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Reining in red entrepreneurs

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Chairman and chief executive of Alibaba Group Jack Ma and other Chinese and French entrepreneurs wait for an economic speech by French President Emmanuel Macron at SOHO 3Q in Beijing, China, 9 January 2018 (Photo: Reuters/Jason Lee).

In Brief

Although China undertook market reforms nearly 40 years ago, it has retained a state-dominated economy. Its own descriptor has for nearly three decades been a ‘socialist market economy’. While private enterprises have emerged, ‘private’ is a formal category of ownership that can be summed up as ‘less state’. In a political sense, there is almost no private sector.


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Former Chinese president Jiang Zemin brought capital-owners into the party by permitting and encouraging business associations of many kinds. However, the patron–client hierarchy was preserved by ‘colonising’ these enclaves with state agencies. The private sector was tainted with the so-called ‘original sin’ of capitalism: self-interest.

Even with the emergence of success stories such as Alibaba and Tencent, the taint of the capitalist ‘original sin’ hovered over entrepreneurs. 2017 was a particularly bad year with major campaigns to control capital outflows into speculative overseas investments. But the government cannot restrict the stigma to the private sector, as private sector corruption obviously owes a huge amount to its enablers in officialdom. The situation is far from resolved: ‘private’ companies like Tencent and Alibaba are seen in ‘non-state’ circles as continuing to operate within a protective ring of official favour that is none-too-delicately referred to as an ‘oligopoly’.

Following the 18th Party Congress and ongoing anti-corruption campaign, some leading cadres have given private entrepreneurs the ‘cold shoulder’. Leading cadres who disregard private enterprise development and entrepreneurs express not incorruptibility but lax governance — a kind of dereliction of duty. In the long run, this will only harden the hearts of private entrepreneurs and is not conducive to economic or social development.

Chinese President Xi Jinping’s anti-corruption campaign was not an omnipotent instrument of reform — it left many grey areas untouched and aroused passive resistance at the grassroots level. But it has had the effect of showing that rent seeking is as much a sin as the self-interest of private entrepreneurs.

Xi must create a regulatory environment that applies the same standards to state and private economic actors while preserving the patron–client hierarchy intrinsic to the Party’s dominance.

‘Rules-based governance’ was the answer. It first appeared in coded form as ‘ruling the country by law’ and was gradually provided with a series of new institutions. Supreme among these innovations is the Supervision Commission, which boiled down in staffing terms to a new, non-Party face of the Party’s Central Commission for Discipline Inspection. These plans unusually refer to ‘loyalty’ rather than ‘financial probity’ as an index of good citizenship. Avoiding abuse of power in the new agency seems problematic at the outset given that ‘disloyalty’ looks harder to prove than ‘bribery’.

Although not new, the buzz-phrase ‘qinqing’ (warm, pure) is being applied in new ways by new agencies, including the United Front Department. This core Party body was founded at the dawn of the Mao era to ensure that the fledgling semi-underground Party drew support away from the Kuomintang and Japan. Its new domestic function is to fine-tune the patron–client relationship referred to above. This was evidenced by an official China Business Daily report that cited a United Front official to explain why the non-state corporate world fervently welcome ‘warm and pure’ non-government business relations.

Guidelines encouraging an ‘entre­pren­eurial spirit’ and environment were issued in September 2017. These documents pledged to protect entrepreneurs’ legal rights and interests; to ensure fair competition by fighting monopolies and regional protectionism; to improve protection of intellectual property rights and to create more tolerance of entrepreneurial failure.

A nationwide negative-list management program aims to ensure fair access to industries and businesses that are not ruled off limits — but it also calls for strengthening party leadership over businesses and asks entrepreneurs to operate according to the virtues of patriotism and frugality.

As well as corruption, the Xi administration faces a crisis of slowing growth. Among the favoured remedies was ‘going global’: a strategy that involves encouraging Chinese firms to seek better returns offshore than are available domestically. Outbound investment in 2002–12 was fitful. The troubled state of many global players was read in Beijing as a window of opportunity but led to some serious losses.

In the mid-2010s, a ‘going global 2.0’ strategy saw Chinese firms spurred on to a new wave of investment that prioritised value-added manufacturing and service industry acquisitions over greenfield resource plays. But by early 2017, regulators were calling for a halt to ‘irrational’ exuberance displayed in ventures in Hollywood, football teams, vineyards and odd real estate bids.

China’s private sector, rather than being fully empowered, responsive and broadly ethical, depends on state-sponsored patron–client relations. While not necessarily corrupt, client status implies subservience — taking orders with little or no question. The big challenge for Beijing is that the clients are becoming less subservient.

Despite the higher standards prescribed for ‘going global’, Chinese firms investing overseas remain susceptible to uneducated gambles, opportunism, fashion and empire building. As was the case with South Korea’s conglomerates, there is a tendency to diversify for its own sake rather than the discipline of a core business.

The government says its measures will change this. But it is too much to expect the majority of firms to acquire all the hallmarks of the private sector free of habitual patron–client dependencies.

Beijing is doubling down, damaging share prices and sending a mixed political message that encourages capital to be used abroad rather than at home. China recommends climbing value chains and acquiring assets at good prices while forbidding immature, irresponsible speculation and self-interested investment.

New-era government business relations intend to let businesses take risks while hoping to save them from dissipating into frivolous, non-core ventures. The issue will be how control is exercised — agencies and methods deemed appropriate domestically may prove unpalatable internationally.

David Kelly is Research Director at China Policy.

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