The Party: The Secret World of China's Communist Rulers (10 page)

At the Bank of Communications, China’s fifth largest bank, Jiang Chaoliang, the chairman, said the party committee was in charge of strategy as well as personnel. Far from being driven solely by making a profit for shareholders, the Party had to act in accord with social ‘stability’ and national ‘macro-economic’ policies laid down by the government. The bank’s foreign partner, HSBC, apparently had no trouble with this, even though its purchase of a 19.9 per cent stake in the Chinese lender had been partially marketed to its own shareholders as a chance to change the old-style corporate governance. Jiang remarked that Sir John Bond, the then head of HSBC, had told him he understood that since he was chairman, he had to be party secretary as well. ‘This guy didn’t think it strange at all,’ Jiang said.

When a Chinese journalist interviewed Li Lihui, the president of the Bank of China, he relayed a joke about how the bank’s independent British director had wanted to attend party committee meetings, ‘but since he was not a Communist Party member, he had tried to find a British communist to participate on his behalf’. Li mirthlessly defended the Party in reply, and its indispensable role in setting the bank’s business direction and liaising with other arms of the government. ‘In China, it is very important to display the political power of the Communist Party,’ he said. ‘Management can solve a majority of problems, but not all of them.’

There is little debate in China itself these days over whether the Party’s backstage role in Chinese state enterprises should be disclosed outside of the communist club. That issue has been settled since the days of the Shanghai Petrochemical listing, which set a precedent of non-disclosure that has been followed ever since. The real conflict inside China is the one that Guo alluded to before he was put back in his box. It is within the system itself, between the traditionalists in the Party on the one side, who want to keep a tight grip on the enterprises, and the increasingly ambitious chief executives of state companies on the other. Guo Shuqing’s complaints about the Party were a harbinger of an important trend with far-reaching implications for the global economy. If the Party expects us to run these companies commercially, these executives argued, then it should allow us to manage them solely on business lines.

The corporate animal that emerged from the protracted and painful birth of China Inc. was a strange new beast. Just as the Party had ordered, it was both commercial and communist at the same time. The split personalities of the powerful, reconstituted state enterprises were not just difficult for the rest of the world to deal with. China has struggled to adapt as well.

As often happens, when change comes, it seems to arrive out of the blue, though the conditions for it have been carefully laid out in front of your eyes over many years. That was the case when Beijing made its first big splash in mergers and acquisitions in the west in 2005, with the $23 billion bid by CNOOC, China’s offshore oil company, for Unocal, the California-based company with energy assets in the US and Asia. The idea of a company ultimately controlled by the Communist Party being allowed to buy oil and gas assets owned by an American company was always going to be a hard sell. But the roots of the eventual failure of the deal went deeper than the predictable political uproar, to the way CNOOC’s chief executive, Fu Chengyu, had mismanaged the competing demands of the Party and his board in configuring the bid.

Fu’s life traversed the same sweep of history as many leaders of his generation. Born in 1951, his studies were interrupted by the Cultural Revolution in the mid-sixties and he had joined the Red Guards, an exhilarating experience, he later told colleagues, with free food and travel all over China. By his early twenties, he was back on the straight and narrow in China’s north-eastern oil fields. Fu rose through the ranks to become one of China’s most cosmopolitan state CEOs, but not so worldly that he understood how to handle the international board the company appointed when it sold shares overseas in one of its subsidiaries.

Ahead of the Unocal bid, Fu had won approval from the government to proceed, and had also cleared the deal through CNOOC’s party committee, which he headed. But his decision to present the bid to the board as a fait accompli angered the independent foreign directors, poisoning CNOOC’s position from the start and shackling Fu’s ability to respond nimbly in the ensuing takeover battle. With opposition to the deal on national security grounds mounting in Congress, the Chinese complained bitterly about protectionism and dropped out. But throughout the controversy, Fu had never been able to address the deeper issue, of the way the party committee had tried to sweep the board aside. No matter what Fu said, there was enough evidence to make a case in Washington that CNOOC represented the political priorities of the Chinese state, rather than a commercial enterprise in its own right.

