China to boost energy private investment to bolster economy

SHANGHAI/BEIJING Wed May 23, 2012 4:36am EDT

SHANGHAI/BEIJING (Reuters) - China signaled on Wednesday it wanted to ramp up private investment in its energy sector, in line with recently unveiled government plans to fast-track infrastructure investment to help combat a protracted economic slowdown.

That followed the announced plan to allow private investment into the vast railway sector, which is struggling with mounting debts and a corruption scandal while attempting to resolve infrastructure bottlenecks.

Allowing private firms to pour money into the railways, banking, energy and healthcare sectors will give a boost to the world's second-largest economy as the government shuns fresh fiscal stimulus.

But analysts doubt there will be any quick effect.

The government has pledged to publish detailed guidelines to encourage private investment in key state-controlled sectors, but how quickly they will be implemented remain in question given the stiff resistance of state-owned giants

"It's a fantastic aspiration, but it's very complicated as it involves a lot of things," said Stephen Green, chief China economist at Standard Chartered Bank in Hong Kong.

"It's impossible to quantify until we see details, but it could probably take years to see any impact," he said.

Such market opening requires deeper government reforms and steps to curb "vested interests" - state giants that seek to maintain their monopoly positions and tend to resist reform.

The government is drafting guidelines to encourage private investment across industries, with special focus on the heavily state-controlled electricity, oil and natural gas sectors, according to an article by the official Xinhua news agency.

Government agencies are expediting the drafting of new rules for private investment and are expected to unveil them by June, said Xinhua. It did not say whether foreign investors would be allowed to participate in any of the sectors mentioned.

Separately, the National Development and Reform Commission (NDRC), the state planning agency, announced about 100 new projects, mostly in the energy sector, on Monday alone, a number roughly equal to the total approvals announced in the first 20 days of May, the 21st Century Business Herald said on Wednesday.

"The NDRC has started to accelerate its new project approvals in March and April, compared with the pace in the first two months," Liu Yuhui, of the Chinese Academy of Social Sciences, a government think-tank, told the Herald.

On Tuesday, the state-backed China Securities Journal said China would fast-track approvals for infrastructure investment, after data last month showed the pace of investment in areas such as roads, bridges and property was at its weakest in nearly a decade.

The government has launched a fresh bid to open up key sectors dominated by state giants under the so-called New 36-Clauses, following repeated failures since 2005.

SLOWING ECONOMY

China's economy stuttered unexpectedly in April, fuelling expectations of more stimulus to boost growth, although a package as big as the 4 trillion yuan ($630 billion) spending plan rolled out in 2008-2009 appears unlikely.

On Wednesday, the World Bank cut its economic growth forecast for China this year to 8.2 percent from 8.4 percent and urged Beijing to rely on easier fiscal policy rather than state investment to lift activity.

Premier Wen Jiabao signaled the government's willingness to take action in remarks at the weekend, saying more priority would be given to maintaining growth.

The 21st Century Business Herald said the recent flurry of investment approvals had not translated into additional demand for loans from commercial banks.

It cited people close to state banks as saying the country's top four lenders only extended new loans of 34 billion yuan in the first 20 days of this month, partly because they lost 270 billion yuan in deposits during the same period.

The top four banks are Industrial and Commercial Bank of China (601398.SS), Agricultural Bank of China (601288.SS), China Construction Bank (601939.SS) and Bank of China (601988.SS). A loss in deposits will hurt their ability to lend, as they all have to meet regulatory requirements on loan-to-deposit ratio.

Chinese banks made 681.8 billion yuan new loans in April, missing market forecasts of 800 billion yuan.

LUCRATIVE SECTORS

He Yifeng, an economist at Hongyuan Securities, said he expected private investment to enter the energy, railway, highway sectors more quickly once the government clears barriers, but investment in the banking sector could be slow.

"The large-scale private investment will take time," he said.

Opening up the lucrative industries to private investors, including foreign investors, could help also spur market competition and improve economic efficiency.

State industrial giants have long enjoyed favorable positions, including easier access to bank loans and other resources - reflected by hefty profits even during the economic downturn, and they are reluctant to see more competition.

They have staged a come-back as they got the bulk of spending during the 2008/09 global crisis, sparking criticism that "the state advances and the private sector retreats".

Profits of Chinese banks reached a record high of 1.04 trillion yuan ($165.10 billion) in 2011, marking an increase of 15.8 percent from 2010, according to China's banking regulator. Profit growth is slowing this year but could still outstrip economic growth.

The numbers cover all commercial banks in China, including the world's most profitable banks such as Industrial and Commercial Bank of China (601398.SS) (1398.HK) and China Construction Bank (0939.HK) 601939.SS. ($1 = 6.3231 yuan)

(Additional reporting by Don Durfee and Kevin Yao in Beijing; Editing by Mark Bendeich and Robert Birsel)

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