The Party: The Secret World of China's Communist Rulers (14 page)

The Party’s most effective tool in elevating competence over cronyism during the last decade has been a practical and resolutely old-fashioned one. The department stress-tests promising officials by rotating them through jobs in diverse parts of the country and in different administrative units, before hauling them back to Beijing into the big league if they pass muster. By the time Chen Deming was tapped to be Commerce Minister in 2007, for example, a key government post which put him in charge of trade policy and negotiations and foreign investment policy, he had already served in three positions with distinct responsibilities.

In Suzhou, as mayor and party secretary, Chen helped build the city in the Yangtze delta near Shanghai into one of China’s most advanced manufacturing hubs, winning kudos on the ground by standing up for local interests even when it embarrassed Beijing. After the central government had signed an agreement in 1994 to set up an industrial park in Suzhou with the Singapore government, Chen authorized the establishment of a rival locally owned business zone across town. When the furious Singaporeans demanded an explanation, Chen replied that foreign investors had to take into account ‘cultural differences’ when doing business in China. It was an answer that combined palpable disdain with, perhaps unconsciously, deep irony. Singapore’s leaders had spent much of the nineties promoting themselves as the spokespeople for the region, extolling the unique virtues of so-called harmonious Asian values, which they had haughtily contrasted with the crass, confrontational west. Chen displayed both creativity and cynicism to play the culture card against Singapore in return.

After Suzhou, Chen was dispatched to Shaanxi, where his reputation survived the dirty, corrupt and accident-prone coal industry, an achievement in itself. Finally, Chen was brought to Beijing, and put in charge of the sensitive energy policy area in the Economic Planning Ministry, before being eventually promoted to take charge of the trade portfolio. Carlos Gutierrez, the then US Commerce Minister and his counterpart in the Bush administration, met Chen in late 2007 for the first time and remarked how impressed he was by his grasp of his portfolio after a short period in the job. Chen’s career path, Gutierrez remarked, reminded him of the rigours successful multinationals put their up-and-coming executives through, sending them first out into the field, to difficult regional offices and underperforming divisions, before bringing them back into head office to see how they performed there. It was an astute observation but one Gutierrez could have taken further.

The organization department moved Chen Deming around as if he was an employee of a company, in this case, the Communist Party of China. Equally, the department treated the heads of state companies in China as if they were apparatchiks as well, to be shifted around at will, whatever commercial conflicts might arise. At a time when the executives at state enterprises had been ordered to behave more like entrepreneurs than politicians, it was inevitable a new set of conflicts would rise to the surface.

By the time Edward Tian arrived at the Mandarin Hotel in London in November 2004 for a meeting with potential investors in his new Chinese telco company, he had steeled himself for some tough questioning. The day before in China, the Central Organization Department had announced without warning a reshuffle of the top executives at China’s three big state-owned telecoms companies, China Mobile, China Unicom and China Telecom. Two of the Chinese companies were listed on overseas exchanges, and another was preparing to sell shares offshore. The move left investors, and the executives of the companies themselves, agape.

It was the equivalent of the CEO of AT&T being moved without notice to head its domestic US competitor, Verizon, with the Verizon chief being appointed to run Sprint, at a time when the three companies were locked in a bruising battle on pricing and industry standards. Tian, a returnee from the US lured to head China Netcom, a fourth, fledgling state telco, was in the midst of a global roadshow to promote his company’s upcoming share sale. Tian had heard rumours about the changes but didn’t know for sure what was coming. ‘It was very hard to explain to western investors,’ he said. Over the coming years, it would take Tian a while to understand the appointments system himself.

Most of the aggrieved foreign investors had never even heard of this strange body with the vaguely Orwellian name, the Central Organization Department. Certainly, the companies, and their bankers and lawyers, had made sure never to mention it ahead of the companies’ billion-dollar share sales. The anger was even more palpable among the many Chinese who had spent years trying to build a genuine commercial corporate culture in the refurbished state enterprises.