Most foreigners dealing with large Chinese state companies in the early days of economic reform felt much like the Japanese executives from the giant Mitsubishi conglomerate negotiating to build a power plant for Baoshan Steel, a pioneering project near Shanghai in the early eighties. The Japanese were aggrieved when the Chinese side got the better of them during the talks and they were forced into concessions. ‘Yes, you win the negotiations,’ the Mitsubishi executives exclaimed. ‘But it was your national team fighting our company team!’ Chen Jinhua, a titan of state industry who recounted this story in his biography, said the Japanese were right. ‘We had invited many capable experts from China’s electrical power system to join our negotiating team, but Mitsubishi, as a single company, had been unable to do so,’ Chen wrote. ‘This example showed the superiority of our wide socialist co-operation.’

By the time big state companies like CNOOC were heading offshore two decades later, socialist co-operation, now re-branded as China Inc., had become as much an embarrassment as an advantage. To add to the confusion, there was no longer much socialist co-operation between state enterprises in any case. In its place, the Party had instituted a form of socialist competition to get the best out of the state sector. Far from being the monolith portrayed by Chen Jinhua, China Inc. revamped for the twenty-first century was more akin to a large, ravenous school of fish. Alert to the movements of their neighbours and inclined to swim in the same direction, Chinese companies competed individually for local and offshore deals like fish chasing the same tasty morsel of feed. Collectively, under the guidance of the mother fish of the Communist Party, China Inc. was as competitive as any large creature in the sea.

The transformation of China in the last three decades owes much to the animal spirits of the ordinary Chinese, many of whom have grabbed the chance to make money for the first time in decades. Much less understood is how the Party has unleashed the state’s animal spirits at the same time, with a force few anticipated. The pendulum swung so fast and so violently that the problem the Party faced with state enterprises was turned on its head. In the nineties, Beijing had worried about keeping the companies afloat. Early in the new century, the restructured enterprises, many of them built from scratch, were so big, wealthy and ambitious that the problem now was not how to keep them alive, but how to keep them in line.

Once written off as dinosaurs of a crumbling communist system, the structure, solvency and profitability of scores of big state enterprises were transformed in a decade. The giants of communist industry were suddenly throwing off billions of dollars in profits, courtesy of government protection from competition, surging economic growth, cheap capital and efficiencies wrenched out of the companies during their overhaul. In 2007, the year which marked the historic high-point of fast economic growth in China, the combined profitability of centrally owned state enterprises reached about $140 billion, compared to close to zero a decade previously, and triple the earnings of five years before. In the Fortune 500 list, which grades companies according to revenues, Chinese enterprises now hovered towards the top, where once they were also-rans.

But if China was getting rich in this period, the Chinese were not. In the ten years from 1997, a period which saw an astounding economic boom, the share of workers’ wages in national income fell dramatically, from 53 to just 40 per cent of GDP. The transformation of the state sector had far-reaching benefits for the Party, just as the convenors of the Beijing Hotel meeting years before had forecast they might. The swelling profits eased the burden on the fiscal budget and strengthened the state banks’ balance sheets. But the preferential policies meted out to government companies, of cheap land, resources and energy, ensured that the profits of China’s boom were captured and kept by the state, at the expense of the population at large. The state’s accumulated war-chest was not only about self-enrichment. With an eye to soaring raw material demands decades into the future and its declining stocks of oil at home, Beijing began to push the big, cashed-up state companies to head offshore in earnest around 2002 to ‘go out and become bigger and stronger’, in the parlance of top leaders. Not surprisingly, the firms at the front of the queue, in the oil and resources sector, created controversy almost wherever they went.

Fu Chengyu’s maladroit tactics in the failure of the 2005 CNOOC deal had angered many within the system, but he kept his job, saved by the shrill and occasionally xenophobic reaction in parts of the US to the Chinese bid. By the time the next big deal came around, China Inc. showed it had learnt many lessons. The fundamental problem, though, of the Party’s lurking backstage presence in large state enterprises remained untouched and unresolved. The same veil of secrecy the Party threw over its own affairs at home obscured the government’s role in state companies as they went abroad. As a consequence, working out where the state ended in government companies and the commercial enterprise began was often nigh impossible for foreigners.

