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

by Richard Mcgregor

  The Party’s distrust of the private sector was never about money nor the flagrant contradiction between individual wealth and the official Marxist and Maoist pantheons. All parties to this on-and-off-again, three-decade-long courtship agreed on the need to turn a profit. The real issue for the Party was the threat that the foreign and local private sector might become a political rival. The Party’s natural instinct, to colonize the private sector, has often been overwhelmed by the sheer wealth of the new entrepreneurial class. In response, party interests have promoted private companies as an engine of employment and reined them in when they have grown too big; invited entrepreneurs to join the Party, while intimidating and jailing business leaders who fall foul of it; and supported more secure property rights, while muddying the rules surrounding ownership of companies, assets and land.

  The larger point, however, of an unprecedented partnership between a communist party and capitalist business, holds. It remains an uneasy, unstable and unholy alliance, but an alliance nonetheless that, in the short term, has turned more than a century of conventional wisdom on its head. It may have taken decades, but a broad consensus has now developed at the top of the Party, that far from harming socialism, entrepreneurs, properly managed and leashed to the state, are the key to saving it. Luckily for China, Deng learnt early on a lesson that nearly every other failed socialist state neglected to heed, that only a boisterous private economy could keep communist rule afloat.

  The first time I met Zhang Ruimin, who heads Haier, China’s largest whitegoods manufacturer and one of the country’s best-known brands, I asked him what I thought was an obvious question. Zhang Ruimin was both chief executive of Haier and also secretary of the company’s Communist Party committee. How did he balance any possible conflict between the Party and private profit? Zhang dismissed the question out of hand. ‘I appointed myself party secretary of Haier, so I can’t have any conflicts with myself, can I?’ he replied.

  In an interview with Xinhua, the official news agency, at about the same time, on the eve of the eightieth anniversary of the Party’s founding in 1921, Zhang had struck a more respectful tone. The agency observed that some reports attributed him with ‘superpowers’, since he had turned Haier from a near-bankrupt shell into a global company in only seventeen years. Zhang responded: ‘How do I have such power? I’m only an ordinary party member.’ Under Zhang’s guidance, the report added, middle and senior managers at Haier were voluntarily studying orthodox communist dogma to help with their work in the whitegoods sector. In 2002, Zhang became the first business leader to be admitted into the Central Committee.

  Zhang was lionized in the Chinese press as the country’s most famous entrepreneur. Journalists, grasping for an analogy, often referred to him as ‘China’s Jack Welch’, a comparison that inevitably found its way into the headlines of the many stories about him in the foreign and local press. Haier was undoubtedly a success story and Zhang was entitled to take credit for its turn-around. In 1984, when he took over as chief executive, he legendarily wielded a hammer to smash fridges made by the near-bankrupt company to make a point to the workforce about product quality, a tale that populates all the business school texts about his entrepreneurial zest. Haier’s branded products can now be bought around the world. The comparison with General Electric and ‘Neutron Jack’ was fundamentally flawed, though, for a very simple reason. Haier is not a private company. And the moment its senior managers tried to exercise their power as shareholders to make it so, the local government issued a peremptory edict to stop them.

  The status of Haier was symbolic of the central problem surrounding business in China. There is little dispute that the private sector in China has grown from an almost negligible part of the economy in the late seventies–so small that official statistics were not kept on it–to the prime engine of new job creation, if not economic output, thirty years later. But nobody knows, or at least can agree on, the true size of the private sector, because of the difficulty of defining who owns what in the first place.

  In September 2005, CLSA, the emerging markets brokerage based in Hong Kong, produced a thick report about how entrepreneurs had taken over as the motor of economic growth in China. ‘The private sector now contributes more than 70 per cent of GDP and employs 75 per cent of the workforce, creating the foundations of the vibrant middle class, so a rollback of market reforms is not an option for the world’s largest Communist Party,’ the report said. ‘Today’s most important economic question is not, “How will the government respond to an economic slowdown?” but rather, “How will China’s entrepreneurs respond?”’

  A week later, a rival and equally respected China research unit at UBS, the Swiss bank, put out a rejoinder, saying the private sector ‘accounts for no more than 30 per cent of the economy, whichever indicator you use’. The report said: ‘In China, the following big sectors are either 100 per cent or majority controlled by the state: oil, petrochemicals, mining, banks, insurance, telcos, steel, aluminium, electricity, aviation, airports, railways, ports, highways, autos, health care, education and the civil service.’

  Yasheng Huang, at MIT, who has spent years poring through official Chinese data and documents on this issue, said when asked for his estimate of the size of the private sector: ‘The honest answer is that I do not know and I think many people do not know. This lack of knowledge itself is telling, and due to the fact that the private sector is still considered somewhat illegitimate.’ Although he did not arrive at an exact figure, Huang did reach one conclusion–the pure private sector in China at the end of the twentieth century, companies with no government ties or involvement at all, was ‘minuscule’, equal to about 20 per cent of all industrial output.

