fully and so it is difficult to have a fair evaluation for the buy-out of shares, Liu said.

No fair ratio of market return is available, which makes the derivation of share value impossible, Liu said.

"Affairs involving State-asset restructuring should not be overseen by the ministry any more, as the State Asset Management Commission, acting as the holding company for government shares in State-owned enterprises (SOEs), has been established after the conclusion of the 10th National People's Congress last month," said Liu.

The establishment of the new body indicates China will step up SOE reform, which involves about 190,000 firms and more than 10 trillion yuan (US$1.2 trillion) in assets.

Under the guidelines set by the 16th Party congress last year, the government will retain monopoly control over a few key industries and eventually reduce presence in common competitive industries through ownership restructuring, mergers and acquisitions, sales, closures and other means.

However, some other experts were not happy with the ministry's move.

Wang Fuchong, a leading industry expert, said what the ministry should do is propose laws to regulate the transactions, not suspend MBOs.

"It is not the MBOs' fault (for State losses)," Wang said, adding that MBOs are a good way to upgrade management of SOEs.

The ministry has approved nine MBO transactions so far.