BEIJING (Dow Jones)
A much-heralded effort by China to support its economy partially with private investment in energy infrastructure may end up being a lot of hot air.
Over the past week, China's government has issued a series of statements announcing a patchwork of measures to support the economy that involves everything from attracting more private investment to faster approvals of clean-energy projects.
However, increased private investment in China's energy sector may not necessarily spur more competition or even economic growth. In fact, it may end up doing little more than reducing the exposure of state-owned energy companies to low-profit businesses and allow them to focus on more profitable endeavors.
China Securities Journal reported Tuesday that the National Energy Administration will release details before end-June outlining how private investment will be encouraged in sectors such as refining, thermal-power generation, natural-gas-power generation and natural-gas pipelines.
Many of these sectors often generate losses for state firms, and therefore aren't terribly attractive to outside investors, said Miao Tian, an analyst at North Square Blue Oak. Also, "high-profit sectors like oil and gas exploration are unlikely to open to the private sector in the short term."
Private investment in natural-gas pipelines, for example, isn't a sure-fire winner as China's gas production is dominated by two state firms, PetroChina Co. (PTR) and China Petroleum and Chemical Corp. (SNP). These two companies prefer to use their own pipelines for long-distance transmission of the fuel.
Although there aren't any laws preventing private natural gas pipelines, a major challenge would be to find gas to put in them, said Gavin Thompson, director of China gas research at Wood Mackenzie. "If you just try to deregulate transmission while there is a virtual duopoly on supply, it doesn't really work," he said.
Natural gas pipelines are fixed assets that generate low--but steady--returns. Without proper reforms to the upstream sector, private pipelines are about as attractive as private refineries, which have been long hampered by lack of access to crude oil, where a handful of suppliers wield incredible pricing power.
Still, some private money is starting to go into long-haul gas transmission. PetroChina has found partners to help build the third phase of its West-East natural gas pipeline, which will carry imported and domestic gas from remote western regions to the country's industrial heartlands in the east and south.
China's state pension fund, which is investing in the project, said Thursday that the third phase of the pipeline, which has a total cost of CNY116 billion (US$18.2 billion), will also be partly financed by a private capital fund.
This marks the first time such a fund will be involved in a large state-owned infrastructure project. The Urban Infrastructure Facilities Investment Fund will invest CNY10 billion and take a 16% stake in the project, it said.
These investments will "serve the country's efforts to expand domestic demand and boost growth," the official Xinhua news agency reported Thursday, citing PetroChina's Chairman Jiang Jiemin.
But in reality, private investment in this sector may serve only to reduce PetroChina's exposure to capital-intensive pipeline projects and allow it to focus more on upstream investments, Thompson said.
The opening of sluice gates to allow private capital to flow into energy projects is unlikely to result in a flood of new money unless the government takes the radical step of opening up its most lucrative sectors, something that would require a massive overhaul to energy policy.
Until that happens, state-owned enterprises like PetroChina may be the ones who benefit--and not the economy.
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