Third plenum expected to determine new relationship between state and private sectors

The business and financial worlds will soon learn how far Chinese President Xi Jinping is willing to go to jump-start the world's biggest economy.

At a major party meeting - the third plenum of the Communist Party's Central Committee, which runs from today until Tuesday - Xi and his coterie are expected to unveil measures that will spur domestic consumption and industrial innovation.

In particular, Xi and Premier Li Keqiang have promised to boost consumption and innovation by reducing the power of state monopolies, easing market access for private enterprises and deregulating the corporate sector.

These moves, experts say, are critical to bolster the economy, where growth has cooled from a peak of more than 14 per cent in 2007 to less than 8 per cent in recent quarters. The target for this year is 7.5 per cent.

But the gathering is unlikely to break up the vast monopoly of state-owned enterprises, a necessity if private and foreign investors are to compete with state-run behemoths. Currently, state-owned oil giants, such as PetroChina and Sinopec , have exclusive access to the best crude oil, from which they reap massive oil processing profits. And the mainland still has no private banks.

Xi clearly needs to make bold moves and fast. Financiers worry that the golden era for foreign investment may be gone, partly because the mainland's labour costs have climbed, while the country's desire for foreign exchange has faded as it sits on the world's largest foreign exchange reserves.

Tao Jingzhou, managing partner at Dechert LLP China who has advised major multinational companies wishing to invest in the mainland for 28 years, said a growing "nationalistic sentiment" may also have chilled the environment.

"China's fever for luring foreign investment is cooling,'' he said. "The intimate honeymoon period is over."

The spokesman for the Ministry of Commerce, Shen Danyang , said China had made progress in improving the environment for foreign investors, easing limits on approving new investments and establishing a free trade zone in parts of Shanghai.

But Tao said his multinational clients were worried. "They asked me whether the situation may get more challenging and whether the worst has yet to come," he said.

So the question remains: how far are the masters of China's economic development willing to loosen state reins?

China's gross domestic product reached nearly 52 trillion yuan (HK$65.6 trillion) last year, up 7.8 per cent from 2011. Foreign direct investment fell 3.7 per cent last year to US$111.7 billion from US$116 billion in 2011. The number of foreign non-financial companies established in 2012 fell 10 per cent from the previous year, from 27,700 to nearly 25,000.

For decades, the reform policies initiated by Deng Xiaoping in the 1980s helped welcome tens of thousands of Sino-foreign joint ventures, creating an unprecedented era of wealth and growth.

According to HSBC, China attracted foreign direct investment at a rate of 37 per cent annually in the 1990s before it slowed to 10.6 per cent in the following decade. In the January-September period this year, foreign direct investment grew just 6 per cent.

Guo Yang, secretary of the president at Baota Petrochemical Group, a private oil processing firm, said recent meetings with government agencies had convinced him that Beijing might further open the energy sector to private investors, though with limits. "Still, that would be a good start if private companies like us could get a small proportion of a quota for obtaining good-quality crude oil," Guo said.

Guo said he also hoped the third plenum would change the financial system, allowing private investors to borrow money from banks more easily. As economic growth cooled in the first half of this year and banks tightened lending, Guo said loans granted to Baota dropped from a year earlier.

"As long as the market struggles, private enterprises are always the first to bear the brunt," he said.

A survey conducted by the American Chamber of Commerce in China showed last month that the number of US companies that believe China's investment environment is improving dropped from a year earlier, from 43 per cent to 28 per cent. The state opened major investigations into the dealings of some foreign companies, while state media initiated campaigns attacking product and pricing policies of some other firms.

Mainland regulators launch- ed corruption probes into the practices of GlaxoSmithKline and Sanofi, prompting sales to plummet. Glaxo's plunged 61 per cent in the third quarter.

In August, authorities slapped record fines of 668 million yuan (HK$843 million) on six overseas infant formula makers for violating anti-monopoly laws.

Gregory Gilligan, chairman of the American Chamber of Commerce in China, said the crackdown on business corruption "appears to be focusing on certain sectors and ignoring others with unclear rationale, stoking fears that the law, far from being strengthened, may be abused." He made the comment in an opinion article in the Global Times.

The European Chamber of Commerce in China said it "strongly supported" the development of a legal framework in China and the government's crackdown on antitrust violations. But it also urged China's government to improve the investment environment through "fair and transparent enforcement" of laws.

More recently, state broadcaster CCTV accused Starbucks of profiteering on the mainland by charging too much for its coffee products. The station also criticised Apple for mistreating Chinese consumers and Samsung for selling shoddy smartphones.

The media attacks resonated with consumers - in a way that Beijing probably never predicted. Social media users lashed out, saying the government had departed from the spirit of a market economy. They urged authorities to shift their focus to large, state-run enterprises that profit from de facto monopolies.

Tao said that while some foreign companies may have engaged in irregular practices, multinationals generally bettered their Chinese peers in corporate governance, legal compliance and social responsibility.

Gary Liu, executive deputy director at the CEIBS Lujiazui Institute of International Finance in Shanghai, said the campaigns against Apple and Samsung may not necessarily have been orchestrated by top leaders, but by lower-level apparatchiks creating a populist media campaign. "Chinese society seems to be undergoing a chaotic transition," he said.

Commerce ministry spokesman Shen defended the state media campaigns, saying they didn't target foreign firms exclusively. Liu said it was unlikely that the party plenum would break up the monopoly of state-owned enterprises, a key policy change needed to give private and foreign investors more space to compete with state giants.

"The hope is very slim. I hope that monopolies can be broken up as soon as tomorrow. But the obstacles from vested interest groups are very strong. The plenum may end up with some empty promises without any concrete and feasible measures," he said.