The problem was not so much the disregard the organization department displayed for the edifice of company law and governance painstakingly constructed in large state companies and sold to foreign investors over the previous decade. According to a prominent Chinese banker, it was ignorance. The Party did not even stop to think about the board and its legal responsibility for choosing the chairman and senior executives. ‘The proper process is that the chairman submits his resignation and then the board discusses it,’ the banker said. ‘The Central Organization Department is totally ignorant about such processes. This is not just about protocol. The issue goes much deeper than that. It goes directly against Chinese securities law, enacted by the National People’s Congress, which says the chairman’s job cannot be influenced by any outside body.’

‘The idea that the boards really run companies is basically as credible as the constitutional guarantee of free speech and religious freedom in China. It does not happen in reality,’ the banker said. ‘At all the major state companies, the party meetings are held regularly before the board meetings. Operating costs, capital commitments and the like are discussed at the board meetings, but personnel remains in the hands of the Party. No matter how many independent directors there are and what oversight they provide, at the end of the day, if all management are appointed by the Party, nothing will change.’

One of the reshuffled telco executives, Wang Jianzhou, who was shifted from China Unicom to manage rival China Mobile, told friends he had had no forewarning of the move. Nor had any of the boards of the companies been consulted beforehand. As an executive of a company listed on the New York and Hong Kong stock exchanges, with all the legal duties such a role entails, Wang hurriedly sought legal advice about the implications of the move. The advice of the lawyer was succinct. He was told: ‘Don’t talk about your old company.’

The deliberate element of surprise in many of these moves, much as it might enrage the executives and investors, serves the Party’s purposes perfectly, by reminding them who’s boss. The reshuffle sent a simple message to executives of the state companies. Overnight, China Mobile had become the world’s biggest mobile company and the rest of the sector was booming alongside it. Power was increasingly accruing to the companies’ CEOs in a strategic industry with important national security implications. ‘The view was that we have to keep these ones in the box; we are better off running these companies with politicians and not entrepreneurs,’ said an adviser to the companies. ‘The idea was to break emerging centres of power.’

The fiction that the Party is not involved in such decisions is carefully nurtured, by ensuring that public announcements of new appointments are made by formal government bodies, such as the State Council, the government body which regulates state enterprises, known as SASAC, the ministries themselves or the parent company. The announcements are invariably heralded in newspaper headlines as ‘job changes’, masking a subtle but fundamental difference in how the appointments are portrayed inside the system itself. From a party perspective, the officials moving between enterprises or in and out of government are not so much changing jobs. They are being shuffled within the same system.

In the first few years of this century, the chairman of China’s offshore oil company, CNOOC, was made the governor of Hainan province; the head of PetroChina joined the chief economic planning agency as a vice-minister; the chairman of Huaneng Power was appointed deputy-governor of Shanxi province; the vice-governor of the central bank was appointed to head the China Construction Bank and the chairman of Chinalco was elevated to a cabinet advisory post. Even the head of the country’s only nominally private bank, Minsheng Bank, the subject of many fawning media articles for being an entrepreneurial upstart in a state financial monopoly, is cleared through the party process.

Edward Tian, the founding CEO of China Netcom, is one of the few people who has been able to view the system from both sides, first as an outsider, and then later, when the Party ushered him into the
nomenklatura
ranks, as an insider as well. Tian was already a wealthy and successful private businessman when he was approached in the late nineties to run Netcom, then a fledgling telco state start-up. His Chinese colleagues at AsiaInfo, a private company he had co-founded and ushered through a listing on the Nasdaq exchange in New York, thought he was crazy to contemplate working in a government enterprise. For a while, Tian found himself agreeing with them.

By Chinese government standards, Netcom was an enlightened project, an attempt by four state investors to deregulate the local telco sector, then dominated by the giant China Telecom and its ministerial patron. The new Netcom aimed to bring broadband to China, shake up the industry and at the same time allow investors, such as the Railways Ministry, an entrée into the then hottest sector in the global economy. The recruitment of the US-educated Tian from the private sector showed the system, including heavyweight backers like Jiang Mianheng, the son of Jiang Zemin, thinking outside of the box as well. But when Tian insisted that as CEO he should join the board of the new company, he was told no. The other directors were all vice-ministers, whereas he was just an entrepreneur. The club was not ready to admit someone without the requisite rank. ‘I was very disappointed and thought about quitting,’ he said. ‘They said calm down, work at it for a year and see how we go.’

