Political Influence in China’s Biggest Companies Almost 100%

April 25, 2011 Posted by China Briefing Reading Time: 3 minutes

NPC members wealthier than U.S. Congress counterparts

Op-Ed Commentary: Chris Devonshire-Ellis

Apr. 25 – The trend of the Chinese government to be involved in the nation’s primary businesses can be illustrated in a number of items recently highlighted in data released by the British Foreign Office (BFO). In a presentation made recently to the European Chamber, a total of 40 of the 46 Chinese companies listed in the Fortune 500 were identified as state-owned enterprises. Of the remaining six, three were Hong Kong businesses.

Meanwhile, the total number of SOEs in China according to official data is estimated at being 192,000 – against some 1.98 million private enterprises. The data indicates that as soon as a business becomes significant, government quickly likes to get involved. However, according to the BFO, government wealth is apparently filtering down to officials rather than state coffers. The top 70 members of the U.S. Congress had a collective worth of some US$3.1billion, against US$75 billion for the top 70 NPC officials.

It is this trend that is causing difficulties with matters of transparency in China, and also for foreign executives doing business in China. With tougher EU and U.S. corruption laws in place that forbid the giving of incentives to overseas government officials, the likelihood when dealing with a large Chinese company is that an employee of that business may also be regarded as a government official. It further underlines the politicizing of commerce in China, in which the state has an active interest in the activities of its largest companies. Corporate business is increasingly used as a tool to actively wield political power, while underneath the governmental influence, China appears to be developing a platform of oligarchs not unlike the Russian example where state-owned assets were de facto transferred into private ownership. The only difference being that in China, politics and commerce go hand in hand and discipline can be meted out by the Communist Party.

This duality of ownership makes transparency and the concept of trade free of political influence a murky issue in China. While the embrace between business interests and politicians in the United States and elsewhere is well known, the massive extent of the clinch between the two in China is not so well understood.

Foreign businesses partnering with SOEs in China would be advised to conduct political due diligence on their investments and to ascertain the extent of risk. While government interest in business can certainly help projects along, on the downside the same relationships can also usher in devastating consequences should things go sour.

“We will not employ a system of multiple parties holding office in rotation, diversify our guiding thought, separate executive, legislative and judicial powers, use a bicameral or federal system, or carry out privatization,” Wang Bangguo, chairman of the NPC, stated in his keynote speech to the NPC recently.

Increasingly, China is politicizing its largest companies, and creating a level of government oligarchs at the same time. Such a balance may not always be healthy, and the onus is on foreign investors to tread warily. Doing business in China is becoming increasingly political, with the nation’s top leaders additionally able to leverage that through substantial and individually wielded financial and commercial power.

Chris Devonshire-Ellis is the principal and founding partner of Dezan Shira & Associates and the founder and publisher of Asia Briefing. He also sits as Vice Chair of the Regional UNDP business advisory council and can be contacted at chris@dezshira.com.

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