Since Chinese President Xi Jinping (習近平) took office in late 2012, Beijing has been promoting so-called “mixed ownership” corporations, where private investors hold stakes in state-owned firms and state funds can have stakes in private companies.
Whether the access private investors have to state companies has increased and whether reform of an inefficient state sector has progressed remain open questions, but it is clear that the Chinese Communist Party (CCP) has been setting up party branches at private firms to exert greater influence over the private sector — which contributes about 50 percent of China’s tax revenue, makes up more than 60 percent of its GDP and accounts for nearly 80 percent of employment.
Until recently, there had been signs that expanding the state’s influence on the private sector and squeezing out private firms are not just debate topics in China, but a policy agenda in the making under the CCP. From Alibaba Group Holding founder Jack Ma’s (馬雲) reportedly forced retirement, Tencent Holdings chairman Ma Huateng (馬化騰) and Lenovo Group founder Liu Chuanzhi (柳傳志) reportedly being dismissed as legal representatives of their businesses, to the Hangzhou City Government assigning officials to 100 local companies and the planned implementation of a corporate social credit system next year, the situation of “letting the state sector advance while the private sector retreats” is more than just words.
On the surface Beijing still emphasizes the importance of the private sector to the economy and China is indeed witnessing a rapid resurgence of the state sector aided by support measures, while private firms continue to struggle because of an increasingly skewed playing field.
In The State Strikes Back: The End of Economic Reform in China? Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics, writes that there is growing concern about the private sector in China as private companies have either been crowded out or devoured by their state-run peers in the past few years.
China’s state-owned enterprises have long monopolized important industries such as finance, energy, telecommunications, steel and transportation. Moreover, they are essential to the CCP’s control of China and its economy. On the other hand, as long as the CCP gives its orders or implements special deleveraging policies, private companies must cooperate regardless of their size, and private business owners lack the judicial guarantee of their properties in today’s political environment. That is, the CCP can do whatever it wants. For example, Chinese regulators in March last year froze licensing approvals for online games without warning, causing several publishers to wait longer than anticipated for approvals, with dozens going bankrupt.
Private firms globally hire former government officials to take advantage of their relationships with and access to government agencies, as well as their knowledge of state programs to secure lucrative contracts and avoid potential problems. However, in China, government officials’ participation in the management of private firms, whether it is a mixed-ownership system or something like the situation in Hangzhou, is to achieve the CCP’s goal of keeping tabs on the private sector and perpetuate the party’s position as the leader — politically, economically and in society. Under the CCP’s authoritarian rule, once state funds or government officials enter private firms, it means a change to company management or business ownership is only a matter of time.
It is feared that the revival of the state sector’s role in China is likely to become more solid, as the economy is facing difficulties. Taiwanese businesses and other foreign firms who have substantial assets in China should be alert and prepare for any eventuality.
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