Doing Business in Xi’s China

Since Xi Jinping came to power, a lot has changed in China and business is no exception. ‘Chinese characteristics’ have always influenced business practices, but lately, the meaning of this phrase has changed. The environment is becoming more dangerous for companies that reach a certain level of clout, some sectors are favored, while others get the short end of the stick. Undoubtedly, politics is back with full force in the Chinese economy.

This article is part of a series of articles authored by young, aspiring China scholars under the Future CHOICE initiative.

Large Firms Are in Trouble

Before Xi got the top job at Zhongnanhai, the business world in China was swamped with corruption, nepotism and dirty deals ruled by personal connections. Deng Xiaoping’s reform and opening up was in many cases lacking a formal framework and businesses grew through like wildflowers. The following Jiang Zemin and the Hu-Wen periods were plagued with corruption, making it very challenging to succeed in China without political connections. Late-night meetings and expensive dinners, the officials were pampered by businessmen. Corruption became an intrinsic part of this system and by 2012, it started to be perceived as a threat to the party.

This lawless era ended with Xi Jinping’s rise. Beginning in 2012, the anti-corruption campaign counts as one of his most significant policies. There have been similar campaigns targeting graft in China before, but arguably none of them was as profound, systematic, large-scale, and long-lasting.

The campaign seemed to bring positive change to China and signaled institutional reform, improvement of governance and a fight against corruption. However, many saw it as an indicator of rising neo-totalitarianism as it has been suspected Xi has used the campaign for political purges to centralize power. Although the anti-corruption efforts have mainly targeted party members and public servants, they transformed the nature of doing business in China, cutting ties between businesses and corrupt officials. The large firm tech crackdown came later, but in 2015, SOE leaders were already growing anxious witnessing the prosecution of Song Lin from China Resources Group, Jiang Jiemin from PetroChina, Su Shulin of Sinopec, and others.

The successful anti-corruption campaign in the state sector may have encouraged Mr. Xi to continue further. Starting with targeting risky overseas investors who diverted capital from China, and continuing to big tech, the crackdown extended to large firms as well. Perhaps the most well-known case is that of Jack Ma and his fintech company Ant Group, a subsidiary of Alibaba. After Jack Ma’s negative remarks directed at the country’s regulators, the government decided to suspend the Ant IPO (Initial Public Offering) in Hong Kong and by doing so largely damaged the market expectations for the company. As expected, the investors panicked, fearing the move against Alibaba signaled a broader policy turn. Indeed, more cases followed, and Beijing’s tech crackdown ultimately eliminated around $2 trillion from global markets.

A new phenomenon damaging the business environment that has intensified in 2023 is related to the disappearing company executives. Mostly they are property developers, like the chairman of Evergrande Hui Ka Yan who was detained by the police in September. A missing high-level company executive, typically secretly detained by the authorities, can trigger confusion and a subsequent collapse in the share price of the company. This is what happened after Bao Fan, a billionaire founder of the investment bank Renaissance Holdings, disappeared at the beginning of the year. His vanishing spooked the shareholders, leading to the share price quickly dropping by 30 percent. In general, a large part of the firms that lost an important representative this year were heavily indebted.

The party’s increased meddling in the economy causes significant concerns for the investors, whose cost of doing business in China rises as the environment grows less predictable and riskier. The consensus seems to be that increased party control is not good for the Chinese economy, which has been doing miserably due to the property crisis and other problems. It is not only the foreign investors that are wary, but also the Chinese have been trying to divert their money elsewhere. With all things combined, a larger capital flight might follow.

The claim that large firms are in trouble in China is also supported by firms attempting to leave or disconnect from the country. TikTok’s parent company, ByteDance, is trying to emphasize the firm’s international ownership and offices, in an effort to distance itself from its connection to China. This is part of a larger trend, as Chinese-origin companies that have achieved global success are increasingly severing ties with their home market and spinning off their international operations. Another example of a rebranding strategy is that of Shein, which moved its headquarters to Singapore and deregistered from its parent company in Nanjing to obscure its original identity. How come the government does not object to this? Possibly, it has shifted its regulatory focus to different sectors, like hard tech, so it lets the less sensitive sectors loose.

