The Party: The Secret World of China's Communist Rulers

by Richard Mcgregor

  Few outside of the industry had heard of the company until it went offshore to Sudan in the late nineties, in search of new sources of oil to replace the ailing Daqing fields. The investment put the company, and Chinese overseas investments in general, on the map in a way Beijing had not anticipated. When human rights activists campaigned to draw global attention to Sudan’s suppression of a rebellion in the country’s Darfur region, they trained their sights not just on Khartoum. They went after PetroChina, which they said had become Khartoum’s chief enabler, as well. The campaign depicted PetroChina and its parent company which held the Sudan assets as one part of the monolithic hulk of an indivisible China Inc. The Party appointed the top executives of the parent company and its overseas-listed subsidiary. A government agency held its shares. Common sense dictated that the company and the state were fused together as a single entity. The obvious conclusion was that the company was in Sudan solely on the Chinese government’s business.

  The controversy, which reached a peak ahead of the 2008 Beijing Olympics, masked a much more complex reality evolving inside China over the politics of state enterprises. The bids by CNOOC and Chinalco were initially largely uncontroversial at home because they had broad backing across the government. That was not the case with PetroChina. It turned out the company was just as unpopular in parts of the foreign policy establishment in Beijing as it was overseas, although not for the same reasons. Chinese officials and scholars were not much concerned with PetroChina’s investment in a country with an abominable human rights record. They could point to the long western engagement with decidedly undemocratic Saudi Arabia and other oil-rich states. They were critical because they saw a single company taking over Chinese diplomacy on a sensitive issue in the name of finding oil.

  Even worse, PetroChina then managed the oil solely in its own profitable interests, indifferent to the foreign policy implications. A brace of academics I interviewed in 2007 volunteered criticism of how Petrochina, far from benefiting China, had sold much of the oil produced in Sudan to the highest bidders in the international market, especially Japan. ‘I am not worried about whether [the Party] controls or directs these companies. It is what these companies do that worries me,’ said Zhu Feng, at Peking University. ‘These state-owned companies have become very powerful interest groups. They even hijacked China’s foreign policy in Sudan.’

  PetroChina did less than brush off this highly unusual public criticism from highly placed scholars. In typical style, the company did not even bother to reply. With China increasingly dependent on oil imports, PetroChina had a strong hand to play against its critics at home. But when it came to throwing their weight around in the domestic economy, however, China’s big oil companies confronted a more perilous political environment. ‘The secret to success is to demonstrate managerial prowess, while not causing problems for the Party,’ says Erica Downs of the Brookings Institution. In a fight over fuel prices in 2005, the oil companies pushed their interests too far.

  PetroChina, along with Sinopec, China’s largest oil refiner and the country’s biggest company by revenue, had long bristled at tight controls on domestic oil prices. When the government refused to match the precipitous rise in global petrol prices in 2005 at domestic pumps, the two companies played hardball in an effort to change the policy. Sinopec was particularly under pressure. As the country’s largest oil importer, it was losing money on every litre of foreign fuel it sold into its home market. In a high-stakes game of bluff, several large refineries were suddenly mothballed for what the companies called ‘scheduled maintenance’. The companies’ actions, as ruthless as any corporate behaviour in the west, created serious shortages of fuel in southern China, which relied almost entirely on imported oil, and also in the Yangtze delta around Shanghai. The threat of angry truckers and taxi-drivers being forced to queue to get petrol in the summer heat, not to say businesses being forced to close down for lack of fuel, backed the authorities into a corner. Wen Jiabao, the Premier, personally stepped in to negotiate an end to the dispute, approving a lump-sum subsidy to the companies to solve the shortages.

  Much as the scholars had criticized PetroChina for putting profits ahead of the national interest, furious local commentators complained the oil giants wanted the benefits from being state-owned semi-monopolies without any countervailing responsibilities. This time, most of the criticism focused on Sinopec, which supplied most of the fuel in southern China. Behaving badly overseas was one thing. Running China’s industrial centres out of fuel was much worse. As Sinopec’s CEO was to discover later, the company’s tactics made him some powerful enemies.

  When Chen Tonghai, the Sinopec CEO, was detained on corruption charges two years later, in 2007, the press was full of lurid stories about his mistress, a woman who acted as a courtesan for a number of ministerial-level officials and brought them all down. Senior industry executives I spoke to, however, traced his fall to the oil crisis two years beforehand. Chen, a princeling, had long been corrupt. His personal expenses amounted to about $5,880 a day, according to his colleagues, not much less than his official monthly salary. But when Chen took on senior leaders during the fuel crisis, he handed his enemies an excuse to bring him down. ‘As the head of a state company, you are expected to fight your corner,’ said one industry executive. ‘But you also have to know when to quit.’

