Chinese companies, specifically SOEs, have an unusual structure: they are a hybrid of corporate organization and government ministry. Their relationship vis-à-vis the Party and the central governmental apparatus should not be characterized as a submissive one.
In recent years, the interests of Chinese SOEs have diverged from those of the Party. Subsidiaries of SOEs, particularly energy, construction and utility companies, have listed on foreign stock exchanges. Bargaining has increased between the central government institutions and the profit-driven SOEs. For example, the three Chinese national oil companies have consistently blocked efforts to form a Ministry of Energy. Each company has its own vision for how China’s energy sector and pricing mechanisms should be arranged, as well as strong political backing from individual members of the Standing Committee.
Many China specialists have noted the prevalence of these disputes between the SOEs and their superiors – either the Party or the central government institutions – and the resulting ripple effect across all policy domains.
It is crucial to distinguish between the different relationships between central government institutions, the CPC leadership and SOEs. The Party has authority over the central government apparatus in terms of personnel appointments and resource distribution. However, the link between SOEs and the central government is not as straightforward. While Beijing’s central institutions have some authority and can set the parameters for the economic engagements of SOEs, the latter regularly sidestep government institutions and instead communicate directly with members of the Standing Committee.
Some SOEs and central government institutions have the same bureaucratic status under the State Council, though SOEs often have greater political clout and financial capacity. Furthermore, SOEs do not always accept decisions made by the central government. Instead, they see government institutions as their brokers with the Party leadership, which could help them to advance their interests during the policy formation process.
The CPC has reinforced its governing mechanism with the aim of regulating the economic activities of SOEs. In terms of asserting control, the Party has the final say in the appointment of the chief executive officer (CEO) and Party secretary in the most powerful SOEs. The CPC chooses the heads of SOEs through two governing agencies: the Central Department of Organization (CDO) (the equivalent of the CPC’s human resources department), and the State-owned Assets Supervision and Administration Commission (SASAC), which puts forward candidate recommendations.
According to SASAC, chairs and CEOs of the more powerful SOEs are ‘directly appointed and assessed by the Party’. Heads of SOEs are appointed to a rank equivalent to a State Council minister or a provincial governor. Within Beijing’s governmental apparatus, bureaucratic ranking is decisive in assessing how much power each appointee has, whereas a candidate’s professional experience is less relevant.
SOE leaders sometimes make business decisions based on their own political ambitions to elevate their bureaucratic rank. Rosen and Hanemann argue that ‘headline business deals will offer CEOs a chance to elevate their political ranking within the Party as well as the bureaucratic status of the whole company in the government apparatus’.
Conflict arises when Beijing’s policy agenda is at odds with that of an SOE. Blindly obeying proposed central government policies might erode an SOE’s commercial interests or put its survival in jeopardy. In cases where an SOE is allocated insufficient resources from Beijing, it will negotiate with the relevant government agencies to foster a shift in the policy agenda. Occasionally, if negotiations fail, SOEs have been known to completely disregard decisions made by the government. These actions have far-reaching implications.
For example, China’s five largest power utility companies (in terms of assets and installation capacity) – known as the ‘Big Five’ – have vehemently resisted setting carbon emission quotas in the past due to their share of the coal-fired electricity generation market. Their reluctance to cooperate with the central government over setting emission targets has slowed the delivery of Beijing’s domestic climate policy agenda.
Government departments have the power to allocate financial support and manpower to SOEs, but recipients always appeal for a bigger share of resources in return for supporting Beijing’s policies. This often brings unexpected complications. Previous bargaining by SOEs has damaged international cooperation and, in turn, the reputations of Chinese companies and the Chinese government, as seen in several BRI-related projects in Europe. It has also prompted some countries, such as Italy, to reconsider their existing memorandums of understanding on the BRI.
This bargaining between SOEs and the central government can be viewed as a process of ‘competitive persuasion’. SOEs argue for support of their preferred policies or investments. The winner of this process will enjoy either financial benefit and/or political backing from the central government. A competitive persuasion process, in which the provision of valuable information and expertise is essential, demonstrates key factors in Beijing’s decision-making process.
The process of competitive persuasion partly explains SOE investments and roles under the BRI. For example, key Chinese utility and construction SOEs were involved in developing a China–Pakistan Economic Corridor (CPEC) campaign to build coal-fired power and hydropower plants in Pakistan. Only SOEs specializing in utilities, power generation and infrastructure construction had the necessary expertise to contribute to the formation of the CPEC initiative in its early stages.
The BRI involves numerous countries and industrial sectors. Beijing’s pursuit of BRI investments frequently converges with SOE commercial interests. Therefore by suggesting investments that the central government is more likely to approve, SOEs can influence the formulation of overall BRI priorities. However, central and provincial governments often have very limited capacity to assess the viability of individual projects suggested by SOEs.
While SOEs have been able to bolster China’s geopolitical authority, backed with generous state loans, their ties with Beijing have drawn criticism from various countries and have undermined their profitability in overseas markets.
Many industries that involve BRI projects are relatively unknown to both central and provincial-level governments. The authors’ own research interviews, and the work of other scholars, reveal that both central and provincial-level governments lack the sectoral expertise and administrative capacity to conduct thorough due diligence on project feasibility. Their restricted capacity has inevitably given those involved leeway to shape final decisions. This knowledge and expertise gap enables the SOEs involved to ‘become de-facto decision makers in their specialized fields’.
Direct association with Beijing is a double-edged sword for the overseas investments of SOEs. While SOEs have been able to bolster China’s geopolitical authority, backed with generous state loans, their ties with Beijing have drawn criticism from various countries and have undermined their profitability in overseas markets.
Recently, the Czech Republic and Romania proposed a blanket ban to stop Chinese SOEs, such as China General Nuclear Power Station, from investing in their physical infrastructure. This arose from deteriorating bilateral relations with China, and a high level of suspicion of SOEs with direct ties to Beijing.
Furthermore, while most SOE leaders possess strong sectoral knowledge, they often lack ‘soft skills’ and familiarity with BRI-recipient countries. Their awareness of local politics is poor and their engagement with the local communities, trade unions and NGOs of host nations is minimal – as evidenced by the backlash against China Ocean Shipping Group Company (COSCO) in Greece. This lack of engagement with host countries risks further damaging Beijing’s reputation and that of the SOEs involved.