By Zhang, Wenkui

China's listed companies have a history of merely 10 years. So far, the total number of listed companies in China is only a little more than 1,000. Nevertheless, these companies hold an ever more important position in China's national economy, and their economic activities have an ever more important influence upon the national economy. In recent years, the restructuring of listed companies is getting popular, having posed an eye-catching phenomenon in China's economic life, which draws extensive attention from the economic community. According to incomplete statistics, the number of cases of restructuring of China's listed companies stood at 705 in 1998 and shot up to 1110 in 1999. In the first half of 2000, the number of major restructuring cases hit 148 as quoted in the Notice on Standardizing Listed Companies' Major Purchases or Sales of Assets promulgated by China Securities Regulatory Commission. Compared with the companies listed in developed stock markets, China's listed companies are unique in terms of their equity structure, performance and management, so are the economic and legal conditions under which they operate. It is therefore of great significance to analyze these unique characteristics and dig out the root of the problems that dog the restructuring of China's listed companies.

I. History and Characteristics of Restructuring of China’s Listed Companies

Although restructuring of China's listed companies started in 1993, it was launched sporadically before 1997. In 1993, Bao An corporation purchased the shares of Yan Zhong corporation on the secondary stock market. This enlarged its holding of the latter's shares from 4.56% to 18%, and turned it into the biggest shareholder. Although Bao An corporation did not succeed in taking over Yan Zhong Corporation, it became a pioneer in China to purchase the shares of a listed company. In 1994, another form of restructuring with Chinese characteristics was invented by Heng Tong Corporation when it purchased Ling Guang Corporation: negotiated transfer of the state-held shares of the listed company and conduction of self-dealings. At that time, Heng Tong attained 35.5% of the 55.26% of the state-held shares of the Shanghai Lingguang Industrial Company, the parent company of Ling Guang, and was exempted from the obligation to declare a tender-offer.

Although these two cases of purchases startled people for the time being, there were not many followers due to the immaturity of the objective environment. With deterioration of the macro economic situation in the years after 1994, some China’s listed companies found themselves in financial difficulty in 1995 and 1996 and some even in red, which gave rise to a special treatment group (known as the ST companies on the stock market). The emergence of the loss-incurring companies and the ST group meant that some listed companies would be disqualified for stock allotment or even be exposed to the danger of being delisted. Since listing quotas and qualification for allotment had an important bearing on regional economies, local governments would try every means to keep their listed companies going on the stock market or to qualify them for allotment, which in turn led to the surge of restructuring of listed companies directed by local governments. In 1996, the Shanghai Municipal Government took the lead in the country to propose the restructuring of listed companies in financial mires to retain their "shell" and qualify them for the allotment of new shares, and also picked out a group of listed companies such as Zhong Cheng Shi Ye and Lian He Shi Ye, for the purpose. The restructuring of listed companies initiated by the Shanghai Municipal Government was copied by one local government after another, and began to heat up rapidly across the country since 1997. The result is a constant increase in the number of cases of restructuring and in the amount of value involved. In view of accelerated momentum of structural readjustment and quick pace of polarization among enterprises, restructuring masterminded by local governments and spurred by market forces has both been in the ascendant since 1999. When the restructuring of China’s listed companies is viewed broadly, it can be discovered that it has something distinct from that of ordinary market economies. China's listed companies are fairly special in terms of origin, relationship with the government, financial preference, and motif of restructuring. All these factors have left a strong mark in the restructuring of China’s listed companies.

1. "Keep shell for allotment and borrow or buy shell"

A fairly large number of cases of restructuring of China’s listed companies have been initiated toward the goal of keeping listed companies in action or qualifying them for the allotment of new shares, or selling shares under the "shell" borrowed or bought from listed companies. This mode is in essence designed to raise funds from the securities market at low costs and with small responsibilities. So far, Chinese enterprises have still relied upon bank loans as their major form of financial resources. Because most enterprises are haunted by comparatively big debt ratios, the stock markets of the country are still at their early stage of development and generally in short supply, the stock market has small restrictions to and pressure on listed companies, the costs for raising funds through stock trading are much smaller than those for direct loans, and almost no responsibilities are involved, enterprises have a strong inclination to raise funds on stock market. At the same time, however, Chinese enterprises face much tighter restrictions than those in market economies when they come to pool funds from the stock market. While old state-owned enterprises enjoy easier access to stock market, some latecomers and newly established hi-tech or non-governmental enterprises, in particular, have more difficulties to raise funds from the stock market. For this reason, the "shell" resources of listed companies have gained a comparatively big value. To reallocate these "shell" resources by restructuring, or to take the chance of restructuring to seize, keep hold of, or make full use of these "shell" resources continually is in line with both the interests of local governments and the aspirations of many non-listed companies. The fall of some listed companies into deep financial mires and the approach of some others to the brink of bankruptcy have also created the opportunity for restructuring.

