China in hardest private-sector push in decade

SHANGHAI/BEIJING Wed May 23, 2012 8:59am EDT

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SHANGHAI/BEIJING (Reuters) - China signaled on Wednesday it wanted to boost private investment in its energy sector as Beijing makes its most determined push since joining the World Trade Organisation to reduce the role of the state sector in the economy.

Many analysts say China must allow more private investment if it is to unlock new sources of economic growth, which the World Bank said would slow in 2012 to its weakest pace in 13 years.

"Downward economic pressure is increasing," Premier Wen Jiabao said at a regular cabinet meeting, where he underscored previous comments that China would increase measures to support growth. His remarks were reported on the government's website.

Beijing intends to fast-track infrastructure investment to combat the slowdown, state media reported this week.

In the latest measures, the government will publish detailed guidelines aimed at encouraging private investment across industries, with special focus on heavily state-controlled electricity, oil and natural gas sectors, the official Xinhua news agency said.

"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.

The government has already said it would allow private investment in the vast railway sector, which is struggling with mounting debts and a corruption scandal while attempting to resolve infrastructure bottlenecks.

Last month, sources told Reuters that China's reformers sense an opportunity to push through a series of changes before President Hu Jintao and Premier Wen step down early next year.

That view could also be partly behind the latest steps to allow more private involvement in state-controlled areas.

DIFFICULT TO BUDGE

But 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.

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.

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.

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. It joined the WTO a decade ago.

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.

That's 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.

SLOWING ECONOMY

Unexpectedly weak economic data for April last week fuelled 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 financial crisis is considered by most economists as unlikely.

In an immediate response to the data, the central bank cut the amount of cash that banks must keep in reserve for the third time since November.

The World Bank earlier on Wednesday cut its 2012 economic growth forecast for China from 8.4 percent to 8.2 percent, which would be the slowest pace since 1999. Growth averaged more than 10 percent through the last decade.

The World Bank urged Beijing to rely on easier fiscal policy rather than state investment to lift economic activity.

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.

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

The top four banks are Industrial and Commercial Bank of China (ICBC) (601398.SS) (1398.HK), Agricultural Bank of China (601288.SS), China Construction Bank (601939.SS) and Bank of China (601988.SS). A loss in deposits hurts their ability to lend, as they all have to meet regulatory requirements on loan-to-deposit ratio.

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, economists say.

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 reflected in a popular saying 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, an increase of 15.8 percent over 2010, China's banking regulator said. Profit growth is slowing this year but could still outstrip economic growth.

($1=6.32 yuan)

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

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