Chinese Reform Proposals Boost Prospects for Private Enterprises

China’s new policy guidelines call for limitations on the activities of state-owned enterprises (SOE), potentially evening the playing field for private companies competing in key industries, particularly the energy sector.


The Third Plenum of the Chinese Communist Party’s (CCP) 18th Congress put economic reform on center stage. The CCP Central Committee's third plenary session, held in Beijing last month, outlined a road map for continued policy adjustments. Based on the road map, economic reforms will accelerate, with a focus on setting boundaries for the state’s involvement in the market and allowing private enterprise a more prominent role, according to a new white paper from IHS Inc. entitled “China’s New Road Map for Accelerated Reform: An IHS View on the Third Plenum.”


“Documents issued from China’s Third Plenum paint a picture of a market where all participants have open, fair and equal access to compete in key industries,” says Brian Jackson, an economist at IHS. “This represents a critical turning point in an economy where the role of the state—often through SOEs—continues to loom large, particularly in capital-intensive sectors such as energy, chemical and mining.  While the documents reaffirm the role of SOEs in areas where natural monopoles exist—such as natural gas pipelines and electric power transmission—the new principles could result in more fair market conditions for private enterprises, if implemented.”


Plenums’ impact
Third Plenums of the CCP's Congresses historically have acted as signposts of change in government policy and the beginning of wider reforms. In some cases, these reforms have dramatically altered the course of China’s economic development.


For example, reforms announced by the Third Plenum in 1978 opened up China’s economy and unleashed three decades of phenomenal growth. Prior to those reforms, between 1970 and 1978, China’s real per-capita gross domestic product (GDP) compound annual growth rate averaged 3.9 percent. Following the reforms, real per-capita GDP growth more than doubled, averaging 8.7 percent between 1978 and 2012, as presented in the attached figure.


A fair shake
The move to equalize the competitive landscape represents a major reform. IHS expects more concrete policies to be issued in the coming months and years that will reflect the principle of a level playing field in the economy for all market participants, including foreign enterprises. Of particular interest will be concrete bureaucratic reforms which strengthen the administrative authority of market regulators, because such agencies currently wield relatively little clout against the leading SOEs.


“The document recognises that there are parts of the economy where natural monopolies exist and that state participation remains crucial in those sectors,” says Jackson. “However, it calls for setting clear boundaries for SOEs in these sectors and separating the monopolistic functions from functions that can be opened up for competition. Natural-resource sectors are singled out because many segments in these areas are natural monopolies, such as natural gas pipelines and electric power transmission.”


Energizing reforms
While the road map affects many areas, the energy sector is front and center of the reform agenda.


“The decision document stipulates that all energy prices that can be formed through market competition should be determined by the market, with little government intervention,” says Xizhou Zhou, senior manager, research, for the IHS China energy insight team.


“IHS believes that natural-resource sectors, including gas, power and oil products, will see further price reforms as competitive segments experience a retreat of government price-setting. Specifically, the recent linking of domestic gas prices to oil prices will further progress to allow domestic gas prices to reach parity with imports. Also, the further tweaking of the oil product pricing mechanism will improve the timely reflection of global crude price movements.”


Stepping on the gas
Structural market reforms in the gas and power sectors also are expected to accelerate. Of particular significance is a clear intention to unbundle natural monopoly assets from business segments that can be opened up for competition, a challenging task involving major vested interests.


IHS expects changes in many national energy companies that own and operate critical infrastructure. If successfully implemented, this would allow more non-state players into the non-natural monopoly parts of the gas and power markets, creating a more level playing field and encouraging further investment to meet the country’s surging energy demand.


This could also mean more opportunities for international companies looking for more diversity in partners in the growing Chinese market.


Finally, there will be greater emphasis on the environment.


With a whole section in the decision document dedicated to environmental and ecological protection, party leaders are clearly responding to rapidly rising public demand for better protection of air, water and land resources. This indicates that many existing trends, such as switching from coal to gas and stricter enforcement of environmental regulations, will accelerate. In addition, efforts to price carbon emissions will continue, following the recent introduction of carbon-trading schemes in seven regions in coastal China.