Chinese Government Allows Private Investment
In Strategic Sectors
The Chinese State Council issued a new policy document
which allows private investors to invest in the power,
rail, aviation and oil sectors. These sectors are now
dominated by large state-owned enterprises (SOEs), and
before the new announcement, private investment was not
allowed in these sectors because of their strategic importance
to the overall Chinese economy.
The power,
rail, aviation and oil industries
have all shown rapid growth over the past several years.
In 2004, China became the world's second largest oil
importer, after the US.
It is unclear if the policy document opens up oil importing,
refining and distribution to private companies at this
stage.
This very important policy document means that privately-owned
Chinese companies may now enter these sectors, and compete
with state-owned enterprises. Policy documents issued
by the State Council are effectively binding directives
issued by the Chinese central government in Beijing which
provincial and municipal governments in China must obey.
The policy effectively opens the door to non-Chinese
financial interests investing in private Chinese companies
which invest in these sectors. While private equity firms
and investment banks have attempted to help the SOEs
come clean on their accounting reports and divest some
of their assets before seeking overseas listings, this
process has gone slowly because the Chinese authorities
have not been able to come to agreement on a bankruptcy
law which would allow some of the SOEs to declare bankruptcy.
The main reason for this is because no officials in
the Chinese government wants to take responsibility for
disposing of state-owned assets at less than market value.
Current Chinese laws do not allow state-owned enterprises
to dispose their assets at less than market value.
The decision to allow private companies to enter these
sectors means that the Chinese government has opened
another door, by allowing competition to the SOEs which,
so far, have had a monopoly. This will put competitive
pressure on the SOEs to clean up their act, and be more
responsive to market and consumer changes.
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