- The relationship between China’s Communist Party and private business can be characterized as an “asymmetric alliance.” The Party grants legitimacy and operational autonomy to private firms, while the latter delivers outcomes desirable to the Party. This alliance has remained preserved under Xi Jinping.
- Political and regulatory restrictions faced by Chinese private firms have been tightened, however, compared with those in the U.S. and Europe, regulations faced by some tech firms in China have arguably been less onerous.
- Of greater concern and relevance to China’s ability to innovate is the constant deterioration of the competitive environment faced by the private sector, with investment by private firms being squeezed out by state owned enterprises.
The drama of Ant Group’s record-breaking $37 billion IPO being halted after an open attack of China’s financial regulators by Jack Ma, founder of Ant Group and Alibaba and one of the country’s most celebrated private entrepreneurs, instantly triggered widespread concerns about the status of private business in the world’s second-largest economy. The suspended IPO, followed just a week later by the release of the newly drafted antitrust rules targeting the tech sector broadly, was widely interpreted as the latest move by the ruling Chinese Communist Party (CCP) to assert greater control over the private sector. Under the leadership of President Xi Jinping, the Party has significantly tightened the regulatory environment, committed a renewed effort on party-building within private firms, and demanded greater political loyalty from private entrepreneurs.
Despite the broadly shared lament for these illiberal changes, there has been little consensus on their significance and implications. Has the private sector, as famously commented by a Chinese writer in 2018, completed its “historic task” and is due to start “fading away”? Has the Party’s strategy for governing the private sector shifted to imposing comprehensive control? How do the changing political and business environments affect the efficiency and innovation capacity of the private sector?
We believe the answers to these questions rely on a more nuanced understanding of state-business relations in Xi’s China—one that goes beyond the simple characterization that the Party is the center of everything. In this article, we argue that the asymmetric alliance formed between the Party and private sector since the reform remains largely unchanged under Xi—meaning that private firms still enjoy substantial autonomy in terms of business operation as long as they do not cross the political and regulatory redlines. However, the boundaries faced by private firms have been tightened dramatically, reflecting the Party’s growing concerns about stability and security as well as the growing tensions between the single-party rule and the vast financial and technological resources controlled by private firms in China’s increasingly complex economy.
Lessons from the History
While it is tempting to view the plight faced by private firms during Xi’s era as unique and unprecedented, history suggests it is not the case. In 2004, Tieben, a Jiangsu-based private steelmaker that had just started to construct a large steelmaking project in the city of Changzhou, was targeted by central government regulators and charged with serious violations of regulations involving investment approval, land use, environment, and bank loans. The owner of Tieben, Dai Guofang, was immediately arrested but was sentenced only in 2009, by when he had stayed in prison for five years. In the middle of a national campaign aiming to curb the overheating economy, the move by the central government sent a strong signal to both the market and local officials that its authority is unchallengeable.
Fast forward to 2009, Wu Ying, a female entrepreneur in Zhejiang province and formerly the sixth-richest woman in China, was convicted of financial fraud and sentenced to death due to her involvement in underground financing. While the death penalty was subsequently overturned by the Supreme Court and reduced to a life sentence in 2014, followed by a further reduction to 25 years in 2018, the harsh treatment of Wu for what many Chinese intellectuals regarded as legitimate financing behaviour once again demonstrated the vulnerability of private firms when facing the power of the state.
The two cases that occurred before Xi’s rise to power remind us that the fates of private firms and entrepreneurs in China have always been at the mercy of the Party. Throughout the reform period, the relationship between the Party and private business can be characterized as an “asymmetric alliance”. The Party grants legitimacy and operational autonomy to private firms, while the latter delivers outcomes desirable to the Party, such as investment, employment, and economic growth. However, the autonomy enjoyed by private firms is only at the operational rather than the political level and is always bounded. Whenever the interests of two partners clash, the Party adjudicates. At the core of the asymmetric alliance is the Party’s ultimate objective of political survival—when private firms contribute to the objective, they can be tolerated or even supported; when they hamper the objective, they need to be disciplined.
The best testament to the asymmetric alliance between the Party and private sector is probably what Deng Xiaoping famously said in the early 1980s as a response to a report he received on the “capitalist” practices of Nian Guangjiu—the founder of Shazi Guazi (“Idiot’s Sunflower Seeds”) and one of the earliest generation of private entrepreneurs in post-Mao China. “Don’t touch him, for now”, said Deng to his subordinates, suggesting a greater tolerance to the private sector but also that the ultimate discretion lay with the Party.
State-Business Relations under Xi
Overall, the economic policies pursued under the Xi Jinping administration strongly favour SOEs at the expense of the private sector. Pledging to make SOEs “better, bigger and stronger”, the government channelled disproportional resources, such as bank loans, to the state sector. The supply-side reform further squeezed the lifeline of many small- and medium-sized private firms, many of which were unfairly treated and forced to close during the campaigns that sought to and reduce excess capacity and de-leverage the economy.
Despite the harsh business environment, the asymmetric alliance between the Party and the private sector is largely preserved. While many have been concerned about the Party’s moves to strengthen institutional linkages with the private sector—through establishing party committees and expanding their role in corporate governance, private firms still retain a great deal of autonomy in terms of business operation and managerial practices.
