Date
20 October 2017
Breaking the monopolies of state enterprises in key sectors won't be easy for China. Photo: Bloomberg
Breaking the monopolies of state enterprises in key sectors won't be easy for China. Photo: Bloomberg

CPC PLENUM: Will China’s rulers bite the bullet on key reforms?

As China’s top leaders prepare for a key economic meeting this week, there are hopes that Beijing will lower the entry barriers and ease the administrative approvals further to encourage more private capital into key sectors and break the long-held monopolies of state enterprises.

Some initiatives are likely to be unveiled at the Nov. 9-12 plenum of the Communist Party’s 18th Central Committee, but achieving the overall objectives will not be easy for the new administration, economists say.

Luring private capital into industries such as telecom and oil & gas, as well as railways, will be particularly difficult, they say, citing the entrenched interests in the industries as well as the huge investment and low return that the businesses will entail in the initial phase. 

Policymakers, meanwhile, will need to look at economic and environmental costs as they pursue reforms, while also keeping in mind the employment aspect at the state-owned enterprises (SOEs). 

“The government may lower the entry barrier in sectors such as education services, telecom, finance, rail and aviation, issue more licenses and cut more administrative approvals” to encourage more private capital, said Liu Ligang, chief economist for Greater China at Australia and New Zealand Banking Group Ltd.

Echoing a similar view, Citigroup Inc. senior China economist Ding Shuang believes the government will keep SOE reform in a low key and emphasize instead the entry of more private capital.

The government should launch projects that can help industry upgrade in sectors such as finance, crude oil, electricity, rail, telecom, upstream resources activities and utilities. The projects should be able to serve as a model and push forward reform in the economy, the State Council said in a statement on Sept. 6.

Health service has just been opened up to private capital. The State Council has issued a circular calling for an increase in the value of the sector to 8 trillion yuan (US$1.31 trillion) by 2020. More measures will be unveiled to boost medical services and health insurance, and support sectors related to pharmaceuticals, healthcare facilities, the cabinet said last month.

To boost investment in the sector, Beijing will relax market entry requirements while giving equal treatment to non-profit private medical institutions and public medical establishments. Both foreign and domestic investors will enjoy the same treatment in specific sectors opened for private investment, according to the policy document.

Market economy

At present, the telecom sector in China is monopolized by China Telecom Corp. Ltd. (00728.HK), China Mobile Ltd. (00941.HK) and China Unicom (Hong Kong) Ltd. (00762.HK), while the oil and gas industry is carved up by PetroChina Co. Ltd. (00857.HK), CNOOC Ltd. (00883.HK) and China Petroleum & Chemical Corporation (Sinopec, 00386.HK). In the rail sector, it is China Railway Corporation that holds the cards.

Economists remind that some industries are unlikely to receive private investment as soon as they are opened up. “Private capital might work well in sectors such as banking, while in industries such as telecom and rail it might not, due to the difficulty in entering the market and making a profit,” Ding said in a phone interview. He noted that SOEs have competitive advantage in both pricing and scale.

Wang Tao, an economist at UBS Investment Research, said: “There is a lot of fixed capital expenditure involved when a new company joins industries such as telecom and rail; so private capital may not be willing to tap the market.”

Too much competition in an industry might take down companies’ profit margins, while economic costs and environment costs should also be borne in mind while chasing reforms, experts said.

Natural resources and the property sector were among the few segments opened up to private capital in the past. Meanwhile, after years of development, many industrial sectors are suffering from overcapacity.

Ding said the problem could be eased as long as the government curtails its planned economy and stops giving directions to the market. Government support has led to many investors rushing blindly into some industries, leading to the current mess.

ANZ’s Liu believes more rational lending by banks and encouraging companies to secure finance in a more market-driven way, such as through the bond markets, will help ease the overcapacity problem.

SOE reform

The State-owned Assets Supervision and Administration Commission will propose a much-awaited reform of SOEs after the third plenary session of the Communist Party, the regulator said in a statement on Oct. 31. The proposal will redefine roles and functions in the wider operations of SOEs and strengthen oversight of their local offices.

Reform needs to be carried out by hiving off SOEs off into smaller companies, a move that will allow more private capital to enter the industries, Ding said, adding that “it takes time to complete the whole reform as it always involves economic cost”.

The reform in SOEs should deal with letting in private capital and allowing privately-owned firms take stakes in SOEs, Zheng Xinli, vice chairman of the China Center for International Economic Exchanges, was quoted as saying in a report carried by the China Business Journal on Oct. 11. 

In the longer term, Ding suggested that the “negative list” policy implemented in the Shanghai free trade zone could be expanded if it works well in the zone. Under that policy, foreign investors are free to invest in any business that is not on the so-called negative list. No more approval is needed and intervention from the government can be reduced. But Ding said it might take two to three years to determine if the mechanism is working well in the zone.

Liu said the ideal way to deepen reforms in SOEs is to re-distribute the property rights, such as getting a company as a whole to be listed instead just one of its subsidiaries. “You look at SOEs in the developed countries, the government only owns about 30 to 50 percent of them while in China, the government holds about 80 to 90 percent stakes,” he said.

– Contact the reporter at [email protected]

RC

Ayishah Ma is a financial reporter on Greater China issues.

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