The Center for Strategic & International Studies (CSIS) recently presented its latest Big Data China publication, "How Private Are Chinese Companies?"
On Feb. 7, Scott Kennedy, the CSIS trustee chair in Chinese Business and Economics and the Stanford Center on China’s Economy and Institutions (SCCEI), presented the latest Big Data China publication. The publication reviews the latest data-driven research and reviews the ability of Chinese companies to maintain their autonomy in the face of influence from the Chinese state.
The event had an introduction by professor Scott Rozelle of Stanford University who turned it over to Kennedy.
Kennedy says the landscape of Chinese business has been steadily changing throughout the years. He points out that it is getting more difficult to distinguish between Chinese private companies and state-run enterprises and that there are some who feel it would be safer to treat all Chinese companies the same – as a potential threat.
Kennedy brought on professors Curtis Milhaupt of Stanford Law School and Lauren Yu-Hsin Lin of the City University of Hong Kong School of Law, who presented research on the topic. Following the presentation, Barry Naughton of the University of California San Diego, Martin Chorzempa of the Peterson Institute for International Economics, and Trustee Chair Senior Fellow Ilaria Mazzocco held a panel discussion on the implications for U.S.-China relations and U.S. policy.
According to Milhaupt and Lin, key research suggests that the capacity to being a truly private company in China is shrinking under policies by the current administration. Despite this, there is still a broad range of willingness among Chinese firms to accede to influence from the state and the state is also limited in it's ability to exert influence over publicly listed companies.
Milhaput said that when it comes to Chinese firms, there are two systems of corporate governance in play. The first is the more traditional system with shareholders, a board of directors and management. The second is a "shadow governance system" provided by the Communist Party that is meant to shadow companies in the private sector. Chinese corporate executives are often dually appointed to manage the companies, while also serving as party secretaries of the committee internal to the firm.
Under President Xi Jinping's administration, there have been efforts to strengthen the CCP's role in corporate governance. These efforts include implementing a party-building policy, a corporate social credit system and special management shares.
In 2015, the Central Committee of the Communist Party implemented the party-building policy to formalize and elevate the role of party committees in Chinese corporate governance. This included requiring corporations to adopt a set of model charter provisions, which included symbolic provisions such as following the constitution of the CCP, decision-making provisions including consulting with party committees as part of the the company's decision-making process, and personnel-related provisions including giving the CCP power to nominate directors and managers.
Milhaupt said that from 2015-2018, roughly 90% of state-owned enterprises adopted some of the provisions, while only 6% of privately owned enterprises adopted some of those provisions, indicating there has been some pushback against the more intrusive provisions. Among SOEs and POEs, the less-intrusive symbolic provisions were much more likely to be adopted than the decision-making provisions and the personnel-related provisions.
According to Lin, the corporate social credit system is a data-driven system that was established by the CCP in 2014 to rate the "trustworthiness" of every market participant in China. Social credit profiles are comprised of a public credit information portion and a yet-to-be-implemented market credit information portion.
The public credit information portion rates the interactions between corporations and Chinese government agencies and is affected if the firm has had court judgements or administrative penalties filed against them or if the company has been blacklisted by government agencies. A corporate social credit score can be up to 1,000 points and is divided into five main categories for scoring including basic data (80 points), finance and tax (195 points), governance (90 points), compliance (450 points) and social responsibility (185 points).
Companies that have a low social credit score could face difficulty in accessing loans and receiving government approvals or be subject to increased inspections. Lin said that with the implementation of the data-driven corporate social credit system, the CCP might be moving to transition from "State Capitalism" to a technically assisted variant of "Surveillance State Capitalism."
Special management shares are state investment vehicles where the state takes stakes (usually 1%) in media, internet, platform businesses to obtain special management rights. By obtaining these rights, the party can hold one board seat and appoint a chief editor in charge of content review, expanding their political control and censorship in private companies. Affected companies include Alibaba, Tencent and Weibo. According to Lin, some companies find the arrangement beneficial because they believe they may have better chance of obtaining licenses and other government benefits if they have a political connection to the party.
Lin summed up the presentation by saying that the influence of the CCP is expanding in corporate governance as a matter of policy, in the structure of managerial incentives and market and corporate governance constraints, and that this will have potentially major implications for China's domestic economy and international economic relations.
Big Data China is a collaboration between the CSIS Trustee Chair in Chinese Business and Economics and the SCCEI dedicated to bridging the gap between cutting-edge quantitative academic research and the Washington policy community.