Chinese reforms could level market playing field

In a new white paper entitled China’s New Road Map for Accelerated Reform: An IHS View on the Third Plenum, market research firm IHS says new policy guidelines in China that call for limitations on the activities of state-owned enterprises (SOE) could even the playing field for private companies competing in key industries, particularly the energy sector.

The Third Plenum of the Chinese Communist Party’s (CCP) 18th Congress put economic reform on center stage. The CCP Central Committee’s third plenary session, held in Beijing last month, outlined a road map for continued policy adjustments.

Based on the road map, economic reforms will accelerate, with a focus on setting boundaries for the state’s involvement in the market and allowing private enterprise a more prominent role, IHS says in the white paper.

"Documents issued from China’s Third Plenum paint a picture of a market where all participants have open, fair and equal access to compete in key industries," said IHS economist Brian Jackson. "This represents a critical turning point in an economy where the role of the state — often through SOEs — continues to loom large, particularly in capital-intensive sectors such as energy, chemical and mining."

Jackson added that while the documents reaffirmed the role of SOEs in areas where natural monopoles exist, such as natural gas pipelines and electric power transmission, the new principles could result in fairer market conditions for private enterprises if implemented.

Plenums’ impact

Third Plenums of the CCP’s Congresses have historically acted as signposts of change in government policy and the beginning of wider reforms, IHS notes, adding that in some cases, such reforms have dramatically altered the course of China’s economic development.

Reforms announced by the Third Plenum in 1978 opened up China’s economy and unleashed three decades of phenomenal growth, is one example, IHS points out. Prior to those reforms, between 1970 and 1978, China’s real per-capita gross domestic product (GDP) compound annual growth rate averaged 3.9%. Following the reforms, real per-capita GDP growth more than doubled, averaging 8.7% between 1978 and 2012.

A fair shake

"The move to equalize the competitive landscape represents a major reform," the research firm says. IHS expects the Chinese government to issue more concrete policies "in the coming months and years that will reflect the principle of a level playing field in the economy for all market participants, including foreign enterprises. Of particular interest will be concrete bureaucratic reforms which strengthen the administrative authority of market regulators, because such agencies currently wield relatively little clout against the leading SOEs."

Jackson added that the document recognized that there are parts of the economy where natural monopolies exist and that state participation remains crucial in those sectors. "However, it calls for setting clear boundaries for SOEs in these sectors and separating the monopolistic functions from functions that can be opened up for competition. Natural-resource sectors are singled out because many segments in these areas are natural monopolies, such as natural gas pipelines and electric power transmission," he said.

Energizing reforms

The energy sector is front and center of the reform agenda. Xizhou Zhou, senior manager, research, for the IHS China energy insight team, said the roadmap "stipulates that all energy prices that can be formed through market competition should be determined by the market, with little government intervention."

Zhou added that natural-resource sectors, including gas, power and oil products, would see further price reforms as competitive segments experience a retreat of government price-setting.

"Specifically, the recent linking of domestic gas prices to oil prices will further progress to allow domestic gas prices to reach parity with imports," he added. "Also, the further tweaking of the oil product pricing mechanism will improve the timely reflection of global crude price movements."

Stepping on the gas

Structural market reforms in the gas and power sectors also are expected to accelerate. Of particular significance is a clear intention to unbundle natural monopoly assets from business segments that can be opened up for competition, a challenging task involving major vested interests, the research group finds.

IHS expects changes in many national energy companies that own and operate critical infrastructure. If successfully implemented, this would allow more non-state players into the non-natural monopoly parts of the gas and power markets, creating a more level playing field and encouraging further investment to meet the country’s surging energy demand.

This could also mean more opportunities for international companies looking for more diversity in partners in the growing Chinese market.

Finally, a call for greater environmental protection

Clearly responding to rapidly rising public demand for better protection of air, water and land resources, party leaders dedicated an entire section in the roadmap to environmental and ecological protection, indicating that existing trends, such as switching from coal to gas and stricter enforcement of environmental regulations, will accelerate, IHS predicts.

In addition, efforts to price carbon emissions will continue following the recent introduction of carbon-trading schemes in seven regions in coastal China.