Special report | Definitions

How red is your capitalism?

Telling a state-controlled from a private firm can be tricky

Ma shows how

“THERE ARE NO genuinely private companies in China,” declares a veteran adviser to multinational companies. In one sense he is right. The state and the party are omnipresent and their role is enshrined in the law. Moreover, as Kent Kedl of Control Risks, an investigative firm, explains, “you don’t become successful in China as a purely private entity, you need a powerful connection. But this can prove an asset or a liability.” Cronies of Bo Xilai, a once-powerful Communist Party boss who is now in jail, know this only too well.

To find out whether a given local firm is likely to behave like a state champion or a market-minded entity, you need to ask three questions. First, how strategic is its industry? Peter Williamson of Cambridge University’s Judge Business School argues that the government will always meddle with firms in industries it sees as strategic, even if they are multinationals. But the opposite is true, too. State firms that operate in sectors of little concern to the government can behave like private ones. Gree Electric, which makes appliances, is state-owned, but Dong Mingzhu, its fiercely independent boss, has transformed it into a highly competitive firm.

Second, who decides on pay, promotion and hiring? For big state-owned enterprises like Sinopec, an oil giant, the party’s organisation department deals with senior executives. Jack Ma, Alibaba’s boss, thinks that if the board and top executives are selected by shareholders, the firm is private.

Looks can deceive. The Chinese Academy of Sciences still controls about a third of Legend Holdings, a giant conglomerate founded by Liu Chuanzhi, which seems to make it a SOE. But thanks to shareholding reforms introduced by Mr Liu, its management is independent. Yang Yuanqing, the boss of its offspring, Lenovo, points out that many of his company’s top managers have been foreigners: “If the government controlled our firm, this would never happen.”

The trickiest question concerns the firm’s relationship with the party. Some business leaders proudly don the red hat. Wang Jianlin, the billionaire boss of Dalian Wanda, a vast private-sector conglomerate, was born an elite “princeling” and cunningly cultivates connections. Many of his group’s divisions, ranging from films to theme parks, fit with the leadership’s desire to promote soft power. This “is very beneficial”, he beams, as his firm gets “more financial support and especially policy support”.

But just because an entrepreneur has good guanxi (connections) does not mean the party controls his firm. SOEs enjoy huge advantages, which forces private firms to get close to the party if they want to succeed, argues Scott Kennedy in a report by Gavekal Dragonomics. “China’s entrepreneurs are more pink than red,” he says.

If employees are party members, where do their loyalties lie? Mr Kedl found that the party units within companies are usually pretty benign. Mr Ma of Alibaba, who is not a Communist, notes that party members are among his top employees. Mr Liu says the same about Legend. Then the man who has done most to modernise business in China drops a bombshell: he reveals that he is the head of his firm’s party cell.

This article appeared in the Special report section of the print edition under the headline "How red is your capitalism?"

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