China's reforms challenge state firms' dominance

China's powerful state-owned giants are facing what is possibly the biggest challenge to their dominant position in two decades, as the new leadership pledges bold reforms to create a better balance between the state and the market, say analysts.

They cite as proof several factors, such as how, for the first time since China opened up its economy in 1978, the Chinese Communist Party (CCP) has elevated the market's role in allocating resources from "basic" to "decisive".

This signalled President Xi Jinping's resolve to loosen the state's grip on the 3.9 trillion yuan (S$800 billion) economy, in the hope of solving problems such as over-capacity, waste and a relatively suppressed private sector.

In another first, Beijing has set a rule for state-owned enterprises (SOEs) to return 30 per cent of their profits - currently this is zero to 15 per cent - to the government by 2020.

The money would be used to fund social welfare, said a statement last Friday after the CCP's policy summit to chart China's growth path for next 10 years.

This push to reform SOEs and support the private sector are some highlights of a plan that Standard Chartered economist Stephen Green called "the most significant wave of market reforms in two decades".

"The CCP is putting more faith in the market than has any previous administration," he said in a note.

Analysts say the other proposed economic and financial reforms will also chip away at the state's role.

For instance, the CCP has pledged to legislate a property tax that will hit many SOEs with real estate interests.

It also affirmed the need for the market to set prices of economic input, particularly interest rates and exchange rates, say analysts.

Indeed, the plenum statement "does not shy away from areas of contention", noted London-based Capital Economics economist Mark Williams.

Beijing also wants private capital to enter key sectors like banking. This could force SOEs to offer more competitive rates to protect market share, besides cutting waste and over-capacity.

It means state monopolies would have to work harder not only to retain customers, but also to retain talent and contain costs.

Their notoriously high managerial pay - some reports claim top executives are paid 1,000 times what an average blue-collar worker makes - and their bottom lines will be hit once they have to surrender 30 per cent of profits to the state and be more transparent in their accounts.

Thus, while lacking in implementation details, the proposed SOE reforms could mark the boldest push since paramount leader Deng Xiaoping called for market reforms to be sped up in 1992, say analysts.

"We could see the state and market holding equally important roles and weights in the economy," said Central University of Finance and Economics professor Guo Tianyong.

Back in 1992, the share of state collective enterprises in gross industrial production was about 50 per cent.

After five years of "de-nationalisation" of these SOEs, that percentage was almost halved to 25 per cent in 1997, while private firms flourished.

However,it is clear that Beijing is not looking to whittle down the dominant role of the state or the importance of SOEs as national champions, said Beijing-based researcher Li Shimin, who specialises in small and medium-sized enterprises (SMEs).

"It is not about privatisation of SOEs, but about giving more opportunities for SMEs to become as big as SOEs," he said.

Despite lingering questions about whether Beijing can deliver on its promises, markets are already cheering the prospect of a more productive and balanced economy, with some analysts predicting a lengthy bull run ahead.

"The government's signal of its reform intentions are strong enough to give us confidence that China's growth path is in relatively good hands," said Beijing-based trader Huang Yipin.

graceng@sph.com.sg

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