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European Voices on China
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How the CCP embraces and co-opts China’s private sector

21 November 2017

By Sebastian Heilmann

The CCP reasserts its control over the private sector by extending its reach far inside foreign and Chinese companies. For foreign investors, such close and often involuntary cooperation with the party-state can bring lucrative opportunities but also lead to questionable business decisions.

Pony Ma Huateng, Chairman and CEO of Tencent Holdings Ltd., attending the opening meeting for the Fifth session of the 12th National People's Congress (NPC) in Beijing, March 2017. Image by ImagineChina

When the Communist Party’s leaders sped up the opening of China’s state-led economy in the 1990s, private and foreign-invested companies experienced a period of explosive growth. By the year 2000, they contributed more than half of China’s GDP, outpacing state-owned and communal enterprises in many sectors. Today, China’s future-oriented technology industries, from biotechnology to e-mobility and Artificial Intelligence, are all dominated by private companies.

Many investors and economists viewed China’s path as confirming the assumption that free enterprises would eventually spawn free markets and political pluralism.  As late as 2014, Nicolas Lardy, senior China economist at the Washington, D.C.-based Peterson Institute for International Economics, argued that a competition-driven market economy would virtually be unstoppable in China.

It is true that the private sector’s swift development initially took place outside the control of the Communist Party of China (CCP).  The party welcomed the sector’s contribution to growth, employment and tax revenue. But it also kept an ideological distance to China’s new capitalists until 2002 when Jiang Zemin officially invited the “progressive productive forces” to become CCP members. At the same time, the CCP started a campaign to set up party structures in private companies. It was the beginning of an ongoing development to co-opt the private economy into the political system.

China’s entrepreneurs: Agents of change or crony communists?

The relationship between politics and businesses in China started to resemble a pattern that is well-known in most economic systems. For businesses and investors in China, connections to political decisionmakers became at least as important as the lobby work of US or German companies in Washington or Berlin. A research team around Xiaojun Yan of Hong Kong University concluded that leading party representatives on lower administrative levels increasingly tended to subordinate CCP organizational discipline and unity  to a lucrative, and corrupt, collusion with local entrepreneurs. From this point of view, China’s private entrepreneurs developed into independent actors with a collective identity who could turn against the CCP’s monopoly on power in case of conflict.

The political scientist Bruce Dickson took a different stance. Based on years of field research, he warned against portraying private entrepreneurs as potential agents of political change in China. In his book “Wealth from Power” he described a “crony communism,” a system of symbiotic and opportunistic transactional relationships between Party cadres and companies.

Such signs of systemic decay were inacceptable to Xi Jinping who sweepingly recentralized political decisionmaking after taking power in 2012. In his view, the CCP had to re-establish control over the private sector while restoring internal discipline. The tough anti-corruption campaign of the past years has made it harder for entrepreneurs to buy political influence. At the same time, the Party has strengthened its control mechanisms within these enterprises. In the past, party cells and committees were predominantly found in state-owned companies. Today, more than two thirds of private companies, Chinese and foreign, host such organizations. CCP cadres not only sit on work councils, but they increasingly fill leading positions in personnel and government relations departments, all the way to executive and supervisory boards.

Tech companies become part of the political agenda

The Party has tightened its grip on strategically important sectors such as China’s large digital platforms Alibaba and Tencent. But its influence is also growing within Chinese subsidiaries of global corporations such as Disney, L’Oreal or Siemens. The aim is to align political with commercial goals.

Of course, this can only work if the CCP does not strangle entrepreneurial initiative. Privately owned Chinese and foreign companies can benefit from government innovation and infrastructure policies as long as they cooperate with the party-state. The big tech companies are a case in point for such mutual benefit. The government creates lucrative business opportunities by including these companies in its digital agenda, the companies in turn help secure political stability by sharing user data with the state for surveillance purposes. The CCP’s political goals are thus effectively incorporated into the economic value chain. The CCP makes skillful use of the opportunism among businesses and investors so as to maintain its monopoly on political power.

Foreign investors are faced with difficult decisions. They do not need to fear expropriation of their assets as the Party leadership has pledged to respect “mixed” forms of ownership and private property. But the managerial autonomy of their China operations will be curtailed by Party directives. This could mean that they could be pressured into making economically questionable business decisions, for example for investing in government-preferred areas or projects.

The CCP’s course is based on the pragmatic calculation that most foreign investors will cooperate because the Chinese market is irresistible and irreplaceable for global companies. Once all companies are under effective internal supervision – through implanted party cells – the Chinese government is less at risk of losing political control over businesses and can even afford to selectively open its economy further to foreign investors. However, due to the omnipresence of party oversight in business organizations, the “Socialism with Chinese characteristics for a new age,” that Xi Jinping declared at the recent 19th Party Congress, represents a further shift away from free-market principles.

A German version of this article was first published in Frankfurter Allgemeine Sonntagszeitung on November 5, 2017.

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The  Mercator Institute for China Studies (MERICS)is a Stiftung Mercatorinitiative. Established in 2013, MERICS is a Berlin-based institute for contemporary and practical research into China.

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