The Party still depends heavily on private firms to achieve the economic goals that are essential for its rule, including GDP growth, tax revenue, employment, and indigenous technological innovation. This reliance has become more evident during Xi’s second term, especially since the onset of the trade war. During a meeting in 2018, President Xi stroke a rather friendly tone on the private sector and pledged stronger policy support. Meanwhile, the government also conducted several reforms to improve the business environment, including reduction of government approvals, administrative decentralization in some economic areas, and provision of more financial support and legal leniency for private firms. These reforms have generated some positive, albeit limited, effects. China’s ranking in the World Bank’s Ease of Doing Business Index has increased from 96th in 2014 to 31th in 2020. Much of the improvement occurred after 2018.
Another factor that forced the Party to renew its commitment to the alliance with the private sector lies in the key role played by the latter in driving indigenous technological development. The competition with the U.S. on technology required the Party to rely more on private firms, given their advantages in terms of innovation capacity, human resources, and efficiency. In the past few years, the government has spent vast resources on various types of industrial policies to support high-tech firms, many of which are indeed privately owned.
While private firms have largely retained their business autonomy, the political and regulatory boundaries they face have been dramatically tightened, which reflected the Party’s growing concerns about security and stability. The term “security” has appeared 22 times in the Communiqué published by the Party’s 19th Central Committee after its Fifth Plenary Session last month, nearly double its frequency compared with five years ago. In the Chinese political context, “security” essentially refers to the political survival of the Party.
The Party’s security concerns are not ungrounded, because leading private firms today can mobilize much more technological and financial resources than ever before. As a result, tensions between the Party and private firms are on the rise. The leveraged expansion of firms such as Anbang Insurance and Wanda raised alerts to policymakers on financial instability, prompting a crackdown on not only their business activities but also, in the case of Anbang, the company and its owners. The authorities are also extremely vigilant about tech firms, especially those with a larger user base. For example, Neihan Duanzi, a mobile platform developed by ByteDance and with a tight-knit community of over 17 million users, was banned because the contents shared on the platform were found inconsistent with the official ideology. The recent showdown between Jack Ma and the government is simply the latest manifestation of the growing tensions between leading tech firms and the party-state in the country, and it will by no means be the last one.
Implications for Efficiency and Innovation
The increased regulatory and political scrutiny on private firms is undoubtedly an impediment to innovation, especially in financial and tech sectors where tensions between the Party and private firms are high. However, these sectors are regulated everywhere, and the regulations faced by some of the tech firms in China have arguably been less onerous compared with in the U.S. and Europe. Therefore, what matters most is not the presence or absence of regulations but rather their nature and the credibility of the legislative processes behind them. An examination of the government’s newly drafted antitrust rules for internet firms suggests many provisions are rather vague, leaving too much room for government discretion, let alone politically-motivated interventions. It is this uncertain and highly politicized regulatory environment that poses the biggest threat to innovation in financial and tech sectors.
In sectors where politics does not loom as large, such as manufacturing, we have argued that private firms still enjoy substantial autonomy at the business level, at least for now. This autonomy is pivotal for the efficiency and innovation capacity of the private sector as well as the Chinese economy as a whole. Key to the performance of private firms in these sectors is, as has been widely discussed, structural factors related to the business environment, including access to financing, fair market competition, protection for (intellectual) property rights, and an effective legal system. Despite some limited improvement in some of these areas in the wake of the trade war, as reflected in China’s increased ranking in the Ease of Doing Business Index since 2018, most are perennial challenges deeply rooted in the Chinese economy that are extremely difficult to address.
Compared with the Party’s efforts to build institutional linkages with private firms and demand for loyalty, we are more concerned about the constant deterioration of the competitive environment faced by the private sector. With SOEs receiving a lion share of financial resources and becoming bigger and bigger, investment by private firms has been squeezed out. The declining share of private investment due to this unfair competitive environment is probably the largest hurdle to innovation and efficiency in the economy.
As a final note, we acknowledge that the industrial policies adopted by the government, by providing financial and policy support to firms in high-tech sectors, have to some extent alleviated the lack of funding faced by some private and potentially innovative firms. However, as we have argued elsewhere, the government’s industrial policies often create new distortions to the playing field and incentives for firms to game the system. As a result, the effectiveness and efficiency of these policies are deeply compromised.
In conclusion, during Xi’s era, the asymmetric alliance between the Party and the private sector formed since the reform remains in place. In the meantime, the political and regulatory restrictions faced by private firms have been tightened. Firms that cross red lines are relentlessly penalized. However, we believe the largest hurdle to innovation and efficiency lies in the deteriorating competitive environment faced by private firms as well as other deeply-rooted structural deficiencies in China’s business environment. To address these perennial issues requires the Party and its leaders to not only preserve the alliance with the private sector but also return to the political agenda of comprehensive reform that has been abolished for nearly two decades.
This article gives the views of the authors, and not the position of the China Foresight Forum, LSE IDEAS, nor The London School of Economics and Political Science.