Return of political commissar

How Xi Jinping is putting the Party back into business

A couple of years ago, top executives of a mid-sized Western multinational found themselves in Beijing attending a strategy meeting of their Chinese subsidiary. After they covered the listed agenda, they found their local CEO cribbing about their Indian operation and how his Indian counterpart was dropping the ball, missing business opportunities and suchlike. The visiting executives thought this was the usual office politics until they found that two others joined in. The Chinese were effectively demanding that global corporation shift the entire Asian business out of their Indian operation and move it to China.

All this might appear par for the course in the internal politics of multinational corporations. What was different here was that two of the Chinese executives involved were ranking members of the Communist Party of China — commissars, as they used to be called — and they were not merely making a sales pitch. The Westerners noticed a distinct “or else…” in the proposals they were hearing from the Chinese colleagues. The Asian business had been placed under the India head because his was the oldest and most profitable unit. There had previously been no cause to review this arrangement. Now the Chinese wanted not only the Asian business, but the Indian unit too.

A year later, they got it. The Indian CEO now reports to the regional headquarters in Beijing.
 

Under Chinese law, all companies are required “to provide the necessary conditions for the activities of party organisations, which shall be established within the company.” Also, if a company has three or more party members, they are required to form a party organisation at their workplace. This applies to all companies, public or private, local or foreign. Before Xi Jinping took office, these terms had to be complied with, but were not taken seriously. Party meetings tended to be more like social events, where a missive from Beijing would sometimes be read.

Now those terms are among the various instruments being used to push Xi’s political, economic and geoeconomics agenda. The number of party units in foreign-owned companies in China grew from 47,000 in 2011 to over 106,000 at the end of 2016. Over 70 per cent of China’s 2.7 million private firms now have a party unit. Party units are proliferating with a zeal not witnessed in China in decades.

Illustration by Binay Sinha

 

Last August, Reuters’ Michael Martina reported that over a dozen executives from European multinationals met in Beijing to discuss the Party’s intrusion into their business operations.

Martina reports that the companies were being pressured to give the Party more formal powers in management. “One senior executive whose company was represented at the meeting told Reuters some companies were under “political pressure” to revise the terms of their joint ventures with state-owned partners to allow the party final say over business operations and investment decisions...Once it is part of the governance, they have direct rights,” he said.” 
 

Deng Xiaoping began the extrication of the party from business. Xi is putting them back in. Government officials, and worse, political party officials have not been known to be great creators of value, innovation and competitiveness. As I’ve written in these pages before, the overall long term effect of Xi pressing the Undo button on Deng’s policies is likely to be an undoing of China’s rise.

In the short term though, the Party will use its influence over domestic and foreign corporations to pursue Beijing’s geoeconomic and foreign policy goals. Indeed, prospects of a trade war with the United States might cause the Chinese party-state to step up its use of private corporations to “direct” trade and investment patterns. This too will hurt China in the longer term but in the process, first hurt businesses and economies in the region. The anecdote I related shows one pathway through which that can happen.
 

What should India do? There is a case for the Union government — specifically the commerce and external affairs ministries — to conduct a confidential sample survey of Indian companies operating in China to get a handle on the extent and the seriousness of the problem. That can form the basis for subsequent action.
 

More importantly, China’s interference in private companies and its involvement in trade and currency wars with the United States present India with a window of opportunity to present international businesses with a competitive alternative. The key words are “competitive alternative” which requires Big Bang economic liberalisation — labour reforms and removal of the regulatory straitjacket.

It is perhaps unrealistic to expect such reforms before the upcoming Lok Sabha elections, but those writing political party manifestos should be aware of a rare opportunity to get business out of China and into India. 

The writer is co-founder and director of the Takshashila Institution, an independent think tank and school of public policy