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'China goes private'—from financial reform to the Belt Road Initiative

January 10, 2018
Anthony Saich

The State & Party's technical prowess is somewhat limited.

  1. 'China goes private.' Tony Saich discusses the Xi and the Party's move toward toward greater control of private business, especially the tech/Internet sectors. 
  2. 'It's the politics, stupid.' Tony explains why Xi focused first on trying to bend Chinese society and the State to his and the Party's will.
  3. 'The State and the Party.' Tony details the problems the Party has in getting the State to implement its policies, and why.

1. The Party goes private

The big idea. 

Having made headway in exerting Party control over Chinese society, the economy, and the State, Xi Jinping has his sights on gaining more control of private business, especially the tech/Internet sectors, in two ways:

  • The government may buy (or receive 'donated') shares and get board seats. 
  • And, Chinese Communist Party Committees embedded in private companies would have a say in major decisions.

What could possibly go wrong?

The background. 

‘The Chinese State didn’t have the capacity to develop things like Alibaba, Baidu, Tencent, and so forth,’ says Harvard's Tony Saich.

  • ‘So, it outsourced its Internet and hi tech development to the private sector.’

Since then, the government has pretty much left these and other tech/Internet companies alone. But, that could be changing. According to Wall Street Journal reporting in October 2017:

  • 'The Chinese government is pushing some of its biggest tech companies—including Tencent, Weibo and a unit of Alibaba—to offer the state a stake in them and a direct role in corporate decisions.' '
  • “This is the thing that keeps Pony up at night,” says a Tencent executive about Mr. Ma, the company’s chief executive.
  • 'Even if the plan doesn't go through, the government has another way to gain control: '[A]t Mr. Xi’s urging, a campaign is under way to set up party units in private companies.' This will give Party representatives authority to approve or veto major decisions, say sources, other than WSJ.

Tony Saich gives context: 

This 'reassertion of State and Party control in the private sector is something we've seen before.' 

  • ‘Essentially, when the private sector has developed in an area and has become successful, the State and the Party move back into that sector both to try and guide it, but also to take more profits from that sector.’
  • ‘I think we’re seeing that now with the hi tech and internet sectors.’

As for Party reps in Internet firms as well as other private companies, Tony says:

  • 'In theory, that was probably the case before. But, in practice, the private companies were probably left pretty much alone.’ 
  • Now, the government is trying to 'to rein in, bring back in Party and State control over that very vibrant sector, and also to ensure it works more coherently for Party interests.’
  • ‘I would suspect that over the next period, we’re going to see a tightening up in that area.’

Why this is important. 

Less tech- and business-savvy Party and State apparatchiks could dampen or even kill the vibrancy and innovation of individual companies and, perhaps, collectively, China's tech/Internet sectors. If that happens initiatives like 'Made in China: 2025' may be jeopardized. Also:

  • Mixed government/private companies will have more difficulties obtaining SIFUS approval for U.S. investments.
  • Beijing would gain even greater control over the web and even greater access to people's personal data. 
  • For analysts, figuring out what's happening in China's economy, tech/Internet sectors, and individual private companies would become a lot tougher. 

2. 'It's the politics, stupid!' 

‍‍The Economist

The big idea. When Xi Jinping came to office, western observers expected him to tackle China's flagging economy day one. But, Xi had different priorities. (Cue western hand wringing).

  • 'When Xi Jinping took over power,' Harvard's Tony Saich says, 'his view was "It's the politics, stupid"' (riffing on Bill Clinton's 1992 winning presidential campaign strategy, summarized in, 'It's the economy, stupid').
  • 'The Party's relationship to society was in very dire straits. It was not just the corruption issues, the behavior of officials, but a lack of trust.
  • 'The Party had trust issues, too. 'The Party didn't trust the State to carry out its policies, and it certainly didn't trust society.' 
  • 'Xi felt there for anything to happen it was essential that the Party itself became stronger, more disciplined, and more unified, and that the Party had to get a much tougher grip over State and over society.'

