Beijing Expanding Influence Over Chinese Companies Through Managerial Incentives, Research Shows

Commuters wearing face masks ride bicycles near the China Central Television (CCTV) building in the central business district in Beijing, on Sept. 1, 2022. (Mark Schiefelbein/AP Photo)

The Chinese regime has expanded its influence over the nation’s companies to be more deeply involved in their businesses, according to research presented recently by strategic and economic analysts at a top U.S. think tank.

The methodical increase in control by the Chinese Communist Party (CCP) has been achieved primarily through managerial incentives such as Party building, social credit, and special management shares, which was discussed by a panel led by Center for Strategic and International Studies (CSIS) researchers Curtis Milhaupt and Lauren Yu-Hsin Lin.

“One of the both fascinating ... frustrating, and perhaps even threatening aspects of Chinese corporate governance is there are actually two systems,” Milhaupt said on Feb. 7 during the CSIS live web conference.

Chinese leader Xi Jinping votes at the closing of the 19th Communist Party Congress at the Great Hall of the People in Beijing on Oct. 24, 2017. (Lintao Zhang/Getty Images)

He stated that beyond the standard corporate managerial structure, there’s a “shadow” system of corporate governance linked directly to the CCP, which has been gaining influence since 2015.

“Corporate executives in China typically wear two hats: a corporate hat and a [CCP] Party hat,” Milhaupt said.

A subtle but noticeable CCP influence over China’s companies—both domestic and international—began to emerge in 2015. And like many big changes, it began with policy building.

The Central Committee of the Communist Party and State Council circulated a set of 10 charter model provisions that Milhaupt says was meant to “formalize the role of the party in Chinese corporate governance.”

Some of the decision-making provisions included giving CCP committee members a higher rank than the board of directors or management within companies. It’s something Milhaupt noted runs “completely counter” to standard Chinese corporate practices.

It appears many Chinese companies have jumped on the bandwagon. Between 2015 and 2018, 58 percent of state-owned businesses were willing to adopt the CCP decision-making provisions into their business charters. Of China’s privately owned companies, 25 percent also were willing to comply.

Significant Perks for Businesses

As of 2022, 90 percent of state and private businesses adopted the CCP “symbolic measures” outlined in the new corporate charter.

“It’s the decision-making provisions that are the most essential [for control],” CSIS panel commentator Barry Naughton said, calling the Party directives “kind of shocking.”

Milhaupt added, “We see a big spike in the adoption of party-building amendments by private firms.”

That’s because compliance and Party affiliation come with significant perks for businesses.

The social credit system has proved an effective tool for influencing businesses as well as individuals.

In 2014, the CCP developed a system meant to rank what Lin called the “trustworthiness” of every market participant in China. It’s an ambitious program that’s scored based on five categories. Scores range from zero to a maximum of 1,000 points and can easily make or break a business in China.

“The consequence would be, if you receive a bad rating, you'll be at a disadvantage in accessing finance, receiving government approvals, or subject to more inspections,” Lin said.

In their research, Lin and Milhaupt noted that politically connected Chinese companies usually scored higher in the social credit ranking.

The Alibaba logo outside a building in Beijing on Nov. 16, 2021. (Ng Han Guan/AP Photo)

The concept of social credit has been sold to China’s population as a means to deter fraud and crime through the use of surveillance and big data, amid international criticism and concerns over human rights violations.

Lin made a point of saying the state’s use of big data to exert greater control over China’s businesses is “something to watch in the future.”

There’s also the use of special management shares. It’s an investment that takes stakes in media or other internet platform businesses—usually around 1 percent—and through that vehicle, certain management rights are gained.

It’s a method through which the CCP can expand control and censorship in private companies, Lin said. The CCP will usually hold a board seat and then appoint a chief editor in charge of content review and approval.

Companies that are feeling CCP management pressure include Alibaba, Tencent, Youku, and ByteDance.

In a bid for preferential treatment, some Chinese firms are directly asking the regime to take special management shares of their company. It can also ensure a clear path through obstacles such as licensing.

It also creates a solid political connection between the Communist Party and private businesses.

Economic Implications

A 2022 Atlantic Council report also expressed concern about the rise of Party influence in Chinese companies. It concluded the growing politicization may have “significant implications” for those who choose to invest in Chinese financial assets.

The analysis further noted that, as Western investors become more exposed to Chinese capital markets, “the global economy is increasingly vulnerable to economic instability in China.”

So far, China’s state-owned enterprises are responsible for most of the country’s nonfinancial corporate debt. The tally even exceeded the nation’s gross domestic product in 2019.

In 2020, companies owned by the regime began defaulting on their debts amid global economic fears ignited by the pandemic. That year, state-run businesses defaulted on more than $6 billion worth of bonds from January to October, according to Fitch Ratings.

The CSIS press office didn’t respond to a request for comment by press time.