In recent weeks, the founders of China’s biggest tech companies announced their resignations one after the other.
Then, the government of Hangzhou City—one of China’s key manufacturing bases and an emerging tech hub—announced on Sept. 20 that it would send 100 officials to work with 100 of the “most important” private companies in town.
These are the latest indications that China’s private sector is in trouble.
They follow widespread anxieties last year that the Chinese regime would push for more state-owned firms to merge with private companies, and a trend of Party authorities becoming more deeply entrenched in the private sector.
Officials Enter Enterprises
The Hangzhou government recently organized a “New Manufacturing Mobilization Conference,” in which the government announced that 100 officials would be sent to private companies to become “government representatives” there.The government said that internet giant Alibaba, carmaker Geely Auto, and China’s largest beverage producer Wahaha would be among them.
On Sept. 22, Cao Shanshi, a Twitter account operated by a reporter for Chinese news portal Sina Financial, uploaded a partial list with 12 additional names, which included surveillance camera makers Hikvision and Dahua Technology; web portal NetEase; fintech firm Ant Financial; and more.
The government did not provide further details about how the government representatives would work with the private firms.
Meanwhile, Han Lianchao, a China activist, exposed a confidential document he obtained that was released by the Haidian district government of Beijing on Sept. 10. Haidian is one of the city’s busiest districts.
According to the notice, the government would send officials to all private companies in Haidian district to check their “operating financial data.”
Several netizens from Taiyuan City in Shanxi province also shared on WeChat, a popular Chinese social media platform, that their local government notified their companies about a plan to send government-hired accountants to take over 17 local companies’ accounting, beginning in October.
In recent years, Chinese authorities have forced private companies, including foreign-invested firms, to set up Party units within their company structure. Members of the Party organization ensure that company policies toe the Party line.
Resignations
Jack Ma, founder of the world’s biggest e-retailer Alibaba, retired on Sept. 10.Meanwhile, Pony Ma, founder of internet giant Tencent, was reported to have resigned from his positions as the company’s legal representative and executive board member on Sept. 19, according to China’s state-run Beijing News. Tencent is the developer of WeChat.
Then, Chinese media reported that Liu Chuanzhi, founder of computer manufacturer Lenovo, was no longer listed as the legal representative of his businesses, raising concerns about the future of the company.
Chinese media reported on Sept. 23 that 16 of the 17 companies—most of them Lenovo subsidiaries where Liu was previously listed as the legal representative—closed or moved to different cities, with a new legal representative listed.
Lenovo said in a statement that the changes were due to business modifications.
The news of changes at some of China’s biggest tech firms drew speculation that the authorities have pressured the companies as part of a new campaign of joint state-private ownership.
Mixed Economy?
Back in 1956, the Chinese regime launched its first joint state-private ownership campaign. In three years, the Party seized property from so-called “imperialist, feudalist, and bureaucratic capitalist classes.” Under the political rationale of ridding the Party of “counter-revolutionary” elements, the Chinese regime seized assets from private individuals and “purchased” their property.According to several overseas Chinese media reports, the two Mas’ recent resignations occurred after the Chinese agency in charge of the regime’s state-owned firms, the State-owned Assets Supervision and Administration Commission (SASAC), asked them to launch joint state-private ownership in their companies.
It is unclear if the joint ownership has commenced, but it is publicly documented that SASAC director Hao Peng invited Jack Ma to the SASAC office on June 16, and invited Pony Ma on July 31. According to the SASAC website, during both visits, Hao asked the two Mas to lead their companies in cooperating with state-owned firms enterprises and help the latter to develop.
This policy began in 2015, when the Chinese regime sought to reform state-owned enterprises and reduce their debt ratios: the proportion of total debt to total assets.
A high debt ratio has been a big problem within Chinese state-run firms for decades. Some bankrupt state-owned firms that fail to make a profit—known as zombie firms—have become a burden on the economy, as the central government pumps financial support to keep them afloat.
According to the SASAC, the average debt ratio of state-owned enterprises was 65.7 percent by the end of this March. This represented an improvement; it was 0.2 percent lower than last year’s figure.
According to the Chinese regime’s reform plan, state-run enterprises would undergo structural reform that can support them to publicly list on the stock market, merge with private enterprises, receive funds from private sectors, and so on.
Since early 2018, more private companies have reported local governments contacting them to arrange for state-run enterprises to be involved in their business.
Carsten Breitfeld, former CEO and co-founder of Chinese electric vehicle startup Byton, explained the reason why he resigned back in April during a media event held by his current employer Faraday Future in Los Angeles on Sept. 19.
Breitfeld said Byton was founded in 2016, and received investment funding from Chinese state-owned automaker First Auto Works (FAW) in 2018 and early 2019. Today, FAW owns about 15 percent of Byton.
“If the Chinese government enters your company, and takes, to some degree, influence or control, which they did at the end of the day, then things will change,” Breitfeld said. “They pushed the direction of Byton not in line with what I thought we should do.”
Breitfeld said he believed FAW’s ultimate goal was to take over the startup completely: “My feeling is [that] they are going to drive it to a stage where the whole Byton thing will be shut down, they will just keep the plant and the platform.”
State Role
Government policies have favored state-run companies in recent years. Private companies have reported that they have a difficult time getting loans from banks, the majority of which are state-run; buying rights to land; and applying for tax incentive plans.“China’s non-state-owned firms are facing their most difficult situation in the past 40 years,” Chen Shouhong, an economist in Hong Kong and China, said while giving a speech to a Beijing business school in September 2018.
Around the same time, hints of the Chinese regime increasing state interference in the private sector emerged, breeding anxiety among Chinese businesses.
An online article penned by Wu Xiaoping, a self-identified senior financial expert, was widely circulated on Chinese social media and mainstream Chinese media outlets. His article proposed that “the private sector has already fulfilled its historical mission of helping the public sector to grow by leaps and bounds, adding that “a new form [of the economy] with greater centralization and cooperation” would soon be ushered in, one where private and public sectors would be merged into one.
That month, Chinese leader Xi Jinping also made an inspection tour of northeastern China, the country’s rust belt region.
At an aluminum production factory in Liaoning Province, Xi gave a speech in which he asserted that the central authorities would support private firms, while advocating state ownership.
“We have unswervingly developed a public ownership economy, and unswervingly encouraged, supported, guided, and protected the development of privately-run enterprises,” Xi said.
