Some of the largest and most influential businesses in the People’s Republic of China (PRC) are controlled or partly owned by China’s government. Despite the crucial role such businesses play in China’s outbound investment strategy, such state owned enterprises (SOEs) remain a mystery to many international players. The purpose of this article is to briefly explore Chinese state owned enterprises: their nature, structure and role, and in particular to look at the line which can be drawn between state and corporation.

The first thing to understand when dealing with state owned commercial partners in China is exactly what type of entity you are dealing with – is it a company, the State, or a bit of both?

Unfortunately, despite the wide use of the term State Owned Enterprise in legal and government documents in China, there is no uniform definition of an SOE in PRC law. The term may in fact be used in relation to three very different circumstances. The first relates to wholly state-owned enterprises, being those which are 100 percent controlled by the PRC government or its agencies. Such wholly state-owned enterprises currently account for only about 7 percent or 117 of PRC SOEs. The second relates to what can be termed ‘state-controlled enterprises’ and include entities where the state owns more than 50 percent of the equity interest in the enterprise (and therefore enjoys absolute control) as well as those where the state owns less than 50 percent of the equity interest but otherwise controls the enterprise through contractual or board control for example. Finally there are also state-participated enterprises, being those where the state holds a minority interest and has no control. In addition to knowing which of the three types of SOE you may be dealing with, it is also important to understand which branch of the State is involved too, as it may be the central or one of the provincial governments who controls the relevant holding. Due diligence when entering into commercial dealings with any PRC entity and any of the abovementioned entities in particular is crucial, as understanding the nature and structure of your counterpart will affect the nature of your dealings with them.

Apr-Jun 2014 issue