State-owned enterprises

Don’t panic! Party leadership is China’s answer to West’s corporate governance issues, say SOE bosses

Foreign firm threatened to quit JV over inclusion of Communist Party leadership in company articles, GAC chairman says on sidelines of Fortune Global Forum

PUBLISHED : Friday, 08 December, 2017, 6:00pm
UPDATED : Friday, 08 December, 2017, 6:15pm

A foreign firm this year threatened to walk away from a joint venture with Guangzhou Automobile Group (GAC) after the Chinese side lobbied to include “the leadership of party” in company articles, GAC chairman Zeng Qinghong said on the sidelines of the Fortune Global Forum in Guangzhou on Friday.

“Foreigners, particularly those from Europe, do not understand how we work to weave party leadership into corporate governance and improve it. I would say there is no reason to panic,” he said during a panel discussion on the outlook for state-owned enterprise reform in China.

Zeng did not clarify which joint venture encountered the dispute about including the Communist Party of China’s leadership in day-to-day operations and value system. GAC is a state-controlled car maker based in Guangzhou that owns several joint ventures, including those with Honda and Fiat Chrysler.

The GAC chairman’s concern and eagerness to persuade foreign companies about the importance of strengthening the party’s role in state-owned enterprises is shared by other bosses.

China has been pushing reforms to strengthen its 131.7 trillion yuan (US$19.9 trillion) state sector, by wooing foreign and private capital, talent and expertise from Western companies, but an intensive plan to bolster the role of the party in companies in the past months has triggered concern from non-state shareholders over efficiency and conflict of interest.

“[For management of state-owned enterprises,] there is always a question about how to balance the desire for better efficiency with social purposes on top of profitmaking obligations … my understanding is there is not going to be a satisfactory result,” Arthur Kroeber, founding partner of the Beijing economic research company Gavekal Dragonomics, said during the panel discussion, adding that he was concerned about the outlook of state-owned enterprise reform as he did not see a clear direction chosen by the leadership when facing contradictory missions and fast-piling debts.

China’s overall debt is about three times its economy now, and state-owned enterprises make up a significant portion of it. As of September, state-owned enterprises reported a faster pace of debt growth, rating agency Fitch said in a report last month.

Xiang Bing, the founding dean of Cheung Kong Graduate School of Business, however, said it was worth giving the “Chinese way” a try.

“Classical tactics in Western corporate governance, highlighted by transparency, regulation and incentive, are meeting more and more challenges – like insider control – nowadays, while China is exploring a new layer of constraints. We should keep an open mind. If it [greater party control] does not work, China will adjust its way of doing things,” he said.

“Stronger party control is one solution to solve the problems that Western thought cannot solve, at a time when the market economy is premature in China,” said Xu Niansha, chairman and party secretary of China Poly Group Corporation. “For instance, it is very hard to persuade some senior managers in Guangzhou to relocate to Beijing as the latter comes rough living conditions, but we can ask our staff to do so. Because they should follow party discipline and see the overall situation.”

The central government owns and administers 101 enterprises in sectors that range from nuclear technology to medicine. Thousands of state-owned enterprises are controlled by local governments.