Q: Except for a very small proportion of mega-companies run exclusively by the State, more than 80 percent of China's SOEs have gone through shareholding reform. What are the ways to realize shareholding reform? Why is the shareholding system the major form of public ownership?

A: In the process of reforming SOEs, China began to realize that more effective forms of public ownership must be explored in order for SOEs to regain their vitality. Implementing a shareholding system and developing a mixed ownership is nothing but a step in this direction.

In the 1980s, immediately after the introduction of the shareholding system and especially after it was adopted in reforming SOEs, China was hit by a wave of shareholding fever. The experiences of several provinces and municipalities have proven that shareholding is an effective system to manage enterprises. In 1993, the Chinese Government made it clear that establishing a modern corporate system was the direction of SOE reform. Since then, China has accelerated shareholding reform.

Except for a small number of companies, such as military factories, SOEs including mega-companies have been encouraged to bring in foreign and private investors, getting listed overseas if conditions permit, and performing mergers and acquisitions so to optimize ownership structure.
 
According to a survey conducted by the National Bureau of Statistics on 4,371 key state SOEs, before 2001, 3,322 or 76 percent of surveyed companies had initiated reforms to set up a shareholding system or corporate mechanism. More than half of them had diversified property ownership and at least 90 percent of the newly founded companies were shareholding companies.
 
Despite the achievements SOEs have made in the shareholding reform, big SOEs in highly competitive sectors are making relatively slow progress in implementing such reform. Major reasons include the overwhelming proportion of State-owned assets, heavy debt burden, imbalanced capital structure, and low profitability, lack of a dominant business scope, redundant labor force and the unpredictability of reform potentials. All these factors have combined to deter large number of potential investors to step in.

The shareholding system, as a capital structure of modern enterprise, is conducive to separating ownership from management rights, as well as to improving capital utilization and company efficiency. Thus, the shareholding system can be adopted in both capitalist and socialist countries.