China's third plenum

Li Keqiang tells local governments not to set up own businesses

PUBLISHED : Friday, 08 November, 2013, 8:27pm
UPDATED : Saturday, 09 November, 2013, 5:45am

Premier Li Keqiang said local governments should no longer set up their own business arms, a signal that the Communist Party would take further steps to rein in monopolies by the state sector and protectionism at the keynote third plenum opening today.

"In principle, local governments should not directly invest in enterprises," Li said in a November 1 video conference with local leaders on their governments' role.

Details of his speech were only released early yesterday.

Local authorities' direct involvement in companies and intervention in their operations could easily result in business monopolies and market barriers, Li said.

"For years, a unified and open market cannot be developed and one of the major hindrances is local protectionism," Li said, referring to the common practice by local governments to favour products or services provided by their own business arms.

Li's remarks were consistent with the government's direction to reduce the state's role in the economy, said Zhang Zhiwei, chief China economist at brokerage firm Nomura.

The direction was correct, Zhang said, as less involvement by local authorities would help lower local debt risk and resolve the problem of monopolies.

"But for the short-term, local governments' income is likely to fall if these measures are in place," he added, noting that it might cause liquidity problems.

Rising local government debt, resulting from local authorities borrowing through local government financing platforms to invest mainly in infrastructure, have sparked concern as the total amount is estimated to be between 14 trillion yuan and 20 trillion yuan (HK$17 trillion to HK$25 trillion).

"Restricting local authorities from investing in companies can help reduce borrowings through local government financing platforms and address the problem of excessive lending," said Raymond Yeung Yu-ting, senior economist at ANZ Banking.

Li's remarks ahead of the third plenum also gave hints on the future role of government in the economy, he said.

"China has maintained a government-dominated economy over the past decades, but now it has to move to a market economy with the government playing a smaller role," Yeung said.

Local authorities' investment in the private market was also a contributing factor to the problem of widespread corruption, he said. "This is also about party discipline that will be discussed during the third plenum."

Despite Li's determination to open up the economy to market forces, Yeung said that achieving this target would be a challenge to the new leadership under President Xi Jinping .

"The relation between the central government and local governments is important in determining whether economic policies can be put strictly in place," he said.

Some economic reform policies, such as tax reform, to help boost local governments' fiscal income should be in place if the central government was set to reduce the state role in the economy, Yeung said.

The amount of local governments revenue to be contributed to the central government should also be adjusted, he added.