* China state firms say reform should mean growth
* Party delegates spend day two of congress praising Hu speech
* U.S. wary of China state link to foreign investment
By Charlie Zhu and Lucy Hornby
BEIJING, Nov 9 (Reuters) - China's big state-owned enterprises argued for continued expansion on Friday, echoing outgoing President Hu Jintao's comments urging more investment in major government firms and curtailing hopes of reform in the bloated sector.
Party delegates spent day two of the 18th Communist Party Congress holding public debates on Hu's speech at which they read out bits that they particularly liked. Reuters reporters heard no one disagreeing with what Hu said in a nearly two-hour-long speech.
At the opening of the congress on Thursday, Hu stressed the importance of continued one-party rule and how it was threatened by corruption, a reference to the downfall of one-time high-flying politician Bo Xilai.
He also suggested a further strengthening of the state in strategic sectors, with the possibility of more market-oriented competition in other sectors.
"The direction of the SOE (state-owned enterprise) reform should be: SOEs must be more market-oriented and they must keep strengthening their vitality and influence," Wang Yong, the head of a commission on supervising and administering state-owned assets, told reporters.
"Scholars may have different views, but that's the development need of the enterprises and the state."
Hu had said on Thursday that Beijing must "unwaveringly consolidate and develop the public sector of the economy".
"(We should) invest more state capital in major industries in key fields that comprise the lifeline of the economy and are vital to national security."
But outgoing Premier Wen Jiabao vowed in a speech earlier this year that Beijing would push ahead with monopoly-busting.
"We must move ahead with reform of the railway, power and other industries, complete and implement policies and measures aimed at promoting the development of the non-state economy, break monopolies and lower industry thresholds for new entrants," he had said.
State-owned enterprises and affiliated businesses account for more than half of output and employment in China, the world's second-biggest economy. They include power grid-operator State Grid, the world's seventh-biggest company.
Oil giants Sinopec Group and China National Petroleum Corp, parent of PetroChina, rank fifth and sixth, respectively. Of the 70 mainland companies on the 2012 Fortune Global 500 list, 65 are state-owned.
Chinese reformers and Western governments say their sheer size and market dominance creates a drag on the economy through vast opportunity for corruption and waste, leading to higher costs for consumers.
Calls for reform built up as factions manoeuvred ahead of the once-in-decade leadership transition at the congress. When Xi Jinping, Hu's anointed successor, is in place he will be under immediate pressure to break the grip of inefficient SOEs and reinvigorate China's three-decade-long economic miracle.
But he will have to deal with the divisions within the party on policy.
Critics claim that without further reform of the state sector, China's growth will stagnate. They call for equal opportunity for private firms, which provide most of the new jobs in China.
On Friday, data for October showed the economy was pulling away from its slowest growth in three years. Analysts said that thanks to a raft of pro-growth policies rolled out by the government in recent months.
Wang, the state assets commission chief, admitted that the enterprises were saddled by a bloated workforce, a legacy of the planned economy.
But he and other state-firm bosses emphasised their importance to what they called "national economic security" in their gathering, laying out plans for further investment and overseas expansion.
The large state role prompted a U.S. congressional advisory panel to complain this week that Chinese investment in the United States had created a "potential Trojan horse".
The study, commissioned by U.S.-China Economic and Security Review Commission, found that Chinese-owned firms in the United States added between 10,000 and 20,000 workers in the past five years and helped shore up financially troubled U.S. firms.
The investment was spearheaded by Chinese state-owned enterprises that enjoyed government subsidies and other market-distorting policies that support industrial policy and non-market goals of the Chinese government, it said.
"Based on this juxtaposition, some will conclude that Chinese FDI (foreign direct investment) in the United States is a potential Trojan horse," the report concluded.
Chinese telecoms firm Huawei Technologies, the world's second-biggest telecoms equipment maker - and another telecommunications firm called ZTE - spent much of this year under siege by U.S. lawmakers who suspect Huawei has close ties to Beijing and that its equipment could be used for espionage.
The telcos are not state-owned enterprises. Huawei is owned by its employees and ZTE by different institutions.
The party congress ends on Wednesday, after which the new Standing Committee, at the apex of power, will be unveiled.
Only Xi and his deputy, Li Keqiang, are certain to be on what is likely to be a seven-member committee, and about eight other candidates are vying for the other places.