Governments generally make poor shareholders. This is because they are more powerful than other owners. So, if officials feel greedy, they can strip assets from their firms without fear of legal redress. Or, if they feel generous, they can persuade banks to lend more to their firms than commercial logic would dictate, or manipulate regulations to help them. Neither improves performance, since the discipline of the market is lost.
Where national security is at stake, the inefficiencies of state ownership may be worthwhile. Or if the government sets up an agency to manage its shares, and is very disciplined about not interfering, then it might work. But in general, large state shareholdings are a bad idea. Therefore, it comes as no surprise that most economists agree that the mainland government should sell its 415 billion or so shares in China's listed companies. What they cannot agree on is how.
There are two main routes. One involves the government selling its 'state shares'. These are ultimately owned by the State Council but are managed by the new state-owned Asset Supervision and Administration Commission and its provincial bureaus. State shares rarely change hands. And they are usually passively held. In other words, bureaus rarely nominate directors to the boards of firms they control.
Selling state shares has been tried before, twice - both times unsuccessfully. In the second, in July 2001, companies were told to sell state shares into the open market when they made an initial public offering or a rights issue. Crucially, the state shares were sold at the same price as normal shares. Investors were less than impressed, fearful that a tsunami of over-priced equity was heading straight for their portfolios. The market fell in value by some 30 per cent over the remainder of the year. The then president, Jiang Zemin, reportedly stopped the sale.
Since the debacle, dozens of suggestions about how to organise a state share sell-off have been floated. The critical issues to address are, first, how to moderate the flow of newly tradable shares and, second, how to price them reasonably. One proposal involves transferring state shares to a national pension fund, and allowing the fund to sell them off gradually. Another recommends a first-in, first-out approach, with the companies that listed first selling their state shares first. Another proposal asks shareholders to vote on whether to allow the state shares to be sold off. Other analysts suggest forgetting about a sale as such. Instead, they argue, shares should be allocated to current shareholders. This would, the thinking goes, compensate them for the terrible performance of the companies. One estimate claims that since 1990, the government has raised 160 billion yuan in stamp tax alone, while shareholders have received only 50 billion yuan in post-tax dividends.
Others argue that a sale would work, but that the market should be allowed to set the price. The Ministry of Finance is rumoured to oppose the idea, wishing to use administrative means to price the shares and thus, it thinks, maximise revenues. Others suggest using the net asset value of the shares as a price floor, and then letting the market decide. The ministry should be happier with this.
But while policymakers have been scratching their heads over which of these options to plump for, the market just got on with it. Since 1998, an active market in 'legal person' (LP) shares has grown up, booming in recent months. When a state-owned enterprise restructures and issues shares, it usually divides into a parent company and a subsidiary that lists. The parent receives LP shares in the listed firm in return for the assets it inserts. Every one yuan of assets is converted into at least 0.65 shares in the listed firm. LP shares are not listed on the exchanges.