Research Shows Beijing Expanding Influence Over Chinese Companies Through Managerial Incentives

By Autumn Spredemann

February 7, 2023  Updated: February 7, 2023 

Commuters wearing face masks ride bicycles near the China Central Television (CCTV) building in the central business district in Beijing, on Sept. 1, 2022. (Mark Schiefelbein/AP Photo)

A think tank of top U.S. strategic and economic analysts presented research on Feb. 7 showing the method through which China’s government has expanded its influence over the nation’s companies.

A panel led by Center for Strategic and International Studies (CSIS) researchers Curtis Milhaupt and Lauren Yu-Hsin Lin discussed how the Chinese Communist Party (CCP) is methodically increasing control in the business sphere.

This has been achieved primarily through managerial incentives like communist party building, social credit, and special management shares.

“One of the both fascinating … frustrating, and perhaps even threatening aspects of Chinese corporate governance is there are actually two systems,” Milhaupt said during the CSIS live web conference.

Party leader Xi Jinping votes at the closing of the 19th Communist Party Congress at the Great Hall of the People in Beijing, China, on Oct. 24, 2017. (Lintao Zhang/Getty Images)

He illustrated that beyond the standard corporate managerial structure, there’s a “shadow” system of corporate governance linked directly to the CCP, which has been gaining influence since 2015.

“Corporate executives in China typically wear two hats. A corporate hat and a [CCP] party hat,” Milhaupt said.

Starting in 2015, a subtle but noticeable CCP influence over China’s companies—both domestic and international—began to emerge. And like many big changes, it began with policy building.

The central committee for the communist party and state council circulated a set of 10 charter model provisions Milhaupt says was meant to “formalize the role of the party in Chinese corporate governance.”

Some of the decision-making provisions include giving CCP committee members a higher rank than the board of directors or management within companies. It’s something Milhaupt noted runs “completely counter” to standard Chinese corporate practices.

And it appears many Chinese companies are jumping on the bandwagon. Between 2015 and 2018, 58 percent of state-owned businesses were willing to adopt the CCP decision-making provisions into their business charter. Of China’s privately owned companies, 25 percent were also willing to comply.

Significant Perks For Businesses

When extended through 2022, 90 percent of both state and private businesses adopted CCP “symbolic measures” outlined in the new corporate charter.

“It’s the decision-making provisions that are the most essential [for control]” CSIS panel commentator Barry Naughton said, calling the communist party directives “kind of shocking.”

Milhaupt added, “We see a big spike in the adoption of party-building amendments by private firms.”

And that’s because compliance and party affiliation come with significant perks for businesses.

The social credit system has fed into this, proving an effective tool at influencing both businesses and individuals.

In 2014, the CCP developed a system meant to rank what Lin called the “trustworthiness” of every market participant in China. It’s an ambitious program that uses a ranking system based on five categories for scoring.

Scores range from zero to a maximum of 1,000 points and can easily make or break a business in China.

“The consequence would be, if you receive a bad rating, you’ll be at a disadvantage in accessing finance, receiving government approvals, or subject to more inspections,” Lin said.

In their research, Lin and Milhaupt noted that politically connected Chinese companies usually scored higher in the social credit ranking.

The Alibaba logo outside a building in Beijing on Nov. 16, 2021. (Ng Han Guan/AP Photo)

Despite international criticism and concerns over human rights violations, the concept of social credit has been sold to China’s population as a means to deter fraud and crime through the use of surveillance and big data.

Lin made a point of saying the state’s use of big data to exert greater control over China’s businesses is “something to watch in the future.”

Then there’s the use of special management shares. It’s an investment that takes stakes in media or other internet platform businesses—usually around 1 percent—and through that vehicle, gains certain management rights.

Lin said it’s a method through which the government can expand control and censorship in private companies. The government will usually hold a board seat and then appoint a chief editor in charge of content review and approval.

Companies already feeling CCP management pressure from this include Alibaba, Tencent, Youku, and ByteDance.

In a bid for preferential treatment, some Chinese firms are directly asking the government to take special management shares of their company. It can also ensure a clear path through obstacles like licensing.

It also creates a solid political connection between the communist party and private businesses.

Economic Implications

A 2022 Atlantic Council report also expressed concern over the rise of communist party influence in Chinese companies. It concluded the growing politicization may have “significant implications” for those who choose to invest in Chinese financial assets.

The analysis further noted as Western investors become more exposed to Chinese capital markets, “the global economy is increasingly vulnerable to economic instability in China.”

So far, China’s state-owned enterprises are responsible for most of the country’s non-financial corporate debt. The tally even exceeded the nation’s gross domestic product in 2019.

In 2020, companies owned by China’s government began defaulting on their debts amid global economic fears ignited by the pandemic. That year, state-run businesses defaulted on more than $6 billion worth of bonds from January to October, according to Fitch Ratings.

The CSIS press office was unable to respond to a request for comment in time for deadline.

https://www.theepochtimes.com/research-shows-beijing-expanding-influence-over-chinese-companies-through-managerial-incentives_5039380.html