Society & the Party, it's complicated.  

Society was losing confidence in Party leadership, and the Party didn't (and doesn't) trust society. Xi's Anti-Corruption Campaign went a long way toward restoring confidence in the Party. But, nothing could make the Party trust society. Tony explains:

  • The Party 'fears that somehow society is getting away from Party rule and from the dominance of the Party.'
  • 'The fear that if society is let loose, it’ll run off in its own merry way, which might be detrimental to, or possibly even in conflict with, Party interests.'
  • 'That worried the Party because it could lead to the flourishing of a range of heterodox and unorthodox ideas within society that could undermine Party power.'
  • 'So we’ve seen a much tougher control over information flows, over what is acceptable to be talked about, and over what is acceptable to be written about. I don’t see that changing in the next five years.' 

3. The State & the Party, it's even more complicated

‍Getting the State bureaucracy in line. 

Why are Xi and the Party working so diligently to bend the State to the their will?  

China is a one-party state with two bureaucracies: the State and Party. 

  • In theory, '[T]he State bureaucracy does the day-to-day job of public administration, and the Party bureaucracy sits next to and controls the way they do it,' Stein Ringen, Oxford professor emeritus told me. 

But, in practice, 

the State doesn't necessarily carry out the Party's policies. Harvard's Tony Saich explains:

  • 'What I mean about the Party not trusting the State is not just a question of the corruption.'
  • 'It's really about State institutions pursuing their own particular interests that may conflict with the policies that the Party wants to push forward and pursue.''
  • Say, for example, on the environment, the Party has good regulations and policies, but State institutions don’t carry them out.'
  • Why? 'Because there are vested interests within their localities that benefit from the perpetuation of pollution producing industries.'

The reality. China is '...such a rambling country with so many different institutions and so many different tiers of government that it’s very difficult to control.'

  • 'The way China works, people are going to fall in line, seek to appease themselves with General Secretary Xi, and try and follow whatever his directives are.'
  • 'But, like most of these things in China, the directives tend to be very vague. This leaves open a lot of potential for local variants and local experimentation.
  • 'My translation: Nothing new here. 天高皇帝远 - 'Heaven is high and the Emperor is far away,' as the oft quoted - since the Yuan Dynasty (1271-1368) - proverb goes. 

What it all means

‍Chinese dynamism: left, after Deng;  right, after Xi?

What it all means. Xi may be able to bring Chinese society and the State to heel, but at what cost? Tony posits: 

  • 'The Chinese leadership really needs to think about: Where does dynamism come from within its economy and within its society?'
  • 'It’s not necessarily within the State-owned sector.'
  • 'So, this recentralization could curb the enthusiasm and entrepreneurialism within society.'
  • 'And, this may be detrimental to meeting Xi's longer term goals of maintaining stable growth and a relatively peaceful societal framework.'
Anthony Saich

Anthony Saich

Professor, Harvard Kennedy School of Government
  • Daewoo Professor of International Affairs, Harvard Kennedy School of Government
  • Director, Ash Center for Democratic Governance and Innovation, 
  • Harvard Kennedy School of Government 
  • Executive Committee Member, Fairbank Center for Chinese Studies, Harvard University 
  • Board Director, National Committee on U.S.-China Relations 

Channels

AsiaStrat
Granite Peak Advisory
Track Research
Trivium China
Gao Feng
Real Estate Foresight
China Beige Book

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Anthony Saich

Anthony Saich

Professor, Harvard Kennedy School of Government
  • Daewoo Professor of International Affairs, Harvard Kennedy School of Government
  • Director, Ash Center for Democratic Governance and Innovation, 
  • Harvard Kennedy School of Government 
  • Executive Committee Member, Fairbank Center for Chinese Studies, Harvard University 
  • Board Director, National Committee on U.S.-China Relations 

Channels

AsiaStrat
Granite Peak Advisory
Track Research
Trivium China
Gao Feng
Real Estate Foresight
China Beige Book