China promises to give market competitors an opening

Associated PressNovember 15, 2013 

— China’s leaders pledged Friday to open state-dominated industries wider to private competition and ease limits on foreign investment in e-commerce and other businesses in a sweeping reform plan aimed at rejuvenating a slowing economy.

The changes promised in a report issued after a closely watched Communist Party conference could be China’s most significant economic overhaul in at least two decades. State media have compared the effort to market-style reforms in 1978 that launched China’s economic boom.

Chinese leaders are trying to replace a growth model based on exports and investment that has run out of steam after delivering three decades of rapid growth. Reform advocates say economic growth rates will plunge, undermining the ruling party’s claim to power, if industries controlled by state companies – from energy to telecoms to banking – are not opened to competition.

Friday’s report pledged to ease barriers to more dynamic private competitors, though the ruling party reaffirmed that state-owned industry is considered the core of the economy.

“We must promote orderly opening to the outside,” the report said.

It left out details of what role private or foreign companies might be allowed in state-controlled industries. But it outlined changes clearly intended to make industries more efficient and productive by injecting more competition. That may threaten politically favored state companies that benefit from cheap credit, land and other resources, prompting a backlash from their allies in the party for whom they provide revenues and jobs to reward supporters.

The report “included sweeping reforms on almost all fronts, in some cases more than expected before the meeting,” said UBS economist Tao Wang. “Of course, the implications for the economy and for the market depend crucially on the implementation.”

Third-plenum precedent

The “third plenum” meeting of the ruling party’s 205-member Central Committee offered a platform for President Xi Jinping, who became party leader last year, to promote his own vision for the world’s second-largest economy.

Such meetings at this point in the party’s five-year political cycle are seen as a launching pad for changes in economic direction after Deng Xiaoping used a third plenum in 1978 to unveil his reforms.

Before the meeting, communist leaders raised hopes and the political stakes by promising “unprecedented” reforms.

They then left companies and financial markets hanging by wrapping up their meeting Tuesday with a brief statement that promised change but gave no details, prompting fears that they had succumbed to political deadlock. Friday’s lengthy report could help reassure the public that the party is taking action, though some analysts have warned against trying to do too much at one time.

Pressure for change has mounted as China’s economic growth declined steadily over the past two years. It tumbled to a two-decade low of 7.5 percent in the quarter ending in June – barely half of 2009’s peak of 14.2 percent. Beijing perked up growth with a mini-stimulus of higher spending on building railways and other public works, but forecasts say it could slump again later this year.

Chinese leaders have been trying to shift to more self-sustaining growth based on domestic consumption. But consumer spending is growing more slowly than they want. Government spending accounted for more than half of the latest quarter’s growth.

Government’s role shifts

Communist leaders have made piecemeal efforts to inject market forces into areas such as bank lending. In July, regulators eliminated controls on interest rates charged on commercial loans in a move that ultimately could lower borrowing costs for private companies.

The party said Tuesday that it will create a committee to “deepen reforms.” Dictating policy changes from such a high political level could help to overcome bureaucratic squabbling and resistance that has hampered previous reform efforts.

Friday’s report said the government will reduce its role in making economic decisions and focus more on acting as a regulator of free-market competition.

It promised measures including allowing the creation of privately owned banks and use of market forces to allocate resources. Both would help nimbler, more efficient entrepreneurs who create most of China’s jobs and wealth but struggle to get financing.

As for foreign companies, the report pledges to ease limits on investment in e-commerce, accounting, logistics and other service industries. That could promote innovation in a wide range of areas in which Chinese competitors are far behind global standards.

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