2. Negotiated transfer of equities

Negotiated transfer of state-owned and institutional equities is the main mode of restructuring of China’s listed companies, and there is a tiny number of cases of acquisition through the secondary market. This is determined by the equity structure of China’s listed companies. Because the non-tradable state-owned and institutional equities of China’s listed companies account for about 62% of the total, negotiated transfer of state-owned and institutional equities has naturally become a mode of restructuring that can be applied most fast and easily with comparatively lower transaction costs. In addition, this mode can enable the government to play a leading role in the process of restructuring. Negotiated transfer was first introduced in the restructuring of Heng Tong and Ling Guang. After being legalized in the Securities Law put into force in 1999, this mode has come to win even greater favour. Negotiated transfer involves extremely small costs in operation, and is conducive to the promotion of the restructuring of China’s listed companies. It is more likely, however, to expose the interests of small shareholders to harms when compared with acquisition on the secondary market.

3. Assets exchange

By exchange of assets, we mean the direct or indirect exchange by local governments or new controlling shareholders of the high-quality assets of their own for the poor-quality assets sank at listed companies. Obviously, exchange of assets generally involves exchanges of unequal value, and this would usually be motivated by the government. Local governments would either employ some administrative measures to mandate the injection of the high-quality assets of other state-owned enterprises into listed companies without consideration to the equality or inequality of the deals, because what is involved is exclusively state-owned assets and such injections are by no means transactions in real sense, or compensate the enterprises (especially non-state ones) unwilling to conduct unfair exchanges in such ways as preferential treatment in taxation and land prices, or privileges in business operation. Still, there are some enterprises, including non-state ones, that are willing to carry out such exchanges of unequal value. These enterprises are by no means, however, making sacrifices for nothing. Their aim is to net a big catch from the securities market with the "shell" they have borrowed or purchased, an act that heralds even greater dangers. In fact, exchange of assets was widely hailed two years ago, and many of its aftereffects have just begun to surface gradually.

4. The important role of local governments

The role of local governments and departments has manifested itself in three aspects: Firstly, direct decision on the transfer of state-owned equities or institutional equities of a state ownership character; secondly, supply of bridging services to help listed companies find restructuring partners; and lastly, offer of favorable policy to restructuring parties, such as compensation for deals of unequal value as mentioned above. Objectively, government participation in the restructuring of China’s listed companies has played a dual role. On the one hand, it has facilitated the successful restructuring of quite a number of listed companies, and on the other, it has interfered with the normal rules of the securities market or even got directly involved in some trade disputes. Some local governments have, for instance, asked transferee enterprises to promise refund of value-added tax so that the net asset-income ratios of the listed companies involved can reach the requirement for the allotment of new shares. This is essentially unfavorable to the sound development of the securities market, and may touch off contradictions between listed companies and the government in the future.

5. Large amounts of self-dealing

Self-dealing is also known as associated deals in China. It refers to the conduction of deals by a company with its controlling or participant shareholders, branches, and affiliates. Since such deals do not differ much from dealing with oneself, they are most likely to lead to exchanges of unequal assets, transfer of interests, and other undesirable phenomena. Self-dealing was first introduced to exchange assets. Obviously, self-dealing cannot be too good to be the way to carry out replacement of assets with unequal value. Secondly, self-dealings are conducted for the purpose of handing over profits to listed companies so that they can meet qualifications for the allotment of new shares. Holding companies and their affiliates can achieve profit transfer by buying either the stockpiles or the poor-quality assets of listed companies at high prices, or by renting the assets of these companies. Self-dealings have not been, of course, conducted for the exclusive purpose of injecting high-quality assets or transferring profits to listed companies. They can also be carried out for the purpose of transferring the high-quality assets or profits of listed companies. This practice has already been followed in reality and deserves our high attention.

