China’s Communist Party seeks to build presence in private sector

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Nan Yi has all the makings of a budding tycoon. His father is chief executive of a company that employs 30,000 people, while his uncle has been ranked one of China’s richest 25 people. Mr. Nan himself studied at Oxford before founding Universal Energy five years ago, when he was in his mid-20s. It’s a renewable energy company building wind and solar farms across Asia that has won commendations for its entrepreneurialism.

But earlier this year, Universal Energy won plaudits of a different sort, for establishing its first corporate Communist Party committee. Months later, Mr. Nan wrote a column in which he pledged his loyalty to the party, whose “political leadership for private entrepreneurs is our ‘benchmark’ and whose national policies and guidelines are our ‘compass,’ ” he wrote.

Mr. Nan did not respond to Globe and Mail interview requests.

His embrace of the party inside his company has placed him at the heart of an energetic new effort by China’s Communist leadership to strengthen its role across the country’s enormous private sector. It’s a deepening shift in the balance of corporate and political power in China that forms at least part of the backdrop to the market upheaval last week with the postponement of the initial public offering by online finance giant Ant Financial. It was set to be the biggest new stock listing in history until it was delayed by stock exchanges.

Soon after, the China Banking and Insurance Regulatory Commission released draft rules for online microfinance that could constrain companies such as Ant. In doing so, China’s regulators were working to translate a political “imperative which comes directly from [President] Xi Jinping, that one of the three decisive battles is financial stability,” said Bert Hofman, director of the East Asian Institute at National University of Singapore.

China’s Communist Party has been an ardent defender of private enterprise. But in companies of all sizes in China today, there is also “more exercise of what the party would call party leadership,” said Mr. Hofman, who was previously the World Bank country director for China.

“They see enterprises, whether they are public or private, they are there for a goal – and the goal is to serve society.”

The object is not to squelch the private sector. The object is to have it succeed, but where necessary to succeed on the path chosen by Beijing.

The establishment of party committees forms one part of this. Dozens of Chinese companies have amended public securities filings to acknowledge the role of party committees in advising their boards of directors. Hundreds have paid homage to “Xi Jinping thought” in corporate filings, The Economist has found.

Chinese planners, meanwhile, are pushing for the party to take a more active role in companies, and to “guide people in private industry to continuously increase their political, ideological, and emotional identification with the Communist Party of China,” according to a high-level September document from the party’s central committee on strengthening its work in the private sector.

That includes shepherding “the younger generation to inherit and carry forward the glorious tradition of listening to and following the party,” the document says.

In response, the All-China Federation of Industry and Commerce called for companies in China to “give play to the leading role of party organizations in selecting and appointing people.”

Such moves are partly rooted in concern about the strength of China’s economy, said Deng Yuwen, a scholar who was previously a senior editor at the Study Times, the official publication of the Central Party School, which trains party functionaries. “Therefore, it has become a top priority to not let the private economy get out of the party’s control.”

Still, what the party wants is not that a “company puts the party before everything,” he said. “Their demand is that a company comply with, even at times sacrifice themselves, for what the party wants. If the party needs you, you should not dare to negotiate with them.”

Mr. Xi has at the same time called on state-owned enterprises to become “stronger, better and bigger.” That marks a reversal of course from previous decades of Chinese economic policy, which had seen a reduction in national ownership of companies. But state-backed companies “are a key pillar for the party’s rule,” Mr. Xi said in an April speech, which was only recently published.

He has at the same time continued to encourage the development of the private sector.

China is acting out of a confidence that it can defy Western critics in establishing its own system, one in which state companies dominate in certain sectors, while private companies flourish elsewhere – with the party exercising oversight over all.

The objective is what Cao Heping, an economist at Peking University, calls the “the most harmonious point, one that combines the modern enterprise system with our national condition.”

State-owned companies have traditionally been seen as less productive, while history has provided examples of the economic wreckage that can result when politics interferes too closely in industry.

But for Beijing, the swelling assertion of the party inside of businesses comes at a pivotal moment, as Chinese leaders look to every corner of their economy to help achieve an ambitious new goal for the country to become a “modern socialist country” by 2035. That will require enormous gains in national wealth for a country whose current GDP per capita remains below that of Malaysia.

Party literature is also filled with mentions of global changes “unseen in a century,” a phrase imbued with confidence that the U.S. position as unchallenged superpower is weakening, providing an opening for China.

For the Communist Party, a better grasp on private industry can help steer the country toward seizing that opportunity.

“Directionally, you have to follow” the party, said Edward Tse, the chief executive of Gao Feng Advisory Company, a consultancy with clients across the spectrum of privately and publicly owned companies in China.

It’s a mistake to think of Mr. Xi’s vision in traditional Soviet terms, as an imposition of claustrophobic control on companies.

Instead, a combination of central leadership from Beijing, provincial support and corporate energy has been a boon for entrepreneurs and executives who have aligned themselves with Beijing’s vision. In the private sector, “innovation and efficiency are actually growing, and growing exponentially right now – at least in some areas,” Mr. Tse said.

“What the Communist Party is driving forward are values for the Chinese people,” he said. “They want to have a certain degree of coherence or alignment within the different layers of the Chinese system. And enterprises are a key part of that.”

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