In Xi’s China, the business of business is state-controlled

During his first decade as China’s leader, Xi Jinping regularly touted the importance of reform and opening up the economy even as he pushed the country sharply in the opposite direction. On Sunday, as he laid out his ambitions at an important political meeting, he barely paid lip service to the notion.

Xi, who is expected to secure a ground-breaking third term when the Communist Party congress concludes this week, made just three references to market reforms in his nearly two-hour speech and omitted more than a dozen others from a longer, written version. He instead focused on issues of national security and corruption, extolled state projects in spaceflight and super computers, and pledged to create a larger role for socialism and the public sector.

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When he did talk about markets, the message was established rhetoric. He lauded “socialist market economic reform,” while also arguing that China’s economy should “give full play to the decisive role of the market in resource allocation.”

Under Xi’s leadership, China is returning to its roots: a state-controlled economy that demands businesses conform to the aims of the Chinese Communist Party. Pro-business, free-market reforms that propelled it to become the world’s second-largest economy have been tabled in favour of state prerogatives.

Many of Xi’s hallmark policies have had an arresting influence on the economy. Restrictive Covid policies have shaken the confidence of consumers and businesses. The housing market, a source of jobs and household wealth, is in crisis, and youth unemployment is at a record 20% after China cracked down on fast-growing industries under the auspices of more responsible development. And in a move that could create concern about the extent of the economic slowdown, China’s National Bureau of Statistics is indefinitely delaying the release of the country’s latest gross domestic product, which was expected today.

The shift in the business climate has been stark. Internet companies, once idolised as champions for China on the world stage, are now fenced in by multiple government agencies. Billionaire tycoons, including Jack Ma, the founder of Alibaba, have been driven underground or imprisoned after criticising the government.

Foreign firms, which rushed into China following its accession into the World Trade Organisation in 2001, are stonewalled by regulators and pilloried by nationalist protests. State-owned enterprises are ascendant, as both private and public companies are forced to adhere to party policies.

Joerg Wuttke, president of the European Union Chamber of Commerce in China, said the Chinese economy is now more inward-looking, less accessible, and deeply ingrained with Xi’s “ideological touch.”

Three decades ago, China’s then leader, Deng Xiaoping, captured the nation’s attention with a tour of southeastern coastal cities to rally support for economic reforms. A wave of young people, inspired by Deng’s commitment to open China to the rest of the world, flooded into major cities to pursue business opportunities.

In 1994, Wen Kaifu quit his job as a middle-school teacher in the south-eastern province of Jiangxi and moved to Shenzhen, one of the country’s first special economic zones, to work for a display manufacturer. Returning in 2004, he started his own company, Holitech Technology, to make liquid crystal displays, the screens used in billions of smartphones.

As Xiaomi and other Chinese handset manufacturers blossomed, so did Holitech. In 2014, the company went public, and Wen became one of China’s wealthiest people with a net worth of $4.1 billion. That same year, China minted over 70 new billionaires.

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Like many Chinese companies that followed the government’s directive to “go global,” Holitech grew bolder in its expansion plans. After its public offering, it acquired seven Chinese component makers. Holitech built facilities in California and Europe, and it pledged to open a factory in India, promising to deliver 6,000 jobs.

Then Xi’s priorities shifted. In 2018, Beijing initiated a nationwide push to curb excessive borrowing by private companies. Holitech had $1 billion in loans and few options for refinancing. The company’s share price plunged, along with Wen’s wealth. China’s securities watchdog investigated him for failing to pay his debts.

State-owned enterprises — called “an important pillar and strength for our party” by Xi — were largely insulated from the debt crackdown.

Fujian Electronics and Information Group, a state-owned holding company of electronic component makers, stepped in to rescue Holitech. It paid roughly $450 million for 15% of Holitech and a controlling voting stake in 2018.

From 2019 to 2021, state-owned enterprises acquired more than 110 publicly traded Chinese companies, valued at more than $83 billion, according to Price Waterhouse Coopers. Such acquisitions were rare before Xi took over in 2012; by then state-owned enterprises’ share of the economy had been declining. After the Fujian investment, Holitech became an example of what Xi envisioned in a 2020 speech to “unify members of the private sector around the party.”

Holitech was enlisted in China’s nationwide mask production blitz. The company’s newly emboldened party committee led activities on party building and lessons on party history where employees experienced “a baptism of patriotic education.” In accordance with Xi’s plans to revitalise rural areas, Holitech, with the help of Fujian Electronics, invested over $1 billion in a new industrial park this summer. When Wen officially stepped back from the company last year, he was replaced by Huang Aiwu, a member of Fujian Electronics’s party committee. Holitech and Fujian Electronics did not respond to a request for comment.

In his prepared remarks on Sunday, Xi emphasised the importance of ensuring that “state-owned capital and enterprises get stronger, do better, and grow bigger.” He also declared — in standard Communist Party doublespeak — the importance of “high-level opening to the outside world.”

But for foreign firms, China’s preferences are now clear: in the scramble for access to the Chinese market, state-owned enterprises get priority.

The blurring lines between politics and business have forced some foreign firms into a difficult decision on whether to play by China’s rules.

Internet companies operating in China must adhere to increasingly stringent rules about proactively censoring content. Overseas technology companies with Chinese customers must house user data in China. And any criticism of China’s policies toward Taiwan or Hong Kong or its human rights record is met with a sharp rebuke and online mobs. It has forced companies into a choice: separate their global businesses into two parts or scale down their Chinese operations significantly.

Stellantis originally wanted to increase its stake in a joint venture to produce Jeeps with state-owned Guangzhou Automobile Group. But the Dutch company said Chinese officials did not approve the plan, which would have meant fewer jobs for Chinese workers. In July, Stellantis decided to dissolve the partnership. Carlos Tavares, Stellantis’ CEO, said the Chinese automaker had breached its trust and that “political pressure” was impacting his former partner’s decision-making.

“There is growing political interference in the way we do business as a western company in China,” he told the Financial Times. “The political agenda has been increasing by the day.”

NYT