The Party: The Secret World of China's Communist Rulers
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The front stage of the government’s regulatory system remained intact on the surface. The local banks and regional regulatory authorities were outwardly undisturbed. Backstage, however, the Politburo had created an entire parallel policy universe, ‘a powerful yet mostly invisible party body for monitoring financial executives’. Zhu and the Politburo did not bother to give these all-powerful party bodies any legal status, by putting bills through the legislature. Nor did they give them the stamp of government authority by publicly announcing their formation through the cabinet. The fact that these two committees had no lawful basis did not matter. The backing of the Politburo and the direct threat to the jobs of provincial bank executives were more than enough to galvanize local officials to sign up to Beijing’s plan to secure the Party’s economic base.
After the Hong Kong-based Far Eastern Economic Review pointed out in May 2001 the uncomfortable fact that the central bank governor had been left off the Party’s finance committee, the response was swift. The clear implication was that the shadowy party body had totally usurped the central bank’s functions. The Party quickly appointed the then governor to the committee, without, however, changing its overarching powers. Acutely sensitive about the issue, the Central Propaganda Department had directed the local media to refrain from discussing the committees, let alone their make-up. The first substantial reports in the Chinese press about these two enormously powerful party bodies, which had taken over the running of the banking system, did not appear until their job was largely done, five years later, in 2003.
It might seem strange that the Party would respond with such alacrity to a single article in a regional, English-language magazine. But from the moment Beijing decided to restructure state enterprises and sell parts of them offshore, the Party had deliberately downplayed its role in their operations, hiding it from its own people, and the rest of the world as well.
The slick investment bankers from Merrill Lynch found themselves in another world when they arrived to inspect the operations of Shanghai Petrochemical Corp. in 1992. Nestled on soft soils of reclaimed land on the outer arches of Hangzhou Bay, the enterprise supported 40,000 employees and their families with onsite housing, schools, shops and health care, and also paid pensions on retirement. ‘There was everything except a funeral parlour there,’ said one of the advisers to the company’s stock market listing in 1993. ‘They even had a police station, which operated under the management of both the company and the police itself.’ A self-contained economic eco-system, Shanghai Petrochemcial was an old-style state enterprise down to its bootstraps.
When Beijing decided to restructure companies like Shanghai Petrochemical–at the time the ninth-largest enterprise in China–and sell part of its shares offshore, it faced many difficult, threshold decisions. What would they do about all the social services the companies supplied, like health care, schooling and pensions? Would they just sack the thousands of surplus workers, or siphon off the funds raised offshore to pay them off? How would they respond to the tight auditing requirements imposed by foreign stock exchanges and the scrutiny of overseas fund managers? And, most sensitive of all, how would they explain the role of the internal party bodies, which for years had run the companies, free of any of the inconvenient strictures of corporate reporting and governance rules?
The same qualities that made Shanghai Petrochemical seem an unlikely candidate to raise money on the New York and Hong Kong stock exchanges in 1993 made it a perfect choice for Chinese leaders intent on launching an overhaul of the state sector. By selling a portion of the company’s shares on overseas stock markets, the Party was in effect recruiting allies for the upheaval to come. When thousands of workers were laid off and Shanghai Petrochemical’s accounts were prised open, the Party could say it was the foreigners’ doing as much as their own. But when it came to disclosing the role of the Party, which directly controlled the enterprise, everyone associated with the deal baulked. It was a battle that would be fought many times over the years to come, with the same result every time.
‘Right back at the very beginning, the first question was–what do we disclose about the CCP? Aren’t they really calling the shots? We struggled over that a long time,’ said one adviser to the Shanghai Petrochemical deal. Another adviser was more frank. ‘Things have changed now, but it was pretty clear that back then the Party was the grand puppeteer for everything that happened in every section of society, and the company. The only force was vertically driven decision making.’
The prospectus drawn up by Shanghai Petrochemical, with Merrill Lynch in Hong Kong and their legal and accounting advisers, was the size of a pre-internet-era telephone book. The document groaned with detail about the product lines, resource use, property holdings and the numbers of employees. The risks associated for a company, as an entity owned by the state, and operating in an environment buffeted by both market forces and powerful, capricious bureaucrats with control over energy prices, were laid out in full view. But apart from declaring the party positions held by one or two directors on the supervisory board, the prospectus was otherwise silent on the role of the single most important decision-making force in the company.
At the time of the 1993 listing, the 1989 Beijing crackdown was still a fresh political memory in Washington. Bill Clinton’s winning presidential campaign the year before had accused George Bush Snr. of coddling the ‘butchers of Beijing’. It was hardly an opportune time in the US to highlight the control exercised by China’s communists over an enterprise raising money in New York. But the notion that the shadowy party bodies with a role overseeing state enterprises, all of which had secret lives at home, were going to advertise their powers overseas was never going to fly anyway. ‘There was an extreme reluctance on the part of the company to do this,’ said the second adviser. ‘Once you start discussing that issue, it is a slippery slope. It is extremely unappealing to document how one entity is responsible for all personnel and all production decisions.’
