1. State shareholders should become an active force in promoting the establishment of effective corporate governance Chen Qingtai State Council Development Research Centre （ DRC ） （ Shanghai, 26 February 2004 ）

2. Part One Long-term factors in the distortion of corporate governance DRC

3. The main features of the distortion of corporate governance The system of authorized agents for state stockholder ’ s interests is not sound After the restructuring and listing of an SOE (State Owned Enterprise), resources for solving the remaining problems of the “ remainder company ” are incorporated into the listed company, with the result that ： （ 1 ） the board of directors loses independence （ 2 ） the independence of the company ’ s commercial interests is lost There is inappropriate government interference and dominance by a single shareholder with a government background The state shareholder exceeds the level of intervention in personnel issues permitted by the Company Law State-owned and legal person shares are not circulated on the capital markets The listed company has inappropriate connections with the parent company “ remaining part ” – refers to what remains of a company after a part of it has been spun off as a listed company “ government background ” and “ dominance by a single shareholder ” refer to poor corporate governance due to one stockholder's decisive majority of shares in a company and the fact that in China, the state often holds a decisive majority of shares of big companies. The management of many companies are appointed by the state rather than the board.

4. Part 2 An important breakthrough in the reform of the state assets administration system DRC

5. Principles for establishing and operating the new state-owned assets administration system The government at central, provincial and municipal levels carries out its responsibilities as investor on behalf of the state ； Each level of government sets up a body specializing in the supervision and management of state-owned assets in order to carry out its responsibilities as investor ； The supervisory body centralizes and unifies the exercise of ownership in relation to investment and shareholding enterprises, linking management of capital, personnel and business ； Reform of the state assets management system is combined with adjustment to the distribution of state assets ； In accordance with the Company Law the investor institution exercises shareholder rights and implements the division of ownership and management rights “ funder ” – the word used here is similar to the Chinese word for “ investor ”. They are similar in the sense that both provide funds to a company. The former is closer to corporate partner, including both individuals and organizations, while the second is in the broad sense of investor.

6. The new system - the first breakthrough With the state as owner, the object of supervision will switch from enterprise to capital The state asset department ’ s “ exercise of investor ’ s responsibilities ” sends out several important messages ： - capital, not enterprises, should be subject to supervision by the investor; - the investor institute acts in accordance with its code of conduct, its focus of concern is capital security and investment reports; - the investor institute ’ s shareholder rights are exercised in accordance with the Company Law. The main means of utilizing capital are participation in corporate governance and the input and withdrawal of capital

7. The new system - the second breakthrough The investor institution centralizes and unifies the exercise of ownership rights This has important significance: - a system and mechanism that can investigate property rights responsibilities has been established; - a body with well-defined responsibilities and rights that utilizes state-owned capital has been formed - the situation of too many managers and multiple objectives in state-owned assets has been brought to an end

8. Part 3 State shareholders should become a positive force in promoting the establishment of effective corporate governance

9. A corporate legal person governance structure is the core of the corporate system Switching from traditional, government-supervised enterprises to corporate governance established under two separate authorities is a profound systematic change In modern, large-scale management organizations the supervision of policy making, operations and management are all highly specialized areas Since effective corporate governance largely concerns the protection of shareholder rights and interests, the leading force in promoting effective corporate governance is the shareholder (the special nature of state capital requires two levels of authorized agents, namely authorized agents within state property rights and authorized agents within corporate governance, before the investor can be put in place)

10. Determining the two objectives necessary for reforming state enterprises by listing shares Firstly, ensure that enterprises with excellent prospects have the opportunity to raise capital, achieve development even more quickly and benefit investors; Secondly, through diversification of stockholder ’ s rights, change the government/enterprise relationship, establish and standardize corporate governance structures and switch to a management system DRC

11. Three significant problems in relation to current enterprise structures after the restructuring and listing of state-owned enterprises The controlling shareholder is still the SOE, the company cannot become a “ real boss ” ; government departments always tend to interfere in listed companies Secondly, the objectives of the controlling shareholder are too diversified Thirdly, the controlling shareholder ’ s resources for solving continuing problems are all within the listed company and the controlling shareholder also has too many connections with the listed company A key factor in enhancing corporate governance is changing the relationship between the listed company and the controlling shareholder

12. State shareholders are becoming a positive force in promoting the establishment of effective corporate governance 1 st, intensify reform of the state-owned capital administration system 2 nd, the regulation of state-owned capital should be split into two 3 rd, promote diversification of stock rights 4 th, explore new forms of restructuring and promote the listing of SOEs as a whole 5 th, the government should create an environment in which effective corporate governance can be established DRC

13. Closing statement Thank you ！ State Council Development Research Centre （ DRC ）