Since Chinese President Xi Jinping was elevated to a status comparable to that of the nation’s founding leader, Mao Zedong, at the recent National Congress of the Communist Party, the party under his leadership is bound to extend more control not only in politics but also over people’s lives, management of the economy as well as corporate activities.
Meanwhile, since the turn of the century, there has been a dramatic shift in the main players of China’s economy from state-run heavy and chemical industries to new sectors like information technology, biochemistry and new energy, which are being promoted by entrepreneurs who seek a free and open economic environment. A potential clash between such newly emerging forces and Communist Party control may well pose a major threat to Xi’s administration.
About a month prior to the Oct. 18-24 party congress, a monetary crisis of sorts originated in China when its government suddenly banned the domestic transactions in Bitcoin, a virtual currency, sending its value downward. The official reason for the ban was to prevent wealthy people and large corporations from transferring capital abroad using Bitcoin. An economist at a state-affiliated think tank, however, says the measure was driven by the Xi administration’s fear of the “free” nature of Bitcoin as a virtual currency that evades the CCP’s control, which might lead to the party losing financial control.
Signs of conflict between the government and the private sector are also emerging in the bicycle rental business. Beijing Mobike Technologies, which operates a fully station-less bicycle sharing system, rents 6 million bicycles in 150 cities worldwide, including 70 in China. The bikes rented by Mobike and its competitor, Ofo, are fitted with microchips so that their movements can be traced with a combination of three satellite-based positioning systems. In an attempt to keep watch on how its people move by keeping track of the movements of the rented bikes, the Chinese government is said to be demanding that Mobike and Ofo turn over relevant data. But Mobike, whose majority shares are owned by American venture capitals and investment funds, are resisting the demand, which would result in the disclosure of customers’ private information.
Huawei Technologies Co. outstripped Apple Inc. of the United States to become the world’s second-largest smartphone manufacturer after Samsung Electronics of South Korea in the July-September quarter. In October, Huawei became the first in the world to launch a model fitted with a microchip featuring artificial intelligence, which was developed independently and is manufactured by Taiwan Semiconductor Manufacturing Co. Huawei may be a Chinese company that the Xi administration should be proud of. But the company is a private corporation whose shares are owned by its employees. That is said to be because Ren Zhengfei, its founder and CEO, resists outside interference and follows a free and open-minded management style, which is believed to come from his hatred of interference from the CCP.
For its 2016 business year, Huawei reported ¥8.9 trillion in sales and a net profit of ¥630 billion — surpassing the comparable figures of many Japanese electronics giants. Even more impressive is Huawei’s research and development capabilities. According to the World Intellectual Property Organization, for the two consecutive years of 2014 and 2015, Huawei filed more patent applications under the Patent Cooperation Treaty than any other firm in the world. Although the top position was taken over by fellow Chinese firm TZE Corp. in 2016, Huawei nevertheless remained above other global leaders like Qualcomm Inc., Samsung, Hewlett-Packard, Intel Corp, LG Electronics and Sony. It has become one of the fastest rising innovative corporations headquartered in Shenzhen, Guangdong Province.
Up-and-coming corporations based in Shenzhen such as Huawei, ZTE and drone manufacturer DJI Co. are full-fledged global businesses that procure funds from American financial institutions and investment funds, hire large numbers of non-Chinese senior executives for R&D, marketing and PR positions, and earn more than two-thirds of their sales outside of China. They have been able to achieve explosive growth by averting excessive reliance on the Chinese market and maintaining a distance from the CCP.
Chinese companies that played leading roles in China’s rapid economic growth from the mid-1990s expanded their business within the framework laid out by the CCP — such as those in the heavily-regulated telecommunications sector, mainstay industries such as electricity, oil and steel, household electric appliances, electronics and automobile makers that acquired the technology and plants through joint ventures with foreign capital and rode on the wave of the sharp expansion in domestic demand. Each company had a CCP committee, with their CEOs and CFOs concurrently serving key positions in the party committee. They consulted the CCP on key management decisions, and moves that did not fit national or party policies were turned down.
But as domestic demand matured and the influx of foreign capital slowed down, the CCP began exploring new avenues of growth in innovations in advanced sectors such as information and communication technology. Since 2010, the party has sharply increased subsidies for R&D efforts at state-owned enterprises and universities. In 2016, China’s R&D expenditure reached 2.07 percent of its gross domestic product. Although this fell short of Japan’s 3.58 percent and South Korea’s 4.29 percent, China’s spending in absolute sum far exceeded those of its two neighbors.
Ironically, though, the rise in R&D spending encouraged researchers and engineers to quit state-run corporations and universities and launch their own innovation-driven new businesses. The CCP’s innovation strategy thus brought about this unintended effect.
On the list of the 2017 Fortune Global 500 companies, three state-owned Chinese enterprises continued to rank high — State Grid Corp. placing second, China Petroleum and Chemical Corp. (Sinopecc) third and China National Petroleum Corp. (CNPC) fourth. But the number of Chinese private corporations on the list increased sharply from 15 the previous year to 24. The ranking of Huawei, the leading Chinese private-sector firm on the list, jumped from 285th in 2014 to 83rd. Many Chinese economists predict that the presence and influence of private-sector firms will expand.
A headache for the CCP is that those newly growing private-sector firms will be unwilling to follow instructions and orders from the party, because doing so could compel them to buy up crippled state-controlled entities or to make unprofitable deals with companies under the management of party elders and their family members — which would damage their competitiveness.
An example of a private-sector business becoming less competitive because of close ties with the CCP is found in the case of Beijing Xiaomi Technology Co., which became a big name as a smartphone manufacturer in 2011 and whose founder and CEO, Lei Jun, was called the Steve Jobs of China. But its growth ground to a halt in the last few years. Because it had its head office in Beijing, unlike most of its competitors which are headquartered in Guangdong Province, it came under close scrutiny of the party. As Lei came under the party’s control — being elected as representative to the National People’s Congress — he was reputed to have lost his edge in management. Xiaomi managed to regain its competitiveness after Lei decided to keep a distance from the party, but not due to increased domestic sales but rather to its success in the Indian market.
In his 3 1/2-hour speech at the outset of the party’s National Congress in October, Xi proudly cited innovative achievements by Chinese corporations. The trouble is, however, that innovation and political control are not necessarily compatible with each other as innovative entrepreneurs abhor party intervention. A key reason why companies like Huawei have been so successful and why 8,000 start-ups are being born every year is that they are located a great distance away from Beijing in the southern end of Guangdong, which was once dubbed an “independent kingdom.”
Gone are the days when steel, cement, electric appliance and automobile industries led China’s rapid economic growth. Promoting innovation is the only way the economy can start growing fast again. But the CCP could be an impediment to such a growth.
Since early this year, increasingly rigid restrictions were imposed on internet services — apparently with a view to preventing the general public from knowing things that are unfavorable about the CCP and its leaders ahead of the party convention. It is inconceivable that a country that restricts the flow not only of capital but also of information would excel in creativity. The more the Xi regime tries in its second term to encourage new innovative businesses, the more damage could be done to the very foundation of CCP rule. It is a dilemma that the country will have to live with in the coming years.
This is an abridged translation of an article from the November issue of Sentaku, a monthly magazine covering political, social and economic scenes. English articles of the magazine can be read at www.sentaku-en.com