The determination to purge the prospectus of the Party made the document comically misleading in parts. The relative novelty of the listing of a Chinese government-owned enterprise overseas at the time required an explanation in the Shanghai Petrochemical prospectus for foreign investors of how the Chinese political system worked. But even here, in a country in which the Party controlled the government and all state businesses, the body’s existence was banished altogether. In a section entitled ‘Political Overview’, purporting to describe China’s political system, the prospectus does not mention the Party at all. Instead, it artfully says that ‘pursuant to the Constitution, the National People’s Congress is the highest organ of state authority’. The highest organ of political authority, according to the constitution, was, of course, the Party itself, which in turn dictated the policies and personnel of the government and enterprises to the state.
Chinese companies and their advisers cite the letter of the law to explain why they don’t disclose the Party’s role in their operations. The board and management have the legal responsibility to make decisions about business strategy and personnel, they say. ‘To the extent that the board is listening to outside influences, they are not disclosed,’ said a lawyer who has advised numerous Chinese companies on offshore transactions. ‘Nor are such things disclosed in the US. Citibank doesn’t say in their disclosure documents that before we fire the CEO, we go and talk to the Saudis.’ Such lawyerly arguments skirt the fact that the Saudis are mere shareholders who could sell their stock and walk away from Citibank tomorrow. The Party has an institutionalized, albeit undisclosed, presence in state companies that is not for sale. As the lawyer admitted: ‘In corporate law, the boards [of Chinese state companies] can choose to disregard the Party’s advice. As a fact of life, they cannot.’
Chinese state businesses have changed dramatically since the Shanghai Petrochemical listing. Scores of other enterprises have sold shares and developed businesses overseas in a commercial environment more challenging than anything con
templated by Chinese companies even a decade ago. Many have forged partnerships offshore and appointed foreign directors to their boards. Party bodies have had to take a step back from detailed involvement in day-to-day business decisions, because the companies are far too complex to be micro-managed as purely political entities. Throughout, however, the Party has remained unyielding on a number of fronts. Its control over personnel appointments has been inviolate, and discussion of its role in the companies overseas has been minimized. By the time the big state banks came to raise funds on overseas stock markets from 2005 onwards, however, the omertà surrounding the Party’s role at home began to spring some leaks.
It is no exaggeration to describe the overhaul and subsequent listings of Chinese banks overseas as a momentous event for the global economy. If the banks’ restructurings did not succeed, then the grand project of Chinese financial and economic reform would be irrevocably damaged. The state’s investment in bank restructuring was immense. The total cost to the Chinese taxpayer of bank reform was an estimated $620 billion, equal to about 28 per cent of Chinese economic output in 2005, and becomes even greater once capital injections announced in 2008 are taken into account. To put that into perspective, the Bush administration’s highly contested financial rescue plan in late 2008, known as TARP, also cost $700 billion, but was much smaller in relative terms, equal to about 5 per cent of GDP that year.
Beijing did not raise and spend the bailout funds in a single up-front transaction. It was spread over many years, funded in a variety of ways, and did not have to pass muster with a powerful Congress. The Chinese plan was hugely controversial within the system nonetheless, and took significant political resolve to push through. Collectively, the big state banks cut the number of branches from 160,000 in 1997 to 80,000 in 2003. ICBC got rid of about 200,000 employees. Even then, it was left with about 360,000 staff and 17,000 branches. The Bank of China and the China Construction Bank laid off 100,000-plus employees each.
In interviews with state bank chief executives, I had always been surprised about their refusal to discuss the job cuts made to get their enterprises into shape for overseas listings, naively thinking it would be a selling point for foreign fund managers. It was only later I discovered that the authorities had classified information about the mass lay-offs as a state secret and restricted detailed reporting to internal publications. Party discipline forbade the bank executives from answering my questions. On other topics related to the Party itself, however, some top executives, like Guo Shuqing at China Construction Bank, were much more forthcoming.
Guo was an unusually open official, ebullient and chatty where most of his peers were stiff and formal. Instead of the kitsch replicas of the Great Wall and packs of green tea that many Chinese companies would give to visitors, a beaming Guo would hand out his books on macro-economic management and currency policy. Born in Inner Mongolia in 1956, Guo had been marked for higher office for many years. By his early forties, he had already served as a vice-governor in Guizhou, one of China’s poorest provinces, a sure sign he was being groomed by the Party, which increasingly insists that rising stars do time in government posts far from the more affluent coast. As a deputy-governor of the central bank, Guo had been parachuted in to run the body which managed China’s foreign reserves after his predecessor had committed suicide by jumping out of the seventh-floor window of a military hospital in Beijing. Guo landed at the China Construction Bank in 2005 in eerily similar circumstances, in the wake of its chairman’s detention for taking bribes. As befitted a political fixer, Guo had never worked in a commercial bank when he took his new job. ‘Ask him if he has ever made a loan in his life,’ one of his colleagues quipped when Guo got the job.
