China‘s new push to open state controlled industries may look bold after a decade of stuttering privatisation progress, but Beijing faces stiff resistance from vested interests in its effort to extend its World Trade Organisation dividend.
Beijing’s leaders, its top think-tanks, the World Bank and private sector economists all largely agree that for China to build on reform-fired growth after its first decade of WTO membership, state firms must be more competitive and capital better allocated.
The question is whether publication this week of detailed plans to allow private investment in highways, health care and railways will really help dilute state involvement in a range of industries where top executives enjoy ministerial level status and firms get preferential access to capital and contracts.
“The issue is not just about writing a document,” said Yao Wei, China economist at Societe Generale in Hong Kong. “Is it a level playing ground? You ask private firms for money, but when they go to banks, can they get the same lending terms as state-owned firms? Do they get subsidies like state-owned firms?”
China’s basic privatisation policy was published in 2010, the so-called New 36-Clauses. Inertia and a lack of detailed guidelines saw the initiative stall, following the pattern of failure seen since 2005 – when the 36 Clauses were first issued.
Resistance from government-backed giants is no small thing. Big state banks, which dominate the sector, profit massively from the guaranteed spread between lending and deposit rates, while state-owned enterprises get spared competition for the best contracts.
Reflecting the scale of earnings at the big banks, the first quarter profits at Industrial and Commercial Bank of China, the world’s biggest bank by market value, was larger than the combined profits at JP Morgan, Citigroup and Wells Fargo.
“It’s entirely natural to protect your market from competition,” said Stephen Green, chief China economist at Standard Chartered Bank in Hong Kong.
“It’s great for Beijing to say these things, but it needs to be a strongly supported policy for it to have real effect.”
On Wednesday, the World Bank cut its economic growth forecast for China this year to 8.2 percent – the slowest pace since 1999 – from 8.4 percent and urged Beijing to loosen fiscal policy rather than use state investment to lift activity.
Cutting red tape and creating a fair business environment for private investors to take on state firms by improving access to bank loans, land and other resources are vital, analysts say.
Despite the barriers to the biggest contracts and the best funding costs, China has a vibrant private sector.
Unleashed by historic reforms launched by former leader Deng Xiaoping in 1978 and underpinned by China’s WTO entry, the private sector has been the most powerful driver of the country’s economic ascent in the past three decades.
But private businesses are still subject to political and social discrimination in China and the government controls strategic industries through state-owned giants.
Current levels of private investment in state-dominated sectors is paltry – private money accounts for just 13.6 percent of fixed-asset investment in the electricity and thermal power sector, and only 9.6 percent in the financial industry.
The National Development and Reform Commission (NDRC), China’s most powerful planning agency, has pledged to break a “glass door” of hidden regulatory and legal obstacles facing private firms even after the government opens up key industries.
Past experience is not immediately inspiring.
A tide of private investment in railways and aviation in 2005 after China issued the original 36-Clauses either ended in failure or acquisition by state rivals.
Privately owned Guangyu Group in eastern Zhejiang province invested in a local railway but pulled out in 2007 after seeing its stake diluted by state-owned competitors, according to a report in the Chinese Business News this week.
China still needs billions more in rail investment to remove some bottlenecks, but private investors could be treading warily given murky regulations in the sector as the Ministry of Railway serves as both an operator and regulator.
Minsheng Bank is the first significant non-state bank, but analysts say it has close government ties. Meanwhile foreign investors in China’s banking sector have sold or watered down their stakes in recent years, mainly to bolster capital or profits, after failing to make major headway.
China’s WTO accession in 2001 fuelled a wave of foreign and domestic private spending and powered the economy out of a slowdown in the wake of the Asian financial crisis and led to a decade of double-digit growth with low inflation.
Contrast that with the 4 trillion yuan ($630 billion) fiscal stimulus package of 2009 that propped up growth, but drove inflation to a three-year high, fuelled a frenzy of property speculation and built a mountain of bad debt at local governments that Beijing is still battling to contain.
“China must rely on reforms to walk out of the current economic trough,” Peng Wensheng, chief economist at CICC, said in a research report.Kevin Yao
- China targets infrastructure to lift economy (chinadailymail.com)
- China eschews fiscal fanfare for supportive spending (chinadailymail.com)
- World Bank says Europe, US might hurt Asian growth (seattletimes.nwsource.com)
- China says economic growth a priority (vancouverdesi.com)
Categories: Finance & Economy