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Xi Jinping's vision for reforming state-owned enterprises is not expected to entail significant privatization.
China's Party Congress 2017

Greater state control under Xi not seen holding China back

Economists expect SOE reforms to continue with minimal privatization

JOYCE HO, Nikkei staff writer | China

HONG KONG -- Market forces are commonly viewed as crucial to economic efficiency. But their minimal presence in President Xi Jinping's centennial vision for the People's Republic of China does not seem to worry economists and strategists.

Xi told the Communist Party congress Wednesday that he aims to make China a "moderately prosperous society" by 2021 and a "fully developed nation" by 2049. This, he envisions, can be achieved by strengthening the position of state-owned enterprises amid a raft of mandates, including opening up domestic markets and affording equal treatment to foreign businesses.

The apparent contradiction is not impossible to reconcile, according to some close observers of China.

"Because of China's unique economic and political system, we just have to get used to the fact that even though the economy is becoming more open, more efficient, more transparent," there will still be "pretty strong state control," said Jing Ulrich, vice chairman of Asia-Pacific at J.P. Morgan Chase, to reporters Friday.

Ulrich, who advises many prominent asset managers and multinationals, believes that reform of Chinese SOEs will unfold in an unconventional manner, without recourse to large-scale privatization.

"The focus of China's SOE reform is to nurture more efficient, stronger, and more competitive SOEs, rather than wholesale privatization," said Ulrich, who noted that the process will end up creating globally competitive industrial conglomerates, national investment companies and national operating companies.

This new leg of reforms will succeed one that emphasized attracting social and private investment in state-owned sectors, mergers and acquisitions, and better management of state-owned capital.

Such strategic areas as national defense, energy supply, telecommunications and media will be "under pretty tight control," while the consumer sector, closely linked to the digital and sharing economy, will see less hands-on intervention by the government, Ulrich said.

Her comments came amid speculation that Beijing is mulling stepping up control in the innovative sector by taking stakes in such tech companies as Tencent Holdings, which operates the mainstream WeChat mobile messaging and payment platform. The government may appoint officials to their boards, according to The Wall Street Journal.

Ulrich said she remains overweight in Chinese equities among emerging-market stocks, with the expectation that earnings per share of MSCI China Index components will register average growth of 17% this year and 15% next year. The benchmark is allocated 40% to information technology, 22% to financials and 10% to consumer discretionary.

Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis, said the centralization of the party's power does not necessarily bode ill for much-needed market reforms.

"The role of the state can continue to increase while leaving some niche markets, mostly noncontrol, to foreign investors," she said, alluding to certain sectors that will not be subject to hands-on control by the government. One reason is that China tends to facilitate know-how, or technology, transfers from abroad by enabling more foreign direct investment, which often comes with the establishment of joint ventures between Chinese and foreign partners.

One key area Beijing is eager to modernize is the financial services sector. Foreign banks will be given "more room" in equity ownership and business scope, China Banking Regulatory Commission Chairman Guo Shuqing told reporters alongside the plenary session.

This, however, will be pushed through against the backdrop of greater oversight by the financial regulator to curtail risks from shadow banking and excessive leverage.

"This is probably going to be the next source of serious policy tension in the next two to three years," said Julian Wee, senior markets strategist for Asia at National Australia Bank.

In preparing for a modern open economy, banks in China will "require a fundamental change in character that entails true independence from the authorities," he said. Yet Xi's emphasis on strengthening the Communist Party's grip on power raises questions about its eventual willingness to cede meaningful amounts of influence over domestic banks to not just the private sector, but potentially foreigners, Wee said.

Julian Evans-Pritchard, China economist at London-based Capital Economics, also raised concerns over Xi's call to "make state firms strong and big" and to "guard against the loss of state assets."

"This should dash any remaining hopes that a market-led shake-up of the state sector may occur in Xi's second term," Evans-Pritchard said in a note Wednesday. "This suggests that many of China's structural problems that are, in our view, caused by the state's outsized role in the economy, will remain unresolved," he wrote.

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