6. Cash Payment

For restructuring China’s listed companies, transfer of equities has been in the main accomplished in terms of cash. Equity deals are usually conducted in the form of cash purchase or exchange of shares. In countries and regions with a comparatively well developed market economy, the latter form has ultimately taken the place of the former and become a major form of equity transfers. As equity transfers are launched in China in the form of cash purchase, it has set comparatively great restrictions on restructuring. The reason is that Chinese enterprises suffer serious shortages of cash, and the country''s credit markets and securities markets are not well developed yet. In fact, many intents of restructuring have not been realized in the country for want of funds, and the value involved in restructuring has been rather small. Shortage of cash may even lead to disputes or frauds in deals because transferees can get hold of equity rights or holding positions by delaying their payments or paying in installments in the first place, and then borrow loans by mortgaging their equity rights or raise funds by allotting new shares for their purchases. They may even directly misappropriate the funds of listed companies to their purchases. All these can easily give rise to disputes during the process of restructuring. The characteristics mentioned above demonstrate that restructuring of China’s listed companies remains at the stage of immaturity, subjects to strong influences from government forces, and still suffers from an incomplete legal system. Since 1996, however, some new phenomena have developed in the restructuring of China's listed companies, signaling the growing strength of market forces in the restructuring of listed companies. A few new forms have come to be put into trial, some deep-rooted problems have been touched, and headway has been made in depth.

a) Repurchasing and selling of state-held shares have been initiated as an important test on the decrease of state-held shares and improvement in the equity structure of listed companies. After Yun Tian Hua announced its repurchasing of state-held shares in early 1999, Sheng Neng and Hu Chang Te Gang followed suit in autumn that year, Chang Chun Gao Xin and some other listed companies joined the rank this year. A plan on the allotted sale of state-held shares was also officially announced in the autumn of 1999. Although repurchasing plays a limited role in reducing state-held shares due to the weakness of such purchases, it has nevertheless provided a new form of practice in China. The allotted sale of state-held shares has not been conducted as smoothly as expected. This is not, however, the fault of the sale itself. Instead, improper arrangement of some details (such as the pricing of the shares for sale) in actual operations is to blame. The proportion of state-held shares to the total shares of China’s listed companies is excessive, and such excess is not favorable to the establishment of a standard and efficient corporate governance structure and to the transformation of management mechanisms. Neither is it conducive to the extension of restructuring itself in a standard way. As the situation stands, it is worthwhile to try out various forms of reducing state-held shares, including repurchasing and allotted sales.

b) Dispute over proxy. The occurrence of the Tong Bai Hui v. Sheng Li Gu Fen this year has marked the beginning of development of dispute over proxy in China. Dispute over proxy was once all the rage in developed countries including the United States, and gradually subdued due to strict regulation by law. In China, however, dispute over proxy has a positive significance: it is conducive to bringing the role of small shareholders into play and to restricting the behaviors of big shareholders with the force of small shareholders. In our view, of course, the more important thing is to formulate laws in this regard because proxy may be abused by big shareholders, and controlling shareholders in particular.

c) The decline of purchasing or borrowing "shell". Since 1999, this year in particular, there has been a noticeable decrease in the number of cases of restructuring featured by "purchasing or borrowing shell". Reasons for the decrease varied. Firstly, the "shell" resources that are comparatively clean and that can bring ailing enterprises back to life have been basically used up after the surge of restructuring in 1997 and 1998. Secondly, failures in restructuring by purchasing or borrowing "shell" and serious aftereffect of some cases have scared off people, and nobody would have interest in "shells" that are unclean and do not provide any cure after being traded time and again. Thirdly, some enterprises with superiority, especially those non-state enterprises comparatively successful in their performance, are awaiting the creation of some new capital channels such as the hi-tech board opened at the Shenzhen Stock Exchange, thus cutting the relative value of the "shell" resources. In any sense, the decrease in the number of cases of purchasing and borrowing "shell" is a desirable signal because it indicates that China''s securities market is moving towards the direction of healthy development.

