(Bloomberg ) China's planned economic reforms are poised to reshape the competitive landscape, allowing private firms such as Alibaba Group Holdings Inc. to compete with state-owned banks, and easing the one-child policy to bolster markets for companies from Nestle SA (NESN) to General Motors Co. (GM)
China's financial sector is set to change with plans that include a new registration system for initial public offerings and allowing qualified private investors to set up small-to-medium sized banks. That has progressed in the past few months as Tencent Holdings Ltd. (700), Asia's biggest Internet company, is part of a group applying for a banking license in China.
"Companies that got too comfortable with the old system now are going to have to change," said Tim Condon, chief Asia economist at ING Financial Markets in Singapore, who previously worked for the World Bank. "This is potentially a huge step forward in opening up the economy."
President Xi Jinping's reforms, which may be the most sweeping plan since Deng Xiaoping's liberalization in 1978, are aimed at giving more influence to market forces and loosening government controls. The changes outlined in a 60-point document after a Communist Party meeting last week present opportunities -- and risks -- to companies in almost every sector of the world's second-biggest economy, which is heading for its weakest annual expansion since 1999.
China's stocks rose, with the benchmark index for mainland companies in Hong Kong surging 5.6 percent, the most since December 2011. The Shanghai Composite Index (SHCOMP) gained 2.9 percent while Hong Kong's Hang Seng Index (HSI) jumped 2.7 percent, the most in more than 10 months.
"It's positive, very positive for sentiment," said Catherine Yeung, investment director for equities at Fidelity Investment Management Ltd. in Hong Kong. Fidelity is adding more Chinese consumer-related stocks, including Internet and health-care companies, she said, without being more specific.
Policy makers will seek to "push forward reform for a registration system" on IPOs, according to the government statement. That may hasten the approval process for the more than 700 companies awaiting regulatory permission for their share sales.
The leaders also decided during the four-day meeting known as the third plenum to further increase the share of direct financing, such as stock and bond sales, in the economy, according to the government's Nov. 15 statement.
Citic Securities Co. (6030), the country's biggest brokerage by market value, jumped 13 percent in Hong Kong trading.
Billionaire Jack Ma, executive chairman of Alibaba Group, has said China's financial sector needs an outsider to "stir things up," according to a transcript compiled by the official People's Daily.
"The entry of tech giant Alibaba into the lending business should give the nationwide banks some concerns about future competition," said Jim Antos, an analyst at Mizuho Securities Asia Ltd. in Hong Kong. "Private banks that can rely on technology to by-pass the expensive and time consuming job of building out a branch network could become significant competition for the commercial banks in only a couple of years."
Still, new entrants won't have the scale to challenge China's biggest banks in the next three to five years, said Chen Xingyu, a Shanghai-based analyst at Phillip Securities Group, which manages more than $22 billion of assets.
Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. (939), Agricultural Bank of China Ltd. (3988) and Bank of China Ltd. are headed for at least their eighth straight year of record earnings after posting average profit growth of 11.5 percent in the three months ended in September.
The Communist Party's meeting that ended Nov. 12 is set to have a similar historical significance as the one in 1978 when Deng decided on a reform and opening-up policy that heralded over three decades of rapid growth, said Yao Yang, dean of the National School of Development at Peking University.
Among proposed changes are making budgets more transparent, improving transfer payments, setting up risk-warning and debt-management systems for central and local governments and speeding up legislation on a property tax.
The pledges included establishing market-determined prices for resources, boosting private-sector and foreign investment, and encouraging urbanization by scaling back the hukou, or household registration system, to allow rural migration to smaller cities. The measures are to be implemented by 2020.
"China will become a high-income country under the leadership of Xi," Justin Lin, former chief economist for the World Bank and adviser to China's top leadership, said Nov. 17.
Grabbing headlines was the policy shift allowing couples to have two children if either parent is an only child, easing the rule which required that of both parents.
The relaxation could boost China's demand for diapers, infant milk powder and other baby-related sectors, according to Summer Wang, an analyst at Bank of Communications. The one-child policy has left China with an aging population and a shrinking pool of young workers.
Of China's 1.36 billion population, 17.1 percent are aged below 15, compared with India's 28.5 percent, Brazil's 25.4 percent and Russia's 15.9 percent, according to data compiled by Bloomberg.
Shares of infant-formula sellers, milk processors and other baby-product makers surged. Diaper maker Hengan International Group Co. (1044) surged 6.5 percent to a record in Hong Kong trading while stroller and crib maker Goodbaby International Holdings Ltd. (1086) and milk companies China Mengniu Dairy Co., China Modern Dairy Holdings Ltd. and Yashili International Holdings Ltd. (1230) climbed.
Mengniu will increase the ratio of infant formula in its product offerings, it said in an e-mailed statement.
The impact on demand may be seen only in 2015, and a study by the China Academy of Social Sciences implies the policy should add about 1 million babies by then, Jessie Guo, a Hong Kong-based analyst at Jefferies said by phone today.
"If you have two kids, you are definitely more likely to have a car than if you have one," said Shen Minggao, head of China research at Citigroup Inc. (C) in Hong Kong. Makers of appliances, clothing and shoes will also benefit as the new rules will boost rural income, Shen said.
China is also trying to bring in a market focus for commodity pricing. The plenum's proposals are negative for sectors including coal and power equipment, because of environmental protection initiatives, Citigroup's Shen said.
PetroChina Co. (857) and China Petroleum & Chemical Corp. (386), the nation's largest refinery companies, posted higher third quarter profit in October after the government in March mandated that domestic prices track global markets more closely, boosting their margins. China has typically used its state-owned oil companies, of which PetroChina is the largest, to control domestic fuel prices, and further pricing reform would only help their refining operations.
"More market-based pricing will raise costs for most consumers where the resource is currently undervalued," said Sijin Cheng, a commodities analyst at Barclays Plc. "On the other hand, it will incentivize upstream producers who have been reluctant to increase production because of regulated prices. All else being equal, it will help rationalize demand and restore market balances."
Chinese leaders are also trying to stimulate creativity in state-owned enterprises in sectors such as manufacturing, healthcare and consumer goods while enhancing control and influence of the state in areas of strategic importance such as utilities and defense, said Jin Qianjing, a Shanghai-based strategist at Shenyin & Wanguo Securities Co.
China has over past two decades liberalized the product market while the prices of key inputs -- capital, land, energy - - remain influenced by governments at all levels and highly non-marketized, said Arthur Kroeber, Beijing-based managing director of economic research firm GaveKal Dragonomics.
"It's very clear the goal is to put an end to that or, over time, marketize it," said Kroeber, who is also a fellow at the Brookings-Tsinghua Center in Beijing. "You are putting state-owned enterprises on notice that playtime is over and you've got to step up your game."