With so much riding on the CCB restructuring, many people were taken aback by Guo’s outspokenness after taking up his new position. Guo began to criticize the Party’s role in the bank almost as soon as he took over as both party secretary and chairman. In an interview with Caijing, a financial magazine famous for pushing journalistic boundaries in China, Guo and a second official complained the bank’s party committee had been usurping the board’s role. The party committee had held ‘dozens of meetings’, scrutinizing loans and interfering in executive appointments deep into the ranks of management, ‘contrary to the bank’s corporate by-laws’. Guo promised this would change under his leadership. ‘The principle is clear: a check and balance between the Party and the policy-making body has to be established,’ he said.
For good measure, Guo added that 90 per cent of the bank’s managers were ‘unqualified’. It is possible Guo did not expect all his comments, particularly this last one, to be reported. Some months later, he attended a small lunch in Beijing hosted by senior executives from a foreign newswire service. Also in attendance was Hu Shuli, the then Caijing editor credited with building the magazine into China’s most independent and formidable publication. After the usual assurances had been given by his foreign hosts that the lunch was off the record, Guo replied that he was not worried about his hosts. ‘I am more worried about the scandal lady over there,’ he said, pointing at Ms Hu. Still, Guo repeated his criticism of the Party when I interviewed him soon after. ‘The Party is not a commercial organization,’ he said. ‘There has been a misunderstanding of the Party’s role in the past and wrong practices inside the bank as a result.’
Morgan Stanley bankers underwriting the CCB listing were caught by surprise by Guo’s comments. A number quietly suggested that if the Party wielded such influence in CCB, perhaps its role ought to be declared in the prospectus as well. They were quickly set straight. ‘Ultimately, no one was under any illusions that the state controlled the companies,’ said an adviser to the deal. ‘To get into details about the party committees in a way that was provocative and tendentious was neither productive nor necessary.’ Another adviser scoffed at Guo’s comments. ‘He was appointed by the Party. How can he tell the Party to take a back seat?’
If the prospectuses were to be scrubbed clean for foreigners, Chinese bank executives took a different approach at home, discussing the Party’s role in interviews with Caijing and local university researchers in 2005 and 2006. These bank chiefs struck a more respectful tone than Guo, but, by Chinese standards, they were remarkably frank. Whatever the prospectuses might say, the executives were clear that the banks were not just commercial institutions. They were instruments of national economic policy, a fact that would be borne out in the global financial crisis three years later.
At the Bank of Communications, China’s fifth largest bank, Jiang Chaoliang, the chairman, said the party committee was in charge of strategy as well as personnel. Far from being driven solely by making a profit for shareholders, the Party had to act in accord with social ‘stability’ and national ‘macro-economic’ policies laid down by the government. The bank’s foreign partner, HSBC, apparently had no trouble with this, even though its purchase of a 19.9 per cent stake in the Chinese lender had been partially marketed to its own shareholders as a chance to change the old-style corporate governance. Jiang remarked that Sir John Bond, the then head of HSBC, had told him he understood that since he was chairman, he had to be party secretary as well. ‘This guy didn’t think it strange at all,’ Jiang said.
When a Chinese journalist interviewed Li Lihui, the president of the Bank of China, he relayed a joke about how the bank’s independent British director had wanted to attend party committee meetings, ‘but since he was not a Communist Party member, he had tried to find a British communist to participate on his behalf’. Li mirthlessly defended the Party in reply, and its indispensable role in setting the bank’s business direction and liaising with other arms of the government. ‘In China, it is very important to display the political power of the Communist Party,’ he said. ‘Management can solve a majority of problems, but not all of them.’
There is little debate in China itself these days over whether the Party’s backstage role in Chinese state enterprises should be disclosed outside
of the communist club. That issue has been settled since the days of the Shanghai Petrochemical listing, which set a precedent of non-disclosure that has been followed ever since. The real conflict inside China is the one that Guo alluded to before he was put back in his box. It is within the system itself, between the traditionalists in the Party on the one side, who want to keep a tight grip on the enterprises, and the increasingly ambitious chief executives of state companies on the other. Guo Shuqing’s complaints about the Party were a harbinger of an important trend with far-reaching implications for the global economy. If the Party expects us to run these companies commercially, these executives argued, then it should allow us to manage them solely on business lines.
The corporate animal that emerged from the protracted and painful birth of China Inc. was a strange new beast. Just as the Party had ordered, it was both commercial and communist at the same time. The split personalities of the powerful, reconstituted state enterprises were not just difficult for the rest of the world to deal with. China has struggled to adapt as well.
As often happens, when change comes, it seems to arrive out of the blue, though the conditions for it have been carefully laid out in front of your eyes over many years. That was the case when Beijing made its first big splash in mergers and acquisitions in the west in 2005, with the $23 billion bid by CNOOC, China’s offshore oil company, for Unocal, the California-based company with energy assets in the US and Asia. The idea of a company ultimately controlled by the Communist Party being allowed to buy oil and gas assets owned by an American company was always going to be a hard sell. But the roots of the eventual failure of the deal went deeper than the predictable political uproar, to the way CNOOC’s chief executive, Fu Chengyu, had mismanaged the competing demands of the Party and his board in configuring the bid.