II. Achievements in the Restructuring of China’s Listed Companies

 Despite a short history and many problems in the restructuring of China’s listed companies, it is necessary to make an objective appraisal of the progress made in this area. Generally speaking, restructuring of China’s listed companies has been a result of the acceleration of structural readjustment, the polarization among enterprises, and the intensification of the restrictive mechanisms of the securities market. Also as an inevitable result of the advancement of China’s listed companies and securities market from the primary stage towards sound development, it will play an active role in readjusting the industrial structure, reforming enterprises in depth, and protecting the interests of investors. 1. Accelerated readjustment of the industrial structure Restructuring of China's listed companies has accelerated the readjustment of the industrial structure. Thousands of cases of restructuring have taken place among China’s listed companies in the past few years, involving hundreds of listed companies. A universal phenomenon in such restructuring is the big change in their business orientation.

 Business lines of a traditional character with low technology content have been given up, while those involving high technology have been introduced. As early as 1994 when Heng Tong purchased Ling Guang, the element of structural readjustment was noticed. The key business item of Ling Guang at that time ---- production of quartz glass, began to weaken, while Heng Tong brought electric energy and instruments under its control to Ling Guang. The role of restructuring in structural readjustment has become all the more prominent since 1998, and such structural readjustment has acquired more characteristics of the day, with businesses such as computer and software being taken up by China’s listed companies one after another. Instances in this regard include the entry of Bei Da Qing Niao into Tian Qiao Department Store, Top into Chuan Chang Jiang, Chuang Zhi into Wu Yi Wen, and Ke Li Hua into E Cheng Iron and Steel. Although some problems have cropped up in these cases of restructuring, the overall situation has been satisfactory. Since China''s stock exchanges have a comparatively strong characteristic of planned economy in their early days, enterprises do not have equal access to listing and technically backward enterprises usually get more chances of being listed than the hi-tech ones.

The current restructuring as a means to achieve structural readjustment and promote the integration between high technology and the capital market is of great significance to China's economic development. 2. Restructuring promotive to readjustment of equity structure and corporate governance A major characteristic marking the equity structure of China’s listed companies is the exclusive dominance of state-held shares, with state-held shares or institutional shares of a state ownership character accounting for 50-60% or even more of the total shares of listed companies. Since the major form adopted in the restructuring of listed companies is the transfer of state-held shares or institutional shares of a state ownership character, the portion of shares held by the state or by state-owned legal entities would be reduced and more shares would be available to other legal persons. What was actually carried out in the restructuring of Heng Tong and Ling Guang in 1994 was a transfer of state-held shares to institutions, with Heng Tong acquiring 35.5% of the state-held shares of the Shanghai Lingguang Industrial Company. In the campaign of restructuring launched since 1998, many non-state enterprises have assigned state-held shares or shares held by state-owned institutions, or even joined listed companies as holding shareholders. This has brought about great changes in the equity structure of China’s listed companies. Significant changes in the equity structure will naturally lead to a noticeable readjustment in corporate governance structure. In the case Heng Tong v. Ling Guang, Heng Tong launched a bold reshuffle of the latter’s board of directors by readjusting the directors composed of the former "cadres" of state-owned enterprises. In the process of restructuring in recent years, efforts have been made to readjust the governance structure of listed companies to an even larger extent. In some cases, even proxy and some other new forms have been adopted in striving for the power of control over the companies concerned. Transformation of the equity and governance structures of China’s listed companies by way of restructuring will generate a far-reaching influence upon these companies, and will be of positive significance to the fulfillment of the task of facilitating both the entry and quit of state capital as advocated at the 4th Plenary Session of the 15th National Congress of the Communist Party of China. It will also help reinforce the balancing mechanisms of listed companies, separate the functions of government from those of enterprises and ultimately realize fundamental transformation of operational mechanisms. Viewed from this angle, to formulate appropriately applicable policies on the restructuring of China's listed companies should be taken as an important strategy for the development of China''s securities market. Such changes in equity and governance structures brought about by restructuring cannot be, of course, adequate conditions for the revival of listed companies. Heng Tong, for one thing, has failed to revitalize Ling Guang. On the contrary, these changes may give rise to some new problems such as the transfer by non-state holding companies of assets from listed companies. At any rate, to change the equity and governance structures of China’s listed companies is the only way to transform their mechanisms in