Over the recent years, the most attention-drawing topic related to China in Europe seems to have been its inbound investment in the region. Alerted by the growing FDI inflow from China along with its Belt and Road Initiative (BRI), the leaders of Germany and France called for the EU common incoming FDI screening mechanism.
Usually a welcomed trend, growing FDI from China has raised more concern rather than enthusiasm. Many have worried that China’s separate framework for Central and Eastern Europe (CEE), the 16+1 (now 17+1) format, would divide the EU or that the Chinese companies are targeting the strategic industries in the region. The fact that Chinese FDI is a part of Beijing’s official policy, aimed at promoting Chinese companies in the international market or advancing its Belt and Road Initiative led many observers to caution against the possible political leverage investments might give to China in those countries in the future. Some even question whether Chinese companies in Europe would turn out to be modern conquerors or strategic partners.
On the one hand, when it comes to CEE, the concerns are somewhat exaggerated considering relatively small proportion of Chinese investments in the countries in the region, as has been discussed elsewhere. While the level of Chinese FDI in Europe reached 37 billion USD at its peak in 2016 and then halved in 2018, Chinese FDI in the CEE was much lower. The combined stock of Chinese FDI in CEE countries in 2017 was around one billion USD after a sharp rise from 9.6 million USD in 2004.
On the other hand, active role of Chinese SOEs in FDI expansion has led many to question whether publicly listed Chinese state companies are merely profit-driven market players or whether they are, at least to an extent, agents of the state.
While there is no single straightforward answer, the Chinese companies are linked to the party-state through an extensive network of formal and informal relations. This could shed some light on the possible implications of the expanded presence of Chinese companies in the CEE. While this is not to argue that Chinese FDI poses a threat, it suggests that the major investors from China have closer ties to the party-state than is commonly observed.
First, when it comes to the large central SOEs in China, which are the major players overseas, their executives often hold ministerial or vice-ministerial rank, making them a part of the nomenklatura, or the cadre system. That is, SOE executives are hand-picked by the party-state. For example, a study shows that in 53 central SOEs, those in the top positions, including board chairmen, CEOs, and party secretaries, are appointed and evaluated by the Central Organization Department of the Chinese Communist Party (CCP). Some of these positions hold ministerial rank equivalent to provincial governors and members of the State Council, while others hold vice-ministerial rank. Deputy positions in these companies are then appointed by the party’s organization department within the State-owned Assets and Supervision Commission (SASAC), China’s key institution in charge of the SOEs.
For example, on December 9, 2019, Central Organization Department of the CCP appointed a new general manager of China Merchants Group Corporation. This SOE and its associated companies have been investing in ports across Europe and have actively sought to get foothold in the Klaipeda port on the Baltic Sea in Lithuania.
That is not to say that this is the case with every Chinese company investing in Europe. Wanhua Industrial Group (Wanhua) acquired full control of the chemical company BorsodChem in Hungary in 2011. Since this is a private company, its executives are selected independently from the party-state. But, just like any other company in China, Wanhua should have a party committee within it. For the purpose of supervision, the CCP has maintained party committees not only in the SOEs, where the chairman or general manager would commonly also serve as its party committee secretary, but also in private companies, in this way linking private companies to the regime. For the same reason, there is also such a committee at Huawei. At least a year ago, Zhou Daiqi, director of the corporate committee of ethics and compliance, was also the secretary of the company’s party committee.
The author’s study on career mobility patterns of the top executives of China’s 33 large central SOEs in the period from 1992 till 2015 reveals that a large majority of them is relatively strongly connected with the Chinese-party state. Some corporate executives have been appointed as directors or deputy-directors of SASAC, also in charge of the reform of China’s state-owned sector. A significant number of the executives also take seats in the parliament – National People’s Congress – and also Chinese People’s Political Consultative Conference, an advisory body composed of representatives of different social and political groups. Furthermore, executives from the large central SOEs regularly join the Central Committee of the CCP, both as regular or alternate members. This was the case with the executives from at least 17 SOEs in 2012 when the 18th CCP Central Committee was elected. They belonged to different industries, mainly petroleum, steel, aviation, aerospace, defense, telecommunications, shipbuilding, and energy. And even more industries were represented by SOE executives at the CCP’s general assembly known as the National Congress of the CCP. Some accounts indicate that the Party Committee of SASAC nominated 52 top managers as representatives of the 18th CCP National Congress. Furthermore, it has been a common practice to appoint SOE executives as provincial governors.
Managers also often rotate from one company to another in the same state-owned business group or between them.
Finally, it has been observed that in China large central SOEs are linked to the state through a particular practice, when substantive management rights in a nationally important SOE are granted to the ministry with supervisory authority over the industry in which that SOE operates. Specifically, the Ministry of Industry and Information Technology retains important management powers over China Mobile, including the power to nominate its top managers. In telecommunications and aerospace or aviation industries there seems to be a two-way top-level personnel exchange between relevant state authorities and SOEs.
When Chinese companies invest abroad, it may be difficult to trace down the complex links between the investing companies and the Chinese party-state, since large central SOEs usually function as large conglomerates with many subsidiaries, and those invest on behalf of the parent company. Just recently, in November 2019, it was announced that China’s COSCO Shipping acquired stakes in Budapest cargo terminal. The purchase was made through COSCO subsidiary Ocean Rail Logistics.
The number of companies under one business group may be large and the chain of ownership long. For example, China Merchants Group Corporation, developing business in three different sectors (transportation and related infrastructure construction, management and services, financial investment and asset management, and, finally, property development and management) has at least 21 subsidiaries in the mainland and five in Hong Kong, according to its website. One of them, China Merchants Energy Shipping Co Ltd, was jointly established by China Merchants Group, Sinopec Group, Sinochem Group, COSCO Group and China National Offshore Oil Corporation (CNOOC) Group. According to the company’s report in 2019, it had 149 subsidiaries, with only six of them fully-owned and the majority of them being indirect wholly-owned subsidiaries, including one in the US.
Having noted the dense network of links between Chinese companies and the party-state, it needs to be stressed that the mere fact of the presence of the Chinese companies in CEE does not pose a threat per se. However, it could become an issue when strategic sectors or strategic infrastructure in a country are overtaken by a Chinese company, what has been the case elsewhere in Europe. In Portugal, Chinese companies dominate power grid sector. In Greece, China Ocean Shipping Company (COSCO) Shipping bought 51 percent stake in Piraeus Port in 2016. The problem in such cases is not the country of origin of the incoming FDI, but whether the receiving country’s government has a robust policy related to the control of strategic sectors and whether it is capable of not giving into the structural power of the investing country, which was obviously not the case for crisis-torn Greece back in 2016.
At the same time, the linkage of the Chinese companies to the party-state could mean that significant proportion of Chinese FDI in a country’s economy comes with a relatively higher political risk. The Chinese party-state has no doubt significant leverage on its companies, when it is the party or state agencies that appoint their top executives. While hard to prove, Hungary’s veto of the EU motion regarding the treatment of human rights lawyers in China in March 2017, has been implicitly linked with rising Chinese investment in the country by foreign observers.
Again, this is not to ring the alarm bells. It does not benefit the CEE countries in search for infrastructure upgrade or broader economic ties to see the world as black or white only. However, the national governments should know who they are dealing with to offset the security risks.
This article is based on the author’s research supported by JSPS KAKENHI Grant Number JP16K17060. Any opinions, findings, conclusions or recommendations expressed in this material are those of the author and do not necessarily reflect the views of the author’s organization, JSPS or MEXT