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China’s Communist Leaders Seek to Bend Business to Party Will

Chinese President Xi Jinping listens to a speech during the Dialogue of Emerging Market and Developing Countries in Xiamen in southeastern China's Fujian Province, Tuesday, Sept. 5, 2017.
Chinese President Xi Jinping listens to a speech during the Dialogue of Emerging Market and Developing Countries in Xiamen in southeastern China's Fujian Province, Tuesday, Sept. 5, 2017.

In a year that has seen China's Communist leaders cracking down on “irrational” investments overseas and putting some of the country’s biggest dealmakers under tight scrutiny, analysts say a top level political meeting this month is likely to be used to further bend Chinese companies to the party's will.

Since Xi Jinping rose to power during the last party congress in 2012, the country’s role on the global stage has also risen dramatically. At the same time, the Chinese economy has begun to slow and there has been a massive outflow of capital.

Leadership and the future economy

Much of the focus during the upcoming 19th Party Congress – a once-in-five-year leadership reshuffle - will be on how Xi further solidifies his position as China’s most powerful leader in decades. But the meeting will also chart government economic policy for the next five years.

One key aspect of that effort to watch will be the signals the party sends to China’s increasingly powerful and wealthy private businesses.

Over the past nine months, some of China’s biggest overseas dealmakers have been thrust into the spotlight as the party put capital flight and other financial irregularities under scrutiny. This has led to an atmosphere of fear in the business community, analysts said.

"We have seen this (made) very clear that companies and people--their primary duty is to serve the party," Christopher Balding, an associate professor of finance and economics at Peking University HSBC Business School told VOA. "I think there is a huge contradiction because you can’t serve the profit incentive and the Communist party. These are two contradictory objectives."

Role of big business

Last month, the party's Central Committee and the government's State Council released joint guidelines which, among other things, called for strengthening the party’s leadership over business. The guidelines pledged bolstered protections for companies at home and help in fighting provincial protectionism. At the same time, it also asked entrepreneurs to operate in accordance with the virtues of patriotism and frugality.

In addition to the guidelines, China’s leadership is rolling out tough new rules for overseas investments that will blacklist companies that invest in areas deemed risky and “irrational,” such as investments in property, entertainment and sport.

Officials say companies will not be banned from making overseas investments, but “will be punished as they become ‘discreditable’ to regulators.”

Analysts do not expect any kind of protest against the party's moves.

"From people I know in industry in China. No, they don't like it. They are not comfortable with it. Are they going to do anything about it? No. They are going to go along with what they are told to do," Balding said.

The past decade has seen the Communist Party encouraging businessmen to play a bigger role in party affairs, with traditional politicians and the military making space for new entrants from the world of finance and manufacturing. The party and government have also encouraged Chinese companies to spread out into foreign markets because they were seen as serving China's purpose of playing a major role in world affairs.

Overseas investments

But late last year, after hundreds of billions of dollars had fled the country, depleting China’s foreign exchange reserves, the party began labeling such investments a “national security” risk.

"Chinese big business, whether state-owned or private, have to be extremely careful today," said Scott Kennedy, Deputy Director, Freeman Chair in China Studies at the Center for Strategic & International Studies. "Long gone is the notion that companies could infiltrate the Party and change its overall direction. Just as it is with the People's Liberation Army, it is the Party that is in charge."

Starting in January, the government reversed its policy of encouraging offshore investments. Official agencies, including the central bank, launched search and seize operations to not just check capital flight, but also launch prosecutions against those suspected of moving large sums of money out of the country in business sectors the government regards as non-priority areas.

The restriction has had a huge impact, with fewer Chinese companies making headlines in the U.S. and in Europe for big-ticket acquisitions. But beyond limiting the financial risks of capital flight, analysts are also asking whether the government is driven by a political purpose like keeping tabs on high profile investors and controlling their business moves.

"We saw major political penalties being exacted on some Chinese overseas investment companies, HNA and Dalian Wanda and so on, have had to toe the line," said David Kelly of Beijing based consulting firm, China Policy.

Clearly, one concern China’s leaders have is that as businessmen move more funds overseas, they might begin to ignore the party's orders and go their own way.

"Once the money is out of China, it is increasingly hard for the party to control that money," Balding said. "I think it is much more important for the Party that they continue to be able to control those funds, those people and companies than worry as much about capital flight."

Future of economic reforms?

There is a growing consensus among analysts that the upcoming party Congress will do little to advance the process of economic reforms that Communist leaders have been promising for a long time. Instead, the party may opt to dilute and perhaps reverse some of the aspects of its reform agenda, they said.

"The reform agenda that will be announced at the 19th Party Congress will be a modified reform agenda and will not be very closely related to the high watermark of reforms which was promised in the (party's) Third Plenum," David Kelly said.

Chang Liu, China economist at Capital Economics said it would be erroneous to expect more market-based reforms, particularly because Chinese president Xi Jinping favors state-owned enterprises (SOEs) compared to the private sector.

"We think hopes for rapid market-based reforms under President Xi were always likely to be disappointed," Chang said adding, "He has shown little appetite for market-based reforms that would weaken the state sector, which he sees as being politically important."