As private companies have gained a foothold in strategically relevant sectors, the CCP has had to develop a new disciplinary system and incentive structure to compel rent-seeking entrepreneurs to serve the party’s interests. This was done in part by regulatory intervention in previously largely unregulated sectors. To increase political and operational control over private companies, regulatory measures have been complemented by stronger party affiliation of the management and traditional economic guidance tools via the state-controlled financial system. As the structure of the economy has changed, the party-state has supplemented its toolkit, turning increasingly to the private sector to achieve ambitious national priorities.
As demonstrated with Alibaba, Beijing is using this growing set of policies, regulations, and informal instruments to reshape economic actors that do not align with strategic goals, or to direct support and guidance to firms that are generally on board. These new tools fall broadly into three categories: Ownership/governance, sticks, and carrots. These are discussed briefly here but are illustrated in detailed case studies at the end of this report.
- Direct ownership
- Golden shares
- Party roles in decision making
- Market access restrictions
- Vertically integrated value chains
- Facilitated investment/divestment
Ownership/governance tools give Beijing direct influence in the decision-making processes of economic actors. Some of this happens through traditional means like direct ownership of SOEs at the central or even local level of the government, or through market access restrictions that have historically forced foreign private companies into joint ventures (JVs) with (often state-owned) local partners, thus creating channels for the party-state to guide decisions.
Others are the result of more recent efforts like mixed ownership reform efforts that in many ways tied SOEs and private companies together, or the application of golden shares in certain companies to ensure the party-state has certain veto powers. Finally, the party-state has other unique means to intervene, such as through party roles of board members, the ability to facilitate investment or divestment (to offload toxic assets from firms like the troubled real estate behemoth Evergrande or to raise funds through rapid sales like tech giant Huawei did with its Honor smartphone brand), or the ability of the State-owned Assets Supervision and Administration Commission (SASAC) to use its ownership of multiple SOEs in a given value chain to coordinate action.
- Regulatory direction
- “Crackdowns” and “rectifications”
- IPO blocks
- Common Prosperity demands
- Assignment to “national teams”
Sticks in Beijing’s arsenal give it the means to drive unruly actors away from the things Beijing doesn’t include in its objectives. This can happen through traditional regulatory direction, both to drive legitimate compliance (like with the new cyber and data legal regime) or as means of political signaling through “crackdowns” and “rectification campaigns” (like choosing the internet platform sector for its first round of cyber and data rules enforcement to send a message to other industries). This can also include steps like scuttling planned IPOs at the political direction of Xi himself. Some sticks don’t look so offensive or damaging, but instead are means of atonement, like embracing Common Prosperity by putting billions into common prosperity funds or joining “national teams” to help close strategic technology gaps.
- Direct subsidies/tax relief
- Policy banks
- Cheap loans
- Advantageous stock listings
- Implicit guarantees
- State guidance funds
- Little Giants status
- HNTE status
- Ensured customer base
- R&D support
- Protected home market
Carrots are a way for Beijing to direct support to economic actors already aligned with national goals to help facilitate their success. They include many traditional means of state aid like subsidies, tax relief, cheap loans from state-run commercial and policy banks, implicit guarantees for SOEs, and protection from foreign competition. However, new support mechanisms have emerged in recent years to help achieve strategic goals, especially those related to closing the tech gap: advantageous stock listings in tech- and SME-specific markets, state guidance funds, status as a Little Giant (small firms in important areas of development) or as a High and New Technology Enterprise, ensured customer bases through public procurement or support from SOE customers, and extensive support in R&D through China’s innovation chain strategy.