  The confusion about what is public and what is private is a deliberate result of the system’s lingering wariness about clarifying ownership. Ask any genuine entrepreneur whether their company is private, or ‘siying’, literally, ‘privately run’, it is striking how many still resist the description in favour of the more politically correct tag ‘minying’, which means ‘run by the people’. In a people’s republic founded on a commitment to abolish private wealth, an enterprise which is ‘run by the people’, even if it is owned by an individual, is more favoured than a company that parades itself as purely private. Most economists now skirt the issue, by dividing companies into two categories, state and non-state, and leave it at that.

  When the Party first gave the green light to the market economy, it was in the countryside that business was initially embraced with the greatest fervour. Under Deng’s new deal, farmers could sell on to the market whatever they produced above the quota demanded by the state. The impact was revolutionary. About five years after the reforms were launched, nearly every farming household in the country had dumped the old commune system and turned themselves into mini-businesses. The key to the revolution of the early eighties in rural China, where most of the population lived and worked, was that it had support at the very top. The party leadership, under Hu Yaobang and Zhao Ziyang, had deep experience in the countryside and also a decidedly liberal policy bent. Rural finance was plentiful. Property rights increased substantially. And private companies, which traded under the euphemism of ‘township and village enterprises’, thrived. Capitalism in China was both vibrant and virtuous in this period, says MIT’s Huang, and offered tens of millions of people a feasible path ‘beyond abject poverty’. The eighties model, however, lasted no longer than the decade itself. The potent combination of political and economic liberalism of this period ended in bloodshed in Beijing in June 1989.

  It didn’t take long after 4 June for the resurgent conservatives to train their fire on the private sector. Chen Yun, the one-time economic planning minister and the father of Chen Yuan, declared that deviations from the planned economy model had caused ‘mortal wounds’ to the system. Jiang Zemin, barely months into his job as party secretary and still deeply insecure in his position, labelled entrepreneurs as ‘self-employed traders and
peddlers [who] cheat, embezzle, bribe and evade taxation’. The chill winds were soon blowing in distant Anhui. By September that year, Nian, ‘Mr Idiot Seeds’, had been arrested too.

  Nian had always flaunted his wealth, building himself a big house and parading a string of girlfriends around the district. The 1 million-plus renminbi in profits that he had stashed at his home in the early eighties, an immense fortune in those days, became so mouldy in the summer heat that he made a great show of drying the notes outside. He laid them in the sun near his factory, much like farmers in China spread their crops out on rural roads to drain them of moisture after the harvest, a display of riches that brought him even greater notoriety. But even in the dark days of late 1989, the Wuhu party struggled to conjure up a crime they could pin on Nian. They first tried to charge him with ‘embezzlement and misuse of state funds’, but this was thrown out on appeal to the provincial-level courts. Once Nian established that he owned the company, he couldn’t be charged with stealing his own funds. All Anhui had left was the charge of ‘hooliganism’, to wit, that he had conducted affairs with ten different women between 1984 and 1989. Nian was defiant throughout. Confronted with the charge of womanizing, he replied: ‘You got your numbers wrong. There were actually twelve.’ Nian was sentenced to three years in prison, but got out after just two, thanks again, he says, to the personal intervention of Deng.

  For all his flamboyance, Nian had tried to do the right thing by the system. He had registered the company as a collective, because he could not get it on the books at the local commerce bureau as a purely private enterprise. He had employed some officials as well, giving the local government an interest in his venture. It won him few favours, however, when the chips were down. The officials apparently resented being made to work for their pay at all. ‘I fined any cadres who read newspapers in work hours and anyone who was late was docked 1 rmb for each minute missed,’ he said. In his absence in jail, the business collapsed and the company was shut down. Nian relaunched ‘Idiot Seeds’ when he was freed and he was still trading enthusiastically when I met him in 2008, but he never managed to re-create what he had established in the eighties.

  The realization that the Chinese economy could not grow and prosper without private enterprise took nearly four years to sink in after the post-1989 backlash. Deng’s southern tour of 1992 was one catalyst, demolishing the most extreme ideological barriers in Beijing. The partial, strategic retreat of the state in China in the nineties gave insiders pole position in the mass sell-off of companies in sectors not considered strategic by the government, such as textiles, food and consumer electronics. China’s entry into the World Trade Organization in 2001 allowed efficient entrepreneurs to find new export markets. Emulating Margaret Thatcher in Britain, when she privatized council homes by offering to sell them cheaply to their occupants, city after city in the nineties in China created private property markets by selling off state housing.

  But just as the 1989 crackdown transformed the Party’s stewardship of the state economy, its management of the private economy was overhauled as well. The policies which promoted the rural entrepreneurship of the eighties were supplanted by a new regime which favoured the cities, the focus of political unrest and economic upheaval. Farmers were more heavily taxed. Credit in the countryside was tightened. The big state industries which had survived the massive restructuring of the nineties retreated into the well-financed fortresses the Party had built for them. Whole sectors, mainly heavy industry, telecommunications and transport, were reserved for the state and shielded from full-blown competition.

