China may allow more private investment in state-owned companies

By David Pierson

May 28, 2012 12 AM PT

BEIJING -- Faced with declining profits and a slowing economy, China said it was drafting plans to boost private investment into industries long dominated by the state.

Investors would be allowed to target government-controlled sectors such as electricity, oil and natural gas, according to the New China News Agency, citing an official at the National Development and Reform Commission on Monday.

Other areas possibly open for investment include healthcare, rail transportation, education and finance. It’s unclear whether foreign investment would be part of the new plan and whether private capital infusion would also lead to more non-governmental control of China’s state-owned enterprises.

If implemented, the reform could go a long way in leveling China’s economic playing field and steering the country toward a more sustainable path.

China’s powerful state-owned enterprises have been criticized for hoarding loans, operating inefficiently and wielding too much political influence. Many enjoy near monopolies in the country’s most strategically important and lucrative sectors, such as telecommunications, aviation and energy.

It’s for these reasons that skepticism remains high that Beijing is serious about wresting much control away from state-run firms.

This is not the first time the central government has touted state-sector reform. China announced policies to boost private capital as recently as 2010 and 2005 without much success.

“State-owned companies are the foundation of the ruling party,” said Hu Xingdou, a professor of economics at the Beijing Institute of Technology, explaining why those policies never gained traction.

But economic conditions today may force China’s leaders to follow their rhetoric with action. China, it seems, could really use the cash.

The profits of state-owned enterprises declined 8.6% from January through April, compared with the same period last year. Foreign direct investment also fell six consecutive months in April. Many analysts have also downgraded their forecast for Chinese economic growth this year to levels not seen since the 2008 financial crisis.

Though Chinese officials are in no position to match the stimulus they launched three years ago (lest they want to revisit another inflationary crisis), the country’s leaders have already started pulling levers to try to stabilize the economy. Officials are reportedly fast-tracking infrastructure projects and raising subsidies for consumer appliances to boost consumption.

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