When it was formed in 2001, the Aluminium Company of China (Chinalco) had all the characteristics of the thoroughly modern, and comfortably bi-polar, Chinese state corporation. The parent company had been formed during the upheavals of the nineties by aggregating a sprawling collection of bauxite mines, alumina refineries and aluminium smelters, and their marketing arms, into a single entity, instantly creating the second largest company in the metals sector in the world. To ensure the new company didn’t develop the sclerotic habits of the old state sector, the government added the market to the mix, directing Chinalco to hive off some of its most valuable assets into a separate entity (known as Chalco) to be listed on overseas stock markets later the same year.

The ‘red machine’ sitting on the desk of the company’s chairman, Xiao Yaqing, signified Chinalco’s status as one of the fifty-odd core companies which the state regarded as essential for its national security and economic development. Next to the hotline connecting Xiao to the party elite was the new symbol of the Chinese corporate state, a screen displaying the stock price of the company’s overseas listed enterprise. Together, the two devices conveyed a mixed message. Front stage, companies like Chinalco bristled with commercial ambition and tracked their stock price as ardently as their western competitors. Backstage, however, the Party sat quietly out of sight, tugging on the reins when need be, safe in the knowledge it retained all the levers needed to control the company. Executives like Xiao juggled a difficult brief. They had to manage the company’s, and what the Party deemed to be the country’s, interests at the same time. One benchmark was business performance; the other was political; and neither of them was clear.

Very much the new face of Chinese state business when he became CEO in 2002, the then 42-year-old Xiao was a decade younger than Fu Chengyu and most state enterprise bosses. Like CNOOC’s Fu, Xiao carried all the political baggage of a top-level state business executive. He was a member of the Central Committee, and he served as chairman and secretary of Chinalco’s party committee. He was also a smart, aggressive businessman. He took the company in different directions, diversifying into copper and rare earths at home and getting involved personally in sensitive negotiations with indigenous landowners at a bauxite project in Australia’s deep north in the company’s push offshore. It wasn’t long, however, before his country came calling with a task that dwarfed anything that Chinalco, or any Chinese state business, had ever successfully taken on.

The alarm bells went off in Beijing the moment BHP-Billiton, the largest mining company in the world, launched its takeover bid for its Anglo-Australian rival, Rio-Tinto, in November 2007. China saw the $127 billion bid, later lifted to $147 billion, the second biggest takeover in history at the time, as an unambiguous threat, because of the way it could create a near monopoly in the seaborne iron ore trade in particular. The international price of iron ore, used to make steel, had increased fivefold in the five years to 2008. The exponential growth in Chinese demand was one driver. But so was the lack of supply, which China believed had been manipulated through under-investment by the big miners. The Politburo quickly decided to oppose the BHP-Billiton bid, a decision which would push China Inc. on to the world stage as never before.

In a matter of hours on the London stock market, Chinalco made China’s biggest ever overseas investment, a $14 billion share raid on London to scoop up 9 per cent of Rio-Tinto. With CNOOC’s mistakes in mind, Xiao went on the front foot immediately, giving interviews to the foreign media in a fashion unprecedented for the head of a Chinese state company, and flying down to Australia to reassure nervous politicians in person about Chinalco’s intentions. Xiao’s message in public was consistent. Chinalco was a state-owned company, but run without interference from the state. ‘All management and commercial decisions are taken independently,’ he said. From the outset, to Xiao’s chagrin, and that of his political masters, his assertions of independence during the two stages of the bid for Rio-Tinto kept running into the same wall of disbelief that confronted CNOOC at Unocal. As the extra-commercial aspects of Chinalco’s tilt at Rio-Tinto added up embarrassingly as the deal progressed, it was not hard to see why.