  Zhang Ruimin’s Haier was typical of the fault-lines left running through Chinese business by the political earthquakes of the late eighties. Haier, defined as a collective enterprise, in which managers and workers owned the company’s shares under the supervision of the local government, had always had strong support from the Qingdao government. The city gave the company land and facilitated credit, but otherwise largely left the company alone. To all intents and purposes, Haier had been privately, and successfully, managed with little interference from the state for many years. Many Haier managers had grown to think they were masters of their own universe and in 2004 they hit upon a plan to turn this conceit into reality. Haier proposed to take over a listed company in Hong Kong and inject into it some of the enterprise’s most valuable assets. In one fell swoop, Haier’s top managers, including Zhang, would become the largest set of individual shareholders, giving them control over the company’s operations, brands and executive remuneration, and also an international currency–shares traded in Hong Kong–to expand offshore.

  Just as Nian’s political timing had often been awry during his career, so too was Haier’s manoeuvre to give its executives a fatter stake in the company. Around the same time, the pendulum of public debate was swinging against the privatization of state assets. An odd alliance of old-style leftists and populist commentators launched a highly charged public campaign on the issue, comparing management buy-outs of state firms to the scandalous privatizations of Yeltsin’s Russia. The government, stunned by the campaign’s popularity, was forced to respond. However grey the definitions may have once been surrounding the ownership of Haier, they were soon clarified. With no prior warning, the Qingdao agency in charge of government enterprises announced in April 2004 that Haier was owned by the state. The Hong Kong deal was killed. Haier and its managers, for the moment, were not going anywhere. The Haier case was a signal reminder that a company could be privately run one day and find itself claimed as a state asset the next.

  Over the next three years, Haier’s executives fought back, using their considerable political and commercial muscle to reverse the decision. Haier’s senior managers refused point-blank to attend meetings for state enterprises convened by the Qingdao agency supervising the city’s companies. ‘If we were invited to share our successful experience, we would have first stressed that we are a collective enterprise,’ Yang Mianmian, the company president, said. When the city asked Haier to take over a failing enterprise in Qingdao, Haier resisted the plan until it died. The Qingdao authorities eventually got the message. In April 2007, with a click of the mouse, the city quietly removed Haier from the list posted on the government website of state-owned enterprises in Qingdao. Haier returned to being a privately run collective. As if to celebrate the turn-around in their fortunes, Haier soon reintroduced a share incentive scheme for its senior managers. Zhang Ruimin was left out, though, because it was not appropriate to give share options to a member of the Central Committee.

  After more than three decades of market reforms, Chinese companies still come in all manner of guises and trade under an array of different business registrations to accommodate prevailing political pressures. They can be fully state-owned, collectively owned or co-operatives; or limited liability companies, with diversified share registers split between both public and private owners. Some private companies are registered as state entities or collectives, giving them what the Chinese call a ‘red hat’ and an extra degree of political protection from harassment by officials. The corporate cross-dressing complicates life for an entrepreneur, but it is common sense as well. Chinese banks, which are all owned by the state, still prefer to lend to the state, because the government will usually stand behind the debt in one form or another. By contrast, the banks have little confidence in lending to private companies, especially smaller ones. The banks may not understand or trust entrepreneurial companies or have the in-house skills to calibrate the risks in lending on cash flow rather than the security of assets. But at the end of the day, the reason is very simple. Private companies are not part of the club.

  The smartest companies have become adept at having it both ways. The largest, and founding, shareholder of Lenovo, the computer firm which bought IBM’s PC business, is a state science think-tank, but the company is registered and listed overseas and largely privately managed. For a while, it was headquartered in the US. Yang Yuanqing, the head of the c
ompany, still squirms when his Communist Party membership is raised. ‘Let’s not talk politics, OK?’ he replied when asked after the IBM deal in late 2004 how he reconciled party membership with his business commitments. But Yang has also tried to keep his distance from politics. His advisers say he quietly rebuffed an invitation to join the China People’s Political Consultative Conference, an honorary body headed by a Politburo member designed to give the impression that the Party is consulting broadly through the community.

  Huawei, the telecommunications equipment manufacturer and perhaps China’s most globally successful company, is careful to say it is a collective rather than a private company, a definitional distinction that has been essential to the company’s receipt of state support at crucial points in its development. In 1996, Zhu Rongji, then vice-premier, visited Huawei with the heads of four large state banks in tow. On hearing the company needed funds to compete with foreign firms in the domestic telco equipment market, Zhu ordered the banks on the spot to support the company. ‘Buyer’s credit [for local customers] should be provided!’ Zhu declared. Huawei’s status as a genuine collective is doubtful. The company has never published a full breakdown of its ownership structure. Most shares are believed to be owned by Ren Zhengfei, a former People’s Liberation Army logistics officer who founded the company in 1988, and his managers. The same murky structure characterizes Ping’an, the Shenzhen-based insurance company. Ping’an, one of China’s largest financial institutions, is classified as a private company, but the true ownership of large chunks of its shares remains unclear.