On Dec. 18th, 2006, Chinese government officially listed the 7 economic sectors of absolute control in China’s economic system, including armaments, power generation and distribution, oil and petrochemicals, telecommunications, coal, aviation and shipping industries. This has several implications – ending the vague definition of “strategically important sectors”, pointing out the direction of SOEs reforms in future, and of both foreign and domestic capital flow.

Beijing, December 18th, 2006 (Xinhua) -- As part of an ongoing drive to improve the efficiency with which state funds are used, China published a list of seven economic sectors critical to the national economy and in which public ownership is considered essential.

Specifically, these economic sectors of absolute control include: armaments, power generation and distribution, oil and petrochemicals, telecommunications, coal, aviation and shipping industries. This is the first time that the Chinese government officially publicized such a list of "strategically important sectors," whose definition has been vague since the late 1990s when China began to adopt the policy of market economy in a grant manner and across different economic sectors.

"State capital must play a leading role in these economic sectors, which are the vital arteries of the national economy and essential to national security," State Assets Supervision and Administration Commission (SASAC) Chairman Li

Rongrong said on December 17th, 2006.

Explaining the new guidelines on SOE (State-owned Enterprise) reform published yesterday, Li said: “the State should solely own, or have a majority share in, enterprises engaged in power generation and distribution, oil, petrochemicals and natural gas, telecommunications and armaments. “ and "In the coal, aviation and shipping industries, the state must always have a controlling stake in central SOEs."
According to Li Zhaoxi, deputy chief of the Enterprise Research Institute affiliated to the State Council Development Research Centre, the words of Chairman Li Rongrong gave a clear sign that by explicitly publishing the "key economic sectors," State capital can be channeled to priority industries and retreat from non-essential areas. And this will facilitate the opening of those areas and speed up the reform of SOEs,

As Li Rongrong said, by taking this move, the Chinese government wanted to enhance the "vitality and competitiveness" of State firms by diversifying their ownership through share-holding reform, strategic investors, restructuring or listing.

To reorient state capital away from non-critical areas to priority economic sectors, SASAC said China will reduce the number of central SOEs by at least one third to between 80 and 100 before 2010 through mergers.

Currently, the 161 enterprises under SASAC raked in sales of 3.7 trillion yuan (US$473.8 billion) in the first half of the year, a year-on-year increase of 20.6 per cent. Of them, at least 40 are engaged in the seven key economic sectors listed yesterday and their total assets represent three quarters of all central SOEs.
Meanwhile, Shao Ning, vice-chairman of SASAC, said that compared with other State firms, reforms of central SOEs have been relatively slow; and will be accelerated through regrouping and structural readjustment.

Finally, diversifying the ownership of SOEs makes it possible that foreign capital could be introduced to these economic sectors of absolute control within the framework of the coming SOEs reforms. In Li Rongrong’s words, "Central SOEs engaged in the downstream oil and chemical sector and in value-added telecom services can continue to bring in private or foreign capital to boost vitality," (Source: Chinadaily)