By WeiYang (Tina) Xu
History of employee ownership in China
In the 1980s, China advocated an “open-door policy” to promote foreign direct investments and foster an economic reform for marketization. In response to the new policy, the concept of employee ownership was introduced to various types of state-owned and collective enterprises. At that time, among 3,200 pilot enterprises in China, 86 percent of them implemented employee stock ownership plans (ESOP).
Starting from the 1990s, the process of restructuring and closing of state-owned enterprises (SOE) was accelerated. The aim of the SOE ownership reform was to turn government agencies and controlled enterprises into shareholding entities. The People’s Congress passed the first corporate code, the Company Law. With the birth of Company Law, employee stock ownership boomed. Due to weak law enforcement and unregulated processes for assignment of stock ownership, however, employee stock ownership became a tool for arbitrage in the primary and secondary markets.
In the early 2000s, during the surge of Reform of Chinese State-Owned Companies, management buyout (MBO) became viral. However, this caused a public outcry concerning the loss of state-owned assets. All types of MBO and employee stock plans were prohibited starting in 2003 by the Ministry of Finance.
After 10 years in 2012, as China's securities market system have gradually improved, employee stock ownership plans have been reintroduced as a way of benefit sharing and improving corporate governance.
In 2014, CSRC (China Securities Regulatory Commission) issued, “Guiding Opinions on Pilot Projects of Listed Companies Implementing Employee Stock Plans.” Employee stock plans were officially effective.
As of Jan 31, 2018, 238 China A-share companies announced their employee stock plans and 150 already implemented their plans.
What is a typical Chinese employee stock plan like?
- Employee stock plans in China are more like ESPPs (employee stock purchase plans).
- All employees (not only limited to senior management) can participate voluntarily.
- Typically, employee stock plans cannot hold more than 10 percent of total company equity and do not allow individuals to own more than 1 percent of company stocks.
- Price: If a non-public offering is used as a source of employee stock plans shares, the issue price shall not be less than 90 percent of the average price of the company's shares in the 20 trading days prior to the base date of pricing.
- Companies themselves can be the administrator of employee stock plans or they can appoint a third-party asset management agency to manage.
- Lock-up period is between 12 and 36 months.
- Source of shares: (1) Transfer of equity by shareholders; (2) voluntary gifting by shareholders; (3) additional issue of shares or increase of registered capital by the company; (4) repurchase of the company's shares according to the company law; or (5) other ways permitted by the law and regulations.
- Source of funds: Salary from employees, and companies provide finance channels to employees (leverage).
Reasons for Chinese companies to have employee stock plans
Similar to ESOPs in the U.S., employee stock plans in China are intended to be a long-term equity incentive system in which internal employees hold shares of the company, share enterprise surplus, and improve performance.
The government advancing the restructure of state-owned companies, however, is a main reason behind the boost of employee stock plans in China. To stimulate global competitiveness and better quality of management, Chinese government has required certain state-owned companies to introduce mixed ownership, allowing non-state-owned enterprises, employees and foreign investors to take stakes in these state-owned companies.
For Chinese-listed companies, employee stock plans also could be tools for managing market capitalization. Employees and management teams use their own money to buy their companies’ stocks through employee stock plans, so investors usually believe that it is a positive signal. Considering when employee stock plans were officially introduced, it also was regarded as a method of the government to increase Chinese stock market demand when the market crashed in 2015.
The future of employee stock plans in China
Many problems still exist in China that impede employee stock plans to reach their full potential. Currently, most official laws and rules are for employee stock plans in listed companies in China. Different forms of employee stock plans exist in non-listed companies, but there are not enough proper laws and regulations. In addition, current Chinese employee stock plans cannot hold more than 10 percent of total company equity and do not allow individuals to own more than one percent of company stocks. Therefore, employee stock plans do not have much real influence on management of companies. Moreover, the Chinese government hasn’t provided any tax policy support for any type of employee stock plans. Besides government policy requirements and market capitalization, the incentives for companies to implement employee stock plans are not enough. At the same time, many Chinese employee stock plans require employees to use their own money to participate. Currently, the main motivation for employees to join employee stock plans come from short-term capital appreciation rather than long-term company growth. China has a unique market and political environment which makes duplication of practices in developed nations not applicable. There are still many necessary changes needed in order for employee stock plans to succeed in China.
WeiYang (Tina) Xu, 2019 Rady MBA Candidate