[Vivienne Bath is a partner of Coudert Brothers' Sydney office and a member of the China Practice Group.]

Last year and this year have seen a number of important legislative and organizational steps taken by the Chinese authorities in dealing with State-owned assets and State-owned enterprises.

On the one hand, the government is moving to facilitate and regularize the recapitalization and reorganization of inefficient State-owned enterprises through the use of foreign and private capital; on the other, it is taking further steps to try to prevent the dissipation of State assets by transfer into private hands at undervalued prices.

The Interim Provisions on State-Owned Capital Management and Financial Arrangements in Enterprises being Transformed into Companies, issued by the Ministry of Finance on July 27, 2002, and effective on August 27, 2002 (the Interim Regulations) regulate methods of restructuring State-owned enterprises into limited liability companies or companies limited by shares and focus on the level of government approval that is required.

The regulations require a full, audited inventory of assets to be taken, as well as a valuation by a qualified asset valuation institution. They also set out procedures for dealing with the assets, claims and debts of an enterprise which is to be reorganized. Interestingly, they also allow for creditors' claims to be converted into equity.

The Supreme People's Court has issued complementary legislation in the form of the Regulations on Several Issues Concerning the Trial of Civil Dispute Cases Relating to Enterprise Restructuring (the Supreme Court Regulations), issued on January 3, 2003, and effective on February 1, 2003.

The Supreme Court Regulations permit the filing of civil suits in relation to such reorganizations (except in the case of an administrative transfer of assets by a competent government department) and expand on the rights and remedies arising from such a reorganization.

Most recently, the Interim Rules on the Supervision and Administration of State-owned Assets of Enterprises (the State-owned Assets Rules), issued by the State Council on May 27, 2003, and effective on that date, set out the responsibilities of the newly formed State Asset Supervision and Administration Commission (SASAC) and its regional offices in supervising non-financial State-owned enterprises across China. SASAC's role is to act as the owner of the assets: supervising the enterprises, appointing high-level officers and guiding reform.

The State-owned Assets Rules set out the right to autonomous operation and freedom from government interference of State-owned enterprises and emphasize the importance of economic operations.

The Provisional Regulations on Reorganizing State-owned Enterprises Using Foreign Capital (the Provisional Regulations) issued by the State Economic and Trade Commission, the Ministry of Finance, the State Administration for Industry and Commerce and the State Administration of Foreign Exchange Control on August 11, 2002, and effective on January 1, 2003, clarify the rules for investment by foreign companies in State-owned enterprises and acquisition of businesses through the purchase of state-owned assets.

Taken together, these rules and regulations constitute a valuable clarification of the often confusing State-owned assets regime and offer to investors (both Chinese and foreign) assurance that they can obtain good title to State-owned assets and businesses. The regulations constitute a useful base for the continuing reform of the State enterprise sector.