  That Chen’s downfall was about more than just corruption was evident from his party-appointed replacement. The corruption inquiry into Chen left Sinopec, a key state company, in a mess. Chen’s replacement, Su Shulin, had just the kinds of skills the Party required to clean it up. His role was not unlike that of Harvey Keitel in Pulp Fiction, the clean-up man who scrubs a car of blood to remove all evidence of a crime. Su had worked in the oil industry but his main experience was in party bodies. In a similar way, Su was sent into Sinopec as a kind of fireman, to re-install the party discipline which the authorities felt Sinopec had lost under his predecessor. Su’s priorities were evident when he began visiting Sinopec’s numerous joint-venture partners. He seemed to know little about the businesses themselves. To the irritation of the company’s partners, Su seemed most agitated about something else altogether. Why, he kept asking, had their joint ventures not established Communist Party cells inside the companies?

  In little over a decade, the Party had pulled off what few had predicted was possible, the construction of a profitable state sector, with independent commercial aspirations, but still ultimately under its control. For Chen Yuan, his freelance policy-making of the early nineties far behind him, the new century had been something of a triumph as well, politically and personally.

  Chen had been removed by Zhu Rongji from his position as a deputy-governor at the central bank in 1998, severely denting his ego and setting back his career. But Chen bounced back in his new job, as party secretary and president of the China Development Bank, a so-called policy lender established to finance favoured state projects, such as the Three Gorges Dam and local infrastructure works. A thoroughly modern communist, Chen managed to turn it into the biggest job of his career, and the bank into one of the country’s most global institutions. Chen first extended the development bank’s largesse domestically, providing loans to oil and car companies which aspired to be national champions. The bank backed a host of politically popular projects, funding rural infrastructure, environmental schemes, loans for poor students and low-cost housing. Unrestrained by the kinds of restructuring the state banks were undergoing, CDB’s outstanding loans rose from $73 billion in 1998 to $544 billion a decade later.

  By 2006, emboldened by the Politburo’s go-global push, CDB had headed offshore in the slipstream of China Inc. The bank won the mandate to manage a $5 billion fund Beijing had established to invest in Africa, and bought into Barclays Bank in the UK. CDB led the financing of Chinalco’s bid for Rio-Tinto and other offshore deals. The ambitious Chen even pushed to buy a share of Citigroup when the US bank was raising new capital in 2008, but was overruled by seni
or leaders fearful of investing in shaky western institutions. In private, Chen boasted that his bank had grown into the largest development lender in the globe, towering over, he said, the iconic World Bank in Washington. Perhaps mindful of ‘hiding his brightness’, Chen would not repeat such comments for the record on the rare occasions he met foreign journalists.

  Even as he emerged as a sophisticated standard-bearer of Chinese state capitalism on the global stage, Chen retained a canny sense of his party’s proletarian roots. When I was in the foyer of the five-star Peninsula Hotel in 2007 ahead of a meeting of the bank’s international advisory board, I noticed a man in a cloth cap and a plain Mao-era jacket, resembling an old state factory manager, striding through the foyer, surrounded by smartly dressed, bustling secretaries and advisers. The outfit was so at odds with the surroundings that I didn’t realize it was Chen until he disappeared into the lift.

  The proletarian look was not favoured by his daughter, Xiaodan. Unlike her father, she had been allowed by her parents to study overseas, at Duke University in the US. In November 2006, she represented China at the Crillon Ball in Paris. The annual debutante ball traditionally features the offspring of European royalty, multinational industrialists and Hollywood movie stars. That year, the ball was also graced by a representative of the globe’s newest power player, the Chinese Communist Party, in the form of Ms Chen. All the debutantes were decked out in haute couture loaned to them for the evening. Ms Chen wore an Azzedine Alaia pink cotton dress, which, if she had had to pay for it, would have cost as much as her father’s official cash salary for a few months. Her appearance at the ball nonetheless neatly symbolized the trajectory of her family, and of the Communist Party along with it.

  The Chen that I chanced across in the foyer of the Peninsula Hotel may have been unique in dressing like an old-style cadre for a meeting with rich and powerful foreigners. These days, Chinese leaders usually reserve their Mao suits and army attire for party and military occasions respectively. Still, Chen’s style and his family’s trajectory were redolent of how top Chinese officials have learnt to speak out of both sides of their mouth. No matter how rich and powerful they have become, they are masters at calibrating their support for Marx, Mao or the market, depending on who is listening. The dexterity of officials in this respect remains one of the truly dizzying things about China Inc. The same official who one minute will be lecturing you about how the west should abide by the strictures of the market, a spiel usually delivered in defence of China’s competitively priced exports, the next minute will be assuring a Chinese audience of the horrors of unfettered capitalism and his or her deep belief in Marxism. The change of political attire is akin to a Wall Street banker disappearing Clark Kent-like into a phone box, and emerging swiftly a few minutes later dressed as Karl Marx.

  Few were as adept at switching stride as Liu Mingkang, China’s bank regulator. Becoming a banker in 1979, aged thirty-three, after the Cultural Revolution, Liu was quickly promoted through a range of state business and government positions. He worked at the Bank of China, in the Fujian provincial administration and at the central bank, before founding the regulatory body in 2003. In between times, he completed an MBA at City University in London, where he still sends up-and-coming finance officials from China on scholarships for an education in liberal finance and economics. When the state banks were being restructured, Liu relentlessly drilled his subordinates on the importance of global regulatory norms, like capital ratios, risk returns and non-performing loan rates. On lazy Friday afternoons at the regulator, lower-level officials joked that Liu would terrify them by landing unannounced in their departments and putting them through an impromptu grilling on ‘Basel II’, the formula named after the Swiss city which dictates the optimum level of bank reserves.

