1st LD-Writethru: News Analysis: China pilots plan for SOE employee stock ownership

China took another step in reforming its state-owned enterprises (SOE) with its decision to pilot an employee stock ownership plan (ESOP) in some state-holding enterprises, the country's top SOE watchdog announced Thursday.

Qualified employees of selected SOEs in industries that are fully open to competition will be able to buy company stocks, according to guidelines released by the State-Owned Assets Supervision and Administration Commission (SASAC) of the State Council.

The initiative aims to incentivize employees, as equity-holders, to work harder to improve company competitiveness.

A similar ESOP scheme proved effective in China in the 1820s, when banks in central China's Shanxi Province allowed employees to share equity and enjoy dividends, which helped the business expand quickly across the country.

Compared with other incentive programs, ESOP can prevent state asset loss while stimulating productivity, especially in knowledge- and technology-intensive sectors, according to Xiang Anbo, a researcher with the Development Research Center of the State Council, a think tank.

The pilot program will not be introduced in large SOEs as most of them are in strategic sectors such as resources, making it too complicated to implement, said Bai Yingzi, a senior official with the SASAC.

Bai pointed out that ownership interest will only be open to competent and outstanding employees, and government-appointed senior management will not be eligible.

The guidelines also stipulate requirements for pilot enterprises, stake-holding and stake transfers, among other details. If the pilot works well, it will be expanded in late 2018 to invigorate the SOE sector.

Some Chinese SOEs tried ESOP programs in the 1980s and 1990s, but faced challenges due to large stake purchases by management and indiscriminately allowing employees to buy shares.

The state should hold at least 34 percent of a pilot company's total equity to ensure state-owned status, while employees should hold less than 30 percent combined, with each individual employee owning no more than 1 percent of the total, according to the guidelines.

An economic downturn has put pressure on China's SOEs, which are major targets of a drive to reform the country's growth model and cut overcapacity.

SOE profits fell 8.5 percent year on year in the first six months of the year, narrowing from a 9.6-percent slump between January and May, according to official data.

The SASAC will conduct regular checks on pilot companies to keep track of reform progress and will hold responsible parties accountable in case of state asset loss, Bai said. Endi