China’s Oil Majors Can Breathe Sigh of Relief As Third Plenary Session Concludes

China’s Oil Majors Can Breathe Sigh of Relief As Third Plenary Session Concludes

On Tuesday evening the Chinese Communist Party’s (CCP) Central Committee released a communiqué from its four-day Third Plenary Session, held November 9-12, containing what many claim offers little real change.

However, in the days leading up to the secretive meeting, which only releases a communiqué after its conclusion, media pundits and analysts both within the country and abroad voiced hope that meaningful changes would be made, especially in light of the perception that Chinese President Xi Jinping, in office just under a year, would be a reformer, breaking the mold of other Chinese presidents and usher in a new era of reform across multiple sectors.

However, these hopes were further dashed Tuesday night in the communiqué that could arguably be described as one full of ambiguity and rhetoric. Hong Kong’s South China Morning Post said the communiqué issued at the end of the four-day party conclave laid down broad policy directions, but contained few particulars. “The only concrete move was to set up two powerful organs – one to spearhead reforms and another to formulate a coordinated national security strategy,” the newspaper said.

Xinhua, the official mouth piece of the CCP, said: “Facing challenges from inside and outside of the country, the Party decided to give a bigger role to the market as it seeks comprehensive reform.”

“According to the communiqué issued after the session, the general objective of the reforms is to improve and develop socialism with Chinese characteristics and push on with modernization of the country’s growing system and capabilities,” Xinhua added.

China’s Global Times said the CCP pledged to let “markets” play a “decisive” role in resource allocation as it seeks to deepen reform to steer the economy to a more sustainable growth model. The communiqué also reaffirmed the dominant role of “public ownership,” saying it will enhance the vitality, control and influence of the State-owned economy as it looks to advance diverse forms of ownership. It’s these two statements that seem ambiguous to many.

However, according to a Xinhua commentary on Tuesday it’s the wording, not any lack of substance in the communiqué, which matters, since the document acknowledged the market’s “decisive role” in allocating resources. Xinhua said the market had often in the past been defined as a “basic role” in allocating resources since the country decided to build a socialist market economy in 1992.

The government-controlled news agency said this is not only a change in wording but more importantly, a “breakthrough” in China’s market reform and highlighting the importance of market power.

Xu Hongcai, director of the Department of Information under the China Center for International Economic Exchange (CCIEE), a think-tank, agreed. He told Global Times the great breakthrough of the document [communiqué] is that it upgraded the role of the market. Global Times, echoing Xinhua’s reporting, said China had struggled to define the role of the marker even after it launched its reform and opening-up in 1978.

Albeit, for those waiting to see if China’s all-powerful State-Owned Enterprises (SOEs) that dominate sectors as far ranging as oil and gas, coal, aluminum, steel, telecommunications, electricity, transportation and others, would be impacted, there was little to celebrate.

It appeared that China’s SOEs, seemingly no longer invincible since recent CNPC and China Mobil corruption allegations unfolded, would be under the radar and headed for some major overhauls. Perhaps they were under the radar during the secretive session, but they have emerged largely unscathed.

Cornell University economist Eswar Prasad, commenting on the communiqué, said the implication appears to be that market forces will be given freer rein but within strictly defined, parameters. “State-enterprises will presumably be corporatized – subject to market forces and competition, rather than privatized,” he said.

However, on November 9, the first day of the session, China’s CCTV said in a broadcast that numerous calls to reform China’s SOEs had grown steadily louder as the plenary session began. “A possible restructuring of China’s oil giant CNPC has placed it at the forefront of talks of reform,” the network reported. It added that experts suggest breaking up the company into different parts to increase its efficiency.

Guo Yang, secretary of the president of Baota Petrochemical Group, a private oil processing company, told the South China Morning Post on the first day of the session that recent meetings with government agencies had convinced him that Beijing might further open the energy sector to private investment, though with limits.

Chen Liuqin, director of China Institute of Energy Economics said reform could be a gradual process. CCTV pointed to the fact that some concrete steps had been taken with private investment allowed into some areas in energy and finance, including blocks for shale-gas exploration. However, China’s fledgling shale-gas industry needs all the help it can get, particularly in gaining expertise and technological know-how to reach the hard to exploit gas, and can’t be fairly juxtaposed with the country’s long-held oil and gas monopolies.

Interestingly, on November 7, two days before the start of the four-day session, a story broke that China’s National Energy Administration had begun a feasibility study to open the country’s piped gas sector to third-party market players. The Shanghai National Business Daily said it is expected that the planned new policy will be enforced from January 1, 2014.

The Want China Times, citing market sources familiar with the issue, said the policy will break the long-term monopoly of the three state-owned enterprises (CNPC, Sinopec and CNOOC) on domestic oil pipe assets, which CNPC alone controls 70%.

However, the sources added that in the face of reality and given market dynamics of the high cost of building pipelines and the unlikely scenario that China’s big three would allow takeovers of their pipeline systems no private pipeline assets will privatized in the short term, despite the implementation of the new policy.

Perhaps for this to happen as well as any change in business as usual for China’s SOEs, particularly its still powerful oil majors, it will take an additional plenary session, but that is another year away.

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