General Office of the CPC Central Committee issued the "Opinions on
Strengthening the United Front Work of Private Economy in the New Era", the Central Committee of the Chinese Communist Party continued the development of its all around development of expanding the CPC's influence, and of ensuring cohesion and discipline among those subject to the CPC's leadership (English translation HERE). This includes private enterprises, Chinese or foreign, operating in China. I suggested two potentially substantial implications. "The first is the use of the
United Front as a means of more closely aligning political and economic
decision making. . . The second, is that--and certainly within Belt and Road
relationships worldwide--the United Front's discipline of private sector
enterprises might affect as well the way in which foreign relationships
with non-Chinese businesses and governments are constructed,
implemented, and advanced." (HERE).
It is the second of the implications that has caused some concern for foreign business. These concerns were recently articulated in a widely circulated statement issued by the European Chamber, self described as "the independent voice of European businesses in China."
The Statement follows.
2020-10-12 | All chapters
On 15th September 2020, The General Office of the Central Committee of the Chinese Communist Party (the Party) promulgated the Opinions on Strengthening the United Front Work of the Private Economy in the New Era (Opinions). The document outlines 28 clauses over eight sections, heavily emphasising the need for closer alignment between the Party and private business on a wide range of issues.
The document comes after a late-2017 push for some foreign companies—mostly those in joint ventures (JVs) with Chinese state-owned enterprises (SOEs)—to establish/strengthen the role of the Party in their operations, and even in their decision-making processes.
The original Chinese text can be found here.
European companies in China prioritise compliance with all relevant laws and regulations that apply to them. The rule of law is a cornerstone of any good business environment, and its development is negatively impacted by the assertion of extralegal bodies. Therefore, since the promulgation of the Opinions, the European business community has become concerned about the possible direct and indirect implications of the document and what they mean for predictability and business decision-making. However, it is important to first draw several distinctions about the various types of interaction between the Party and business.
Background on Party-business interaction
Party Organisations (commonly referred to as ‘Party Cells’) are mandated by the Company Law. All enterprises in China, including foreign ones, are required to give space to a Party Organisation, as long as at least three Party members working for the company want to create one. The European Chamber understands that Party Organisations play no role in decision-making, and has not heard anything from members that would indicate otherwise.
Party involvement in business decision-making is the more concerning matter. The European Chamber recognises that deciding upon the structure and management of SOEs within China is a domestic issue that is for the Chinese Government to decide. For JVs between Chinese SOEs and foreign companies, however, the European Chamber understands that any change in the enterprise’s governance would require agreement by all shareholders to amend both the JV agreement and articles of association. The Chamber is unaware of any legal framework mandating such Party involvement in private companies.
Direct implications for European companies
The Opinions are raising concerns within the foreign business community that the Party will push to establish or strengthen positions within the private sector. It remains unclear how foreign-invested companies might be affected.
In the short term, European Chamber members are concerned about the resurgence of efforts to establish and/or strengthen the role of the Chinese Communist Party in business decision-making, as they would be if any political party attempted to do the same. Any efforts to do so would have a considerable impact on business sentiment, and could lead foreign companies to reconsider future and even current investments in China.
In the long-run, members worry that this will become a regular cycle in which every few years, the Party inches forward into the private sector. In the European Business in China Business Confidence Survey 2020, 43 per cent of respondents reported that the business environment had become more political compared to the previous year. The Opinions will do little to convince the foreign business community that things have improved in this regard.
Indirect implications for European companies
Most European companies are in China for China, and are here to offer goods and services to their local customers. As many firms focus on B2B sales, the potential influence of the Party in their business could have a sizeable impact on them.
First, it could drive private companies to incorporate more political calculus into their decisions, instead of just following market forces. The potential damage this could cause is considerable, and could drag down efforts by China’s vibrant private sector to further refine productivity and profitability, and even lead companies to reconsider who they partner with.
Second, the European Chamber cannot ignore the impact that the Opinions could have on Chinese private companies. Clause eight in particular explicitly calls for the development of a “backbone of private businesspeople that can be relied on at critical moments”. This will likely add to the voices of those in the US and the EU that assume all Chinese companies, not just SOEs, are heavily influenced by the Party. This would lead to a worsening of the situation for China’s private firms already under the spotlight. It could also raise questions over the many European companies acquired legitimately by Chinese private companies, and see European companies with Chinese partners being scrutinised more closely.