Days numbered for monopoly of state firms

PUBLISHED : Thursday, 05 April, 2012, 12:00am
UPDATED : Thursday, 05 April, 2012, 12:00am


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Seven years after Beijing said in a policy circular it would make it easier for private enterprises to enter industries cornered by state-owned giants, little progress has been achieved.

Bosses in the private sector have expressed frustration for years at the central government's failure to spell out how private enterprises should be helped to break the state's stranglehold on such key sectors as oil, aviation, railways, banking and utilities,

Premier Wen Jiabao has now weighed in on the issue, saying mainland banks are 'profiting too easily' from their monopolistic position.

The State Council signalled Beijing's resolve to make reforms when it set a deadline of June 30 for civil servants to come up with detailed plans to implement the circular. And late last month, the National Development and Reform Commission called a meeting of 45 government departments to drive the initiative.

'Without the details, the policy circular amounts to a piece of waste paper,' Hu Chengzhong, chairman of China Delixi Group, a maker of power transmission and distribution equipment in Zhejiang province, said during a panel discussion at the Chinese People's Political Consultative Conference annual session last month.

In 2005, the State Council issued a policy circular on supporting the development of private enterprises. It said private firms should be allowed to invest in sectors monopolised by state-owned firms. It called for faster reform and greater competition in sectors such as electricity, telecommunications, railways, aviation and petroleum.

Private firms should have equal access to the capital markets, and banks should be encouraged to increase their lending to small and medium-sized firms, it said.

It also said private capital should be permitted in financial services like banking and insurance, as well as utilities that had been traditionally operated by the government, such as water, gas, domestic heating and waste treatment and disposal.

While the policy sounded good on paper, putting it into practice has proved complicated.

Last year, Hu said, Delixi wanted to develop a medium-sized refinery in oil-rich Xinjiang. Despite the support of the region's leaders, the project had a hard time winning Beijing's approval, since state-owned PetroChina, which dominates Xinjiang's oil and gas industry, opposed it. This year, Hu said, PetroChina agreed to supply three million tonnes of domestically produced crude oil to Delixi, leaving it to import the remaining five million tonnes to feed the refinery.

Since all crude oil imported by private firms must be refined by state-controlled giants the China National Petroleum Corp (CNPC) or China Petrochemical Corp (Sinopec Group), this made it very difficult for Delixi to source enough crude oil.

CNPC, Sinopec and the China National Offshore Oil Corp together produced 94 per cent of the country's crude oil in 2010 and 98 per cent of its natural gas, a South China Morning Post calculation using data from the firms' annual reports and BP's Statistical Review of World Energy shows.

The trio, together with state-owned conglomerate Sinochem Group, accounted for 91 per cent of the country's crude oil refining throughput in 2010, squeezing private refiners' room for expansion.

In the financial sector, the policy circular said if stringent regulations were established to curb risk, private firms should be allowed to set up financial intermediary businesses.

But Guo Guangchang, the chairman of Fosun Group, one of the mainland's largest privately owned conglomerates, said the barriers to entry had not been lowered.

'Saying they want to let private firms enter the financial industry is not enough. We need them to tell us the exact conditions for entry,' Guo said on the sidelines of the National People's Congress meeting last month. 'As it stands, they haven't said you are not allowed to enter, but you don't see the successful cases. The result is a glass ceiling.'

China Minsheng Bank, set up in 1996, is the mainland's first and only major commercial bank majority-owned by private investors. Private investors have been allowed minority stakes in smaller banks controlled by local governments.

Wang Jianxi, executive vice-president of sovereign fund manager the China Investment Corp, which holds large stakes in state banks, said Beijing should encourage the establishment of institutions that focus on lending to small and medium-sized private firms, since the operating models of large state banks neither suit this type of business nor provide incentives to do so.

A research report jointly released in February by the World Bank and the Development Research Centre of the State Council called on the government to redefine the roles of state-owned enterprises, break up monopolies, lower entry barriers to private firms in some industries and provide easier access to finance for small and medium-sized firms.

It said this would help rebalance the role of the government and the private sector and facilitate China's goal of becoming a high-income nation by 2030.