A year later, Netcom was showing promise. Hundreds of managers had been hired. Thirteen cities had been linked up to its broadband network. Revenues were rising. Finally, the investors agreed to have their CEO on the board. ‘This was a big moment. I felt that the system recognized me,’ Tian said. Real recognition did not come until about two to three years later, though, when the once small state start-up company took over the operations of ten provinces from China Telecom. For Tian to stay as CEO of the expanded Netcom, he now had to pass muster not with his board, but with the Party, in the form of the organization department. For both sides it was a novel experience.

Tian wanted the job, but not some of the privileges and restrictions that came with the position, which had the rank of vice-minister. He didn’t want a ‘red machine’ on his desk. And he didn’t want an official passport, because that would have restricted him to two overseas trips a year, the limit at that time for people with a vice-ministerial ranking. Any trips above this number required an elevated level of approval. ‘I didn’t want to join the political system,’ Tian said. ‘It would impinge on my freedom.’ The organization department, because of his foreign education, agreed to make an exception for him. Once he had passed his internal review and revived his membership of the Party–his membership from his university days had lapsed while he was overseas–the department was satisfied. It confirmed him as the CEO and allowed him to join the inner sanctum of the party committee.

However, the night of the long knives in the telco industry, when the department reshuffled the industry leadership, still rankled with Tian and his chairman and party secretary, Zhang Chunjiang, who also sat through the embarrassing London roadshow. When the pair returned from overseas, they wrote to the Party and the government to register their concerns about the game of executive musical chairs. After the Netcom listing, Zhang went even further in an effort to prise open the Party’s control over the company. He recruited John Thornton, the former president of Goldman Sachs, then teaching in China, to sit on the board, and McKinsey & Co., the management consultancy, to advise him about how the internal processes should be run.

For Thornton, who already had experience of taking Chinese state companies to international stock markets, Zhang’s introductory lecture on the role of the party committee was an ‘eye-opening’ moment. ‘There are six functions for which the party committee was responsible,’ Thornton said, ‘and they were the ones that mattered.’ The project laboured for months over how to run the company in a more transparent and accountable fashion. Should the evaluation and appointment of senior executives be the direct responsibility of the board, as Netcom had promised in its overseas listing documents and as Chinese law stipulated? Or should the power over personnel remain with the party committee? Netcom eventually agreed that the board would approve senior executive appointments. But there was a catch. The committee which recommended the appointments to the board had to have a majority of its members appointed by the Party. The board’s role in evaluating and appointing was strengthened in theory, but in practice the directors only saw candidates cleared through the party system. The efforts to open up the company’s personnel system, after much work, ended in a whimper. ‘It looked all shiny and glossy on the surface,’ said an adviser, ‘but if you poked around, it was very traditional underneath.’

By a year or so later, Tian had left, to go back to the private sector. Zhang had been moved on to chair another telco, China Mobile. In 2008, China Netcom disappeared altogether, subsumed by another state company in the latest industry reshuffle. In late 2009, Zhang was detained by the party’s anti-graft unit on unspecified corruption allegations, bringing to a rather ironic end the career of an official once heralded as a champion of Chinese-style corporate governance. Still, Tian left the system with a more favourable view than he had had when he joined. ‘I feel I could justify this system now and understand how it has worked for 1,000 years,’ he said. ‘Ten years ago, I would not have had a similar feeling.’ Tian compared his time at Netcom to his experience on boards in western companies, where he said CEOs were chosen by busy directors in consultation with headhunters. However political the process in China might have been, he maintained the vetting of CEOs was generally more thorough in his homeland. As an insider, Tian had even come to rationalize the industry reshuffles. ‘The competition was very furious. It’s like three brothers fighting each other for no clear objective,’ he said. ‘The parents say: “Let’s change your seats. You will see each other from another angle. You had better behave yourself from now on.”’