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Chinese companies shore up government ties to survive

A woman rides her bicycle in front of a closed factory in Wenzhou, China, Oct. 17, 2011.


In China's heavily connected business world, some private enterprises are finding if they can't beat the state-owned behemoths that dominate the economy, they should simply join them.

Private enterprises have largely regained the share of China's economy lost after the 2008 financial crisis, but are doing so in part by mimicking their state-owned counterparts' behaviour when it comes to forging state and Communist Party connections.

"Today the winning recipe is more complex: It requires both integration with the national economy and blending into the political mainstream," Scott Kennedy, director of the Research Centre for Chinese Politics and Business at Indiana University, wrote in a research report entitled "Pink Capitalists in Bloom."

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In 2008, as China's roaring economic engine began to quiet under the strain of global recession, the central government unveiled a 4-trillion yuan ($586-billion at the time) stimulus package designed to keep its economy growing. Beijing opened up bank lending, building infrastructure and subsidizing everything from cars to household appliances in an effort to get people spending.

It worked, but at a price for the private sector, struggling under falling exports and unable to compete with state-owned enterprises being handed cheap bank loans.

Then, with inflation, bank lending tightened. Suddenly even the limited lending available to private firms was gone and in cities like Wenzhou, famous for its entrepreneurial spirit, factories began closing and owners fled the country or even committed suicide to avoid the shame of bankruptcy.

Last fall, central policy makers stepped in with bailouts and, in Wenzhou, an experimental government project to formalize some grey-market lending is in the works, to make life easier for private business.

Now, six months on, Prof. Kennedy argues that with the exception of real estate and construction, in which private firms have lost ground, the private sector has generally weathered the storm better than most realize. And the most successful firms often look very much like their state-owned counterparts when it comes to their larger business bases and their connections.

"I think a significant number of them made peace with the system so they are not trying to operate at the margins of the economy," Prof. Kennedy said in an interview in Beijing.

Many successful private enterprises have former government officials as founders or managers; it is considered standard practice in many places for entrepreneurs to be Communist Party members and to form Party committees in their firms, Prof. Kennedy said. Business leaders are also becoming more prominent as delegates to their local or national People's Congress, the formal legislating body in China's authoritarian one-party system.

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At the Chinese Academy of Social Sciences, a government advisory body closely linked with many ministries, there is acknowledgment that despite much official encouragement, the private side of China's economy is still facing roadblocks.

"Overall, China's private economy has significantly developed in recent years, but we have seen that the private economy has come across many hindrances in the process," said Ju Jinwen, a professor in the Institute of Economics at the Chinese Academy of Social Sciences, a government advisory body closely linked with many ministries.

State-owned enterprise still makes up 40 to 50 per cent of GDP, Prof. Ju said. In the United States, its economic contribution would be 6 to 7 per cent, while in most of Europe, it runs about 10 per cent, he said.

Restrictions against private enterprise remain in monopoly industries like railways and aviation, as well as in natural resource industries like mining and oil. Access to financing is also limited; banks are set up to deal with large-scale, state-owned enterprises and even the corporate bond market is dominated by state-owned companies.

Ideally, Prof. Ju said, Chinese policy makers would like to shrink the state-owned enterprise share of the economy to 20 to 25 per cent – but that process may take as long as a decade.

Special to The Globe and Mail

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