China encourages enterprise mergers, reorganization

The State Council issued guidelines on Monday encouraging mergers and the reorganization of businesses in key industries as China transitions toward a more open, market-oriented economy and tries to reduce leverage.

Businesses are encouraged to enter into trans-regional acquisitions and reorganization so that the country can create a smaller number of higher quality companies.

State-owned enterprises are encouraged to draw private capital through the transfer of shares, capital increases and new share issuances.

The guidelines urge for the accelerated reforms of monopoly industries and the introduction of private capital to encourage investment from various sources and diversified ownership.

Businesses struggling with overcapacity are highly advised to accelerate mergers and reorganization to cut excess capacity. Zombie enterprises are encouraged to phase out of the market.

Mergers and reorganization should be pushed in industries with low concentration ratios or with lots of homogeneous competition, to improve profitability.

The government pledged financial support for mergers and reorganization. Eligible enterprises are allowed to issue preference shares and convertible bonds to raise funds for these activities, according to the guidelines. Endi