China's reforms challenge state firms' dominance

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.

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