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Zhou Probe Signals China Tackling Obstacles to Reforms

Zhou Yongkang, former member of the Standing Committee of the Political Bureau of the Chinese Communist Party (CCP) Central Committee, attends the closing of the  National People's Congress at the Great Hall of the People in Beijing, China, on March 14, 2011. Photographer: Feng Li/Getty Images
Zhou Yongkang, former member of the Standing Committee of the Political Bureau of the Chinese Communist Party (CCP) Central Committee, attends the closing of the National People's Congress at the Great Hall of the People in Beijing, China, on March 14, 2011. Photographer: Feng Li/Getty Images

July 31 (Bloomberg) -- Chinese President Xi Jinping’s anti-corruption drive has breached the highest ranks of power. The most important beneficiary may be the economy.

This week’s Communist Party announcement of a probe into former security chief Zhou Yongkang shows Xi has amassed enough backing to take down a top figure and his network of supporters. That greater clout can now be deployed to embed policy shifts that reduce the state’s role in the economy and help sustain growth, said BNP Paribas SA and Bank of America Corp. analysts.

Implementation of the broadest economic reforms since the 1990s has been gradual since plans including opening state-owned enterprises to more competition were unveiled after a November conclave of party leaders. Xi is trying to sustain expansion amid a property slump and rising bad debts in the world’s second-largest economy, which is projected to grow this year at the slowest pace since 1990.

“This is definitely beneficial for SOE reform -- it won’t be hard to drive it anymore,” said Chen Xingdong, chief China economist at BNP Paribas in Beijing. The Zhou investigation signals Xi has consolidated power, as it’s “not the decision of a single person,” Chen said.

The probe escalates an 18-month campaign against corruption to the highest level in the party’s 65 years in power, representing a tightening grip on power by Xi. Zhou was a member of the party’s most powerful Politburo Standing Committee until November 2012, when Xi took over as party chief.

Steady Growth

The Politburo discussed the economy on July 29, the same day the Zhou probe was announced, saying after a meeting that “more effort is needed to maintain steady economic growth” and that the country must balance reform, development and stability in the second half, the official Xinhua News Agency reported.

Reforms will concentrate on investment management, simplifying administrative-approval procedures and opening monopolies to competition, Xinhua said.

China’s annual economic growth will slow to 5.9 percent by 2019 if the nation fails to implement policy changes on the financial industry, government spending, SOEs and the exchange rate, and expansion continues to be fueled by credit and local authorities’ expenditures, the International Monetary Fund said in an annual report on the country.

“Fast implementation of reforms would have substantial benefits in terms of boosting living standards and reducing risks,” the Washington-based fund said in its report released last night. Without such policies, annual growth may slow to less than 4 percent by 2030, “with considerable risk of an even sharper slowdown,” the IMF said.

SOE Management

China earlier this month picked six SOEs, including State Development & Investment Corp. and Cofco Corp., for trials that would allow more-independent business management, freer hiring of top executives or mixed-ownership structures.

“All reform roads lead to and through SOE reform,” said Stephen Green, head of Greater China research at Standard Chartered Plc in Hong Kong. Leveling the playing field between SOEs and private companies in competitive parts of the economy such as real estate, steel and auto production “will have a huge impact on productivity and job generation,” Green said.

The more than 100 companies directly controlled by the central government accounted for a quarter of industrial output in 2011, according to a report by Fan Gang, head of the National Institute of Economic Research and a former academic member of the monetary policy committee of the People’s Bank of China.

Budget Policies

Barclays Plc sees details arriving soon on changes to budget and tax policies, including a consumption tax on luxury goods and “environmentally unfriendly” items such as batteries, according to a report yesterday by Chang Jian, chief China economist in Hong Kong.

Since Xi came to power, Chinese authorities have targeted “tigers and flies,” parlance for cadres from the top to bottom ranks, in a bid to root out corruption. Among them have been several people with connections to Zhou and China’s oil industry, where Zhou spent three decades and rose to lead state-owned China National Petroleum Corp. in the 1990s. Zhou later oversaw hundreds of thousands of police and paramilitary forces with an annual budget of more than $100 billion.

Shares of PetroChina Co., the listed unit of CNPC, fell 1 percent at 10:17 a.m. in Shanghai after a 3.1 percent gain yesterday that was the biggest in five months. The Zhou probe “will unlock significant shareholder value” at PetroChina, which will deepen cost-cutting efforts after last year’s purge of senior executives, Jefferies Group LLC analysts said in a note. The benchmark Shanghai Composite Index was down 0.3 percent.

High Profile

“With some high-profile arrests under its belt, we believe the focus of the new government can start to shift from the anti-graft campaign to real institutional reforms, which are badly needed for China’s long-term economic health,” Lu Ting, Bank of America’s head of Greater China economics in Hong Kong, said in a note.

The anti-corruption drive has hurt some areas of the economy, reducing demand for luxury goods and hospitality services. It may have also played a role driving real estate prices lower by discouraging officials from buying multiple properties.

While news of the Zhou probe is welcome from an economic perspective, going after additional “tigers” may increase political tensions and hurt the economy, said Xu Gao, chief economist at Everbright Securities Co. in Beijing.

Li’s Stimulus

As the economy slowed this year, Premier Li Keqiang enacted stimulus by bringing forward railway spending, cutting reserve requirements for some lenders and reducing taxes. Growth accelerated for the first time in three quarters in the April-June period, expanding 7.5 percent from a year earlier, yet analysts project a 7.4 percent pace for the rest of 2014, based on median estimates in a Bloomberg News survey.

Reforms backed by Xi are “facing opposition from every corner of the country,” including local governments on increasing spending for public services and SOEs on allowing private-sector investors in markets such as telecommunications and energy, said Wang Qinwei, an economist at Capital Economics Ltd. in London.

Now that Xi has consolidated power, “he will be able to push reforms if he wants to,” said Wang, who previously worked at the People’s Bank of China.

To contact Bloomberg News staff for this story: David Tweed in Hong Kong at dtweed@bloomberg.net; Xiaoqing Pi in Beijing at xpi1@bloomberg.net

To contact the editors responsible for this story: Andrew Davis at abdavis@bloomberg.net; Chris Anstey at canstey@bloomberg.net Scott Lanman

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