  Long considered to be one of the country’s most westernized officials, Liu wowed foreign visitors with expositions in flawless English about financial reform. Whether he was spinning you a line or not, Liu cut a deeply impressive figure. On important political occasions, however, Liu, the smooth global banker, dropped out of sight and reappeared, reprogrammed, as a sombre student of Chinese Marxism. At the time of the 2007 party congress, Liu eschewed the nostrums of liberal finance and Basel II and lectured staff about the great invention of ‘Sinified Marxism’. Speaking to leading cadres at the opening of a new term at the bank regulator’s party school in late 2007 ahead of the congress that year, Liu urged his officials to ‘use the latest fruits of Sinified Marxism to guide our practice’.

  Around the same time, Guo Shuqing, of the China Construction Bank, intoned that ‘the only way to put the latest communist principles into practice was to maximize returns for shareholders’. Guo at least had a concrete point to make. The largest shareholder in the bank was a central government agency, which was in turn controlled by the Party. It was certainly in the Party’s interest that the bank make a sustainable profit. Indeed, the economy depended on it. But the notion that shareholders’ returns could be so directly tied to communism was novel, even for China.

  Easy as it is to mock these utterances, they cannot be dismissed as mere ritualistic incantations of faith, like the lapsed Catholic who still goes to Sunday Mass from habit and a desire to maintain valuable social networks. The rhetoric about the Party is backed by the full force of its political institutions that make and break careers. At times as sensitive as that of the party congress, these statements are timely genuflections at the feet of the Party by officials, and indicative of political loyalty and reliability, both essential to a career in public life.

  The financial restructuring of China’s vast and sprawling state sector embodies such contradictions perfectly. The overhaul of these companies was done in plain and often painful view. Entire communities and their families, whose lives had once been entirely dependent on the iron rice bowl the enterprises provided, were upturned. The companies’ executives had been exposed to pressure from global investors in ways never thought possible. And a conservative political class whose entire lives had been built around old-style state ownership had been swept aside.

  The political restructuring of these enterprises, however, and the role of the Party, has not been nearly so clear. With the need to be profitable and compete globally, top executives of state enterprises these days have a relative freedom to run their businesses inconceivable a decade ago. Human nature being what it is, many have exploited that freedom to build personal empires of their own. But throughout the reform of the sector, the Party has retained its influence by maintaining power over all senior appointments. Through personnel, they can in turn direct corporate policy.

  The Party’s power was on display in late 2008 and early 2009, when the deepening global financial crisis threatened to engulf China, as it had the rest of the world. The central bank, the bank regulator and even the banks themselves, all counselled caution in formulating a response to the crisis. All three had battled hard to build a credible commercial banking system over the previous decade. The Politburo, however, staring into the abyss of a sharp slowdown, issued an edict from on high for the money pumps to be opened. Once done, the banks had no choice but to race out of the blocks. In the first six months of 2009, Chinese banks lent nearly 50 per cent more than during the whole of 2008. Just 15 per cent went to household consumers and private businesses, compared to a peak of one-third in 2007. Most went to state companies.

  The behaviour of Chinese banks was instructive compared to their counterparts in the developed world. Many western banks were by that stage controlled directly by their respective national governments. In Washington and London, the US and UK administrations were imploring financial institutions to restart lending to revive their respective economies, but they possessed few concrete tools to force them to do so. In China, by contrast, the banks were both state-owned and state-controlled. When the Party directed the banks to lift lending, the senior executives had a political duty to comply. More than business was at stake. ‘Top executives [a
t the big state banks] are also government officials with vice minister-level positions,’ reported Caijing magazine. ‘So in addition to caring for their banks, they are responsible for supporting the central government’s economic stimulus policy.’

  The Party’s control over personnel was at the heart of its ability to overhaul state companies, without losing leverage over them at the same time. So important does the Party rate its power to hire and fire government officials that it places it on a par with its control over the media and the military. Zhou Tianyong, a relatively liberal political theorist at the Central Party School in Beijing, laid out the Party’s absolute bottom line in a book published in early 2008, Storming the Barricades.. ‘To uphold the leadership of the Party in political reform,’ Zhou wrote, ‘three principles must be followed: that the Party controls the armed forces; the Party controls cadres; and the Party controls the news.’

  The party body with ultimate power over personnel, the Central Organization Department, is without a doubt the largest and most powerful human resources body in the world. Barely heard of outside China and little known inside the country itself, beyond official circles, its reach extends into every department of state. Much like the Party itself, the department is a fearsome, secretive hulk, struggling to adapt to a vastly more complex world which has grown up around it in the last three decades.

  3

  The Keeper of the Files

  The Party and Personnel

  ‘The cadres all know where we are. It’s a bit like knowing where your parents live.’

  (Wang Minggao, the Organization Department of Hunan province)