“Comprehensive Party Building”

Another trend that emerged during Xi’s rule is the emphasis on the adoption of Party cells or Party committees in enterprises and empowering them to become an active part of the management structure. This can be traced to the amendment to the CCP Constitution from 2012. Such committees are not only present in the SOEs, but also in private domestic enterprises and foreign firms. According to the Constitution, all business, social, and army units with three or more CCP members have to establish a Party cell.

What does a Party cell do? The activities are described vaguely, ranging from carrying out CCP principles and policies, implementing decisions from higher levels, providing guidance and overseeing the observance of the laws and regulations of the state, leading the labor union, and stimulating the healthy development of the enterprise. The operation of such intrusive Party organs raises questions about whether companies in China can really be private, and where this trend will lead in the future.

However, apparently, companies are motivated to incorporate a Party cell for all the wrong reasons and not their loyalty to the Party. Even though 94 percent of private entrepreneurs say it is useful to have government connections, only 4 percent are interested in the Party’s development. This perspective is deeply pragmatic – a company can benefit from Party connections and the image of a Party supporter when dealing with local governments.

The CCP’s efforts to boost its control over the key actors on the market have taken numerous forms. A notable one is the use of “special management shares”, often referred to as “golden shares”, that Beijing has employed mostly in the tech sector since 2013.  Under this arrangement, the Party secures a seat on the company’s board and the right of veto, while owning as little as 1 percent of the shares. The CCP is known to own a golden share in ByteDance, Weibo and Alibaba and other companies are expected to follow suit. The instrument has also caused suspicion and fear of CCP meddling in international firms abroad. For instance, TikTok was confronted about the issue during a hearing in the US Congress earlier this year.

Starting a Business is Easier

With all the doomsday news about the Party cracking down on promising and successful businesses, how is it that China is ranking so well in the Doing Business Index? Since 2012, China has risen from the 91st place to ranking 31st in 2021, with the greatest leap happening between 2017 and 2019 when special government working groups were created to work on each Doing Business indicator. The improvement of the business environment has also been a consistent feature of the state council agenda, proving the government’s commitment to pursuing this goal.

Doing Business Index measures regulations that directly affect businesses in all stages, such as obtaining construction permits and electricity, paying taxes, and resolving insolvency. However, the index does not take into account the development of the financial market, environment, or intellectual property, where China’s rank would differ significantly. Recent reforms that have made it easier to do business in China include simplification of paying taxes and getting construction permits. According to the Chinese government data, the number of enterprises has risen by more than one hundred thousand since 2012, so the reforms do seem to have a positive impact.

The improvements to the market environment have been felt in some areas more than others, which holds true for the success of Chinese startups. In recent years there has been a sharp increase in the number of Chinese unicorns – startups valued at more than $1billion USD – making China the second-largest unicorn base after the US.

The state has a finger in this pie too. Picking winners once again, Beijing has strong sectoral preferences rooted in its long-term industrial policy. Sectors encouraged by the government include green energy, biotech, smart manufacturing, software and artificial intelligence, and semiconductors. The number of only semiconductor unicorns has increased from 0 in 2017 to 30 in 2022. Despite some of the sectors blooming, others are experiencing turmoil. For instance, education technology firms disappeared completely from the Chinese unicorns list, largely due to crackdowns and related bankruptcies.

A Visionary Reformer or a Control-Obsessed Dictator?

Simultaneously changing for the better and worse, the Chinese business environment seems to be on a dual-track trajectory. One interpretation of what is happening is that the regulatory framework in China, which has been patchy for a long time, is being built up, with necessary adjustments, some of which are painful for certain sectors of the economy.  The second possible explanation is that the economy is becoming more politicized in sectors that are either important or potentially threatening to the CCP rule. As the sectors crucial for Beijing’s industrial policy become strictly controlled, the less important ones gain more freedom.

Perhaps this period will make Xi Jinping famous for his economic reform in the same way that Deng Xiaoping is applauded for opening up and reforming the Chinese economy in the 1980s. So far that does not seem probable. Nevertheless, with the slowing growth of the Chinese economy and foreign firms’ decoupling from the country, this period might be just as transformative for Asian power as the reforms in the 1980s, one way or the other.