(Bloomberg) -- China is preparing to overhaul its bloated and inefficient state-run companies to bolster an economy forecast to grow at the slowest pace in more than two decades, according to people familiar with the matter.

The proposal would include consolidation and reduce the government’s role in state-owned enterprises by stripping ownership stakes from the agency that regulates them, the people said. The plan, which could be released as soon as this month, calls for bundling the companies by industry and handing their control to state asset-management firms, the people said, asking not to be identified because the talks were private.

The shake-up is poised to affect thousands of companies, including some of the world’s largest, such as China National Petroleum Corp. and China Mobile Communications Corp. The country’s state companies are perceived to be so rife with corruption and poorly run that Sanford C. Bernstein & Co. estimates that they trade at discounts totaling $2 trillion.

And:

“Putting SOEs under the supervision of asset-management companies that will focus on improving the efficiency of investment would be a major step towards putting China on a more sustainable growth path,” said Arthur Kroeber, the Beijing-based research chief for Gavekal Dragonomics.

The government is pushing Chinese companies in key industries, including communications and power generation, to expand overseas, a plan outlined by Li March 5 in his report to the annual legislative session. The ongoing merger of the state’s two biggest train-equipment makers and the technology ministry’s “Made in China 2025” plan to remake the manufacturing industry are part of the broader plan.

The overhaul comes as state-run companies increasingly find themselves the target of President Xi Jinping’s nationwide corruption crackdown, leading to the downfall of more than 70 executives last year, according to Xinhua. The changes would affect some of the same 26 major firms named as inspection targets last month by Wang Qishan, China’s anti-graft chief.

David Fuller's view

Corruption is usually the biggest problem in command economies.  China’s top leaders, seldom lacking in confidence, believe they can achieve the same economic dominance the country enjoyed before the 20^th century.  Consequently, President Xi Jinping has grasped the nettle of corruption.  It will not be easy but this is a sensible and necessary decision on behalf of China, which remains one of the world’s fastest growing economies.   

China’s Shanghai A-Shares Index (p/e 15.83 & yield 2.00%) are currently in a medium-term consolidation of their strong initial gains commencing in July 2014.  The government now appears to favour equity appreciation as part of its economic programme, and an upside breakout from the current trading range would reaffirm the bull trend. 

Hong Kong’s stock market indices have receded from their range highs this month because the HK$ remains pegged to the surging USD.  The Hang Seng Index (p/e 9.92 & yield 3.80%) remains cheap and is still in a gradual, ranging overall upward trend.  The China Enterprises Index (p/e 8.07 & yield 3.75%) is even cheaper and appears well supported by underlying trading.  For both these Indices, upside breakouts over the medium term would reaffirm upside potential. 

I participate in China mainly via the sterling denominated JPMorgan Chinese Investment Trust plc, which currently sells at a discount to NAV of 12.346%, according to Bloomberg.