Chinese state-owned companies under scrutiny

Content from the Brookings-Tsinghua Public Policy Center is now archived. Since October 1, 2020, Brookings has maintained a limited partnership with Tsinghua University School of Public Policy and Management that is intended to facilitate jointly organized dialogues, meetings, and/or events.

Earlier this month, China’s anti-corruption watchdog—the Central Commission for Disciplinary Inspection—announced the next targets in President Xi Jinping’s intensifying graft campaign. Unlike 2014, when military and Communist Party organs were front and center in Xi’s line of fire, this year Beijing is taking aim at the top fifty-three state-owned companies and their Party-appointed executives.

Among those first in the crosshairs are China’s largest petroleum, automobile, electricity, shipping, and telecommunication companies. But high-profile corruption investigations at these crown-jewel firms won’t solve their problems. More important is announcing the long-delayed policies necessary to enact the reform agenda announced at the 2013 Third Plenum Party conclave. There, China’s leaders vowed to boost market competition and transparency, and strengthen corporate governance. Yet the biggest obstacle to reform lies not with China’s central government but rather with the state-owned companies themselves.

At first glance this may seem paradoxical given the Party’s assumed influence on state-owned companies and its tight control over their executives. Indeed, the companies’ top leaders—chair of the board of directors, Party secretary, and general manager—are all appointed directly by the Party. What’s more, a single executive often simultaneously holds more than one of these positions, especially in strategic industries like defense and petroleum where Party control is fundamental.

But central state-owned enterprise leaders are far from passive Party agents. They possess vice-ministerial or ministerial ranking, and in some cases have authority on par with the very government agencies that monitor them. Executives also wield deep personal networks they can leverage to resist change. A lucky few possess family or political connections with top leaders, further insulating them from government pressure.

More importantly, many executives lack incentives to prioritize Party orders over their personal interests. During the Hu Jintao era (2002-2012), more than half of the leaders of central state-owned companies were late-career appointees and retired directly after their posts ended. With no prospect of political promotion, many executives are deeply reluctant to implement reforms and change a status quo from which they personally profit—legally or otherwise.

Nor have weak governance institutions done much to reign in state-owned companies and their executives. Corporate culture in China is characterized by the so-called “number-one leader phenomenon,” in which a single powerful boss exerts dominant influence. Building a bureaucracy to regulate state-owned firms was supposed to change this, but success has been limited. And while boards of directors are now common in most of the top fifty-three state-owned companies, the chairperson is almost always also the Party secretary.

Byzantine corporate structures further complicate oversight of these companies and stymie reform efforts. Company leaders operate in sprawling business groups, some with more than two hundred subsidiaries. The firms’ massive size and spread create ample space for misreporting and illicit activity. These tangled structures can be a headache for executives, but also a boon if they want to give their regulators the slip.

China’s top graft buster Wang Qishan has warned that he will dangle the fabled Sword of Damocles over state-owned companies, prompting speculation of an intensifying political purge. No matter the motive, prosecuting corrupt executives is a critical step. But it’s no substitute for providing an overdue prescription for reform—one that gives real teeth to regulators, boosts outside members in corporate boards, and makes clear which sectors will be opened to market competition. Without such a policy roadmap, it may not matter how many swords fall in Beijing.

This piece was originally published on the Council for Foreign Relations’s
“Asia Unbound” blog