China's State Economic & Trade Commission, Ministry of Finance, State Administration of Industry & Commerce and State Administration of Foreign Exchange issued Tentative Rules on Using Foreign Investment to Reorganize State-owned Enterprises on November 8 2002.The rules will take effective from January 1 2003.
According to the rules, foreign investment will be used to reorganizestate-owned enterprises when: (i) holders ofstate-owned property rights ofstate-owned enterprises (SOEs) transfer all or part of the rights toforeign investors, changing the SOEs to foreign-invested enterprises (FIEs); (ii) holders ofstate-owned shares ofstate-owned corporations transfer all or part of the shares to foreign investors, changing the state-owned corporations to FIEs; (iii) domestic creditors of SOEs transfer their creditor rights to foreign investors, which reorganizes the SOEs to FIEs; (iv) SOEs or corporations withstate-owned shares sell all or part oftheir assetsto a foreign investor, and the investor establishes an FIEthrough assets purchased either by itself or jointly with enterprises selling assets; (v) SOEs or corporations with state-owned shares absorb foreign investment through increasing capital and shares, and thus reorganize themselves to FIEs.
The Rules do not apply to the reorganization of financial enterprisesand listed companies withstate-owned shares. Foreign investors are prohibited from participating in the reorganization of SOEs if the business scope of the SOE falls within the prohibited foreign-invested industries under the Foreign Investment Industrial Guidance Catalogue. Chinese parties will continue to hold controlling interests or relative controlling interests in theenterprises if the Chinese parties, according to the Foreign Investment Industrial Guidance Catalogue, must hold these interests.