State Companies Emerge as Winners Following Top China Meeting; Enterprises Fended Off Calls to Curb Their Influence

State Companies Emerge as Winners Following Top China Meeting

Enterprises Fended Off Calls to Curb Their Influence

BOB DAVIS And BRIAN SPEGELE

Nov. 13, 2013 9:25 a.m. ET

BEIJING—China’s biggest state-owned companies emerged as major winners following a meeting this week of top Communist Party leaders, who reaffirmed their “dominant role” in the economy in comments that suggested they have been able to fend off repeated calls to curb their enormous influence.The supportive language suggests Beijing may have to pursue indirect routes to shake up companies criticized as bloated and adding inefficiencies to markets ranging from energy to infrastructure to telecommunications. One route, analysts said, could be to open them up to more foreign and domestic private competition.

The meeting of top Chinese party leaders known as the Third Plenum ended on Tuesday with a statement pledging to pursue reforms and support the private sector, even as it failed to deliver specific goals. A more detailed plan is expected in the coming days that should clarify the party’s plans for economic overhauls.

Despite the meeting’s mission, the concluding statement leaders issued late Tuesday reaffirmed the role of state-owned enterprises, pledging to “incessantly strengthen” their “vitality.”

“We don’t expect fundamental reform of the state-owned enterprises in the near term,” said a Chinese official involved in putting together the overhaul plan, a view echoed by outside economists who analyzed the plenum communique.

“The position of state-owned enterprises hasn’t changed,” according to Guan Qingyou, deputy head of research at Minsheng Securities.

Shanghai’s benchmark stock index fell 1.8% on Wednesday and Hong Kong’s fell 1.9%, outpacing other Asian declines as investors expressed disappointment with the vague statement. One exception was defense and surveillance shares, which rose in Shanghai as a result of language in the statement saying both should be supported.

Officials and academics who worked on the plan discussed at the plenum said state-owned companies are so adept at blocking change that Beijing is looking to an old playbook to slowly reduce their influence: enlist foreign help. As part of this strategy, China has agreed to negotiate investment treaties with the U.S. and European Union, which would open previously closed sectors to outside competition, including those dominated by state-owned firms.

In exchange, China would look to ensure that the state-owned firms had greater access to U.S. and European markets, where they would be forced to sharpen their competitive edge.

That is a strategy similar to one pursued by former Premier Zhu Rongji, who used China’s negotiations to enter the World Trade Organization to make changes domestically, including reducing subsidies and tariffs that protected inefficient state-owned companies.

Some analysts argue that the communique’s language lauding the private sector as well as the critical role of free markets means that the party expects to gradually open some sectors to competition or figure out ways to provide better financing and aid to such firms. Arthur Kroeber, managing director at Gavekal Dragonomics, a Beijing market research firm, said boosting competition could make state-owned enterprises more efficient as well as providing opportunities for private firms. There is “a willingness to let the position of state enterprises be eroded at a more rapid pace” than in the past, he said.

State-owned companies contribute 26% of industrial output, according to Nicholas Lardy, a China specialist at the Peterson Institute for International Economics in Washington. But state-owned companies have near-monopolies in energy, transportation, electricity, banking and other sectors that are considered crucial to the economy. Overall, there are roughly 100,000 state-owned firms, according to the World Bank, though many of them are smaller entities owned by provinces or cities and which compete with private firms in such fields as retailing, real estate and restaurants.

Critics complain that state-owned firms get preferential treatment by state-owned banks and are the recipients of a host of government subsidies and tax breaks and pay dividends at levels well below those of competitors.

The largest state-owned companies also have “implicit advantages,” according to a report last year by the World Bank and the Development Research Center, a Chinese government think tank, because of their “closeness to decision makers.” Chief executives are party members and sometimes have a party rank equal to that of ministers, the report added.

Their powerful standing hasn’t shielded the companies from a corruption crackdown ordered by Chinese Communist Party Chief Xi Jinping, and which some party insiders say was partly aimed at weakening their political influence. They also have been included in an official austerity effort that has discouraged lavish banquets and purchases of flashy luxury cars.

The biggest target so far has been Jiang Jiemin, newly installed earlier this year as the top official with the State-Owned Assets Supervision and Administration Commission, which oversees SOEs and is widely considered by analysts and economists as a vocal lobby against change.

Mr. Jiang until this year was the chairman of China National Petroleum Corp., China’s largest oil company by production. Officials in September said he is under investigation for “severe disciplinary violations”—language that Chinese officials usually reserve for corruption cases—and he has been unreachable for comment since.