How Firms Serve the Party-State

China is one of the 21st century's most consequential nations. It has never been more important to understand how the country is governed, and what its leaders and its people actually want and believe. Welcome to peckingology, the podcast that unpacks China's evolving political system, and the trajectory of China's domestic and foreign policy. I'm your host, Henrietta Levin, senior fellow with the Freeman Chair in China Studies at CSIS. This is peckingology. I am very pleased to be joined today by Dr. Ning Ling. Ning is an assistant professor of political science at Georgetown University as well as a Wilson Center China Fellow, and the author of a very new book called Politicizing Business, while firms are made to serve the party state in China. Ning, it is great to see you, and thanks for coming back on peckingology. Thank you so much for having me. We like to start all of our episodes with a personal question, and you already talked a bit about your background when you were last on peckingology all the way back in 2021. For our newer listeners, I'm hoping you can still remind us how you originally became interested in studying Chinese business and politics, how you realized this was the book that you needed to write. But also, I want to make sure our older listeners learned something new. So for this book, you conducted over 200 interviews in 15 cities across China. So I'm hoping you can also tell us which city was your favorite. I was born and raised in China, so I'm naturally interested in China, and then I was a business consultant for a while, so I got interested in business. So China and business became my focus in my PhD studies. In all of my field work in China, I would say my favorite sites are in Southwest China. So Guijuo Province and Sichuan Province, partly because the food there was so spicy and great. That is a great reason. My first trip ever to China, knowing almost nothing about China, was to middle of nowhere Guijuo, and I think it's how I ended up here as well, because it's a beautiful part of the world. So to dive into the book, you start off by saying that firms are considered an integral part of the Chinese political system, which is a really interesting observation. And with that in mind, how would you characterize the relationship between politics and business in today's China? I think in China ever since 1978, the parties they never gave business in China real autonomy. So they have over the years enhanced the business autonomy of business, meaning they have really curbed economic predation over time, but they never really, and couldn't probably, have meaningful commitment to curb their political predation on business. The state very much sees business as part of the political system, and she served the Chinese political system. You mentioned also that those trends, relationship between politics and business, has characterized the Xi era, but it also precedes Xi significantly. So can you help us understand how this has evolved over time? So China's economic reform started in 1978, and then under Deng Xiaoping's rule of China, there were two waves of nationwide crackdown on the entire private economy. Both of them is because then believe that the private entrepreneurs are becoming too rich, too organized they might impose a threat to the regime. And then back then, the crackdown was in the form mostly of arresting and prosecuting private entrepreneurs with crimes that are now no longer a crime they're decriminalized. And then after 1992, CCP wrote into China's constitution that the private economy is very much part of China's socialist market economy, and then the private economy in the self-gain legitimacy. And then the crackdown became sector-wide. So every once in a while, and different localities, you will see local governments, sometimes national government, go in and crack down on different private sectors. And most of your research for this book was conducted, I think, between 2015 and 2019, so it precedes the COVID era. So before we get further into the details, I'd love to get your thoughts also on the degree to which these trends have further evolved in the post-COVID time, especially as China's economy starts to slow. Like, does that affect how cadres would think about politicization of firms? My observation is they're probably in trenching politicization now. So for example, I know that after COVID, the private companies now actually have a new political service, which is to increase employment size, to help the state solve unemployment crises. And then also throughout the entire Xi Jinping's poverty alleviation campaign, they also actively solicited donations and contributions from private business. So politicization to me seems to be going on, particularly when the Chinese state now lacks money. It's going to be more from the private sector. It's an important factor. And so just to further impact this relationship as it evolves between politics and business, you know that the party does very consistently over time state emphatically that it supports entrepreneurs, but in the same breath calls on them to be politically sensible. What does that mean? Exactly. That is almost impossible to dissect for both the business side or government officials. Like what does it mean to have a company being political sensible? Does it mean they have to change their operations, but change operations for what go? It's exactly because being political sensible is such a vague line that the local or any government officials in China could actually take advantage of it and go to business and say, do this and do that because otherwise you are not politically sensible. And that is actually a very important condition for politicization of business in China. It's very much allowed by the party's state because the nation makes sure that private entrepreneurs do not become an anti-vergain force. And do you think that that ambiguity in the guidance the party provides to firms on what is acceptable? Do you think that the value for the party that ambiguity is creating flexibility for the party to intervene with firms, however they deem it's necessary or is it intended to ensure the firms feel to some degree insecure? I think primarily probably serving the first purpose that you mentioned. It gives the party flexibility to preempt and to watch how the private sector would develop politically. But then it definitely also satisfies the second purpose you mentioned. Then incidentally it's going to create a private sector that's always on their toe, very gingerly thinking about, right? Have we crossed the red line yet? And in terms of where those red lines may or may not lie, you also have a really interesting observation in the book that the fate of private firms is often subject to the winds of the state, but even when these firms deliver economic outcomes and even when they play by the political rules. So why are even the firms that must feel they're doing everything right? Why do they end up being punished as well? So one thing I think that private companies in China, most of the time they're doing counter to the situation of being politicized and they believe that if they make the right connection, we're saying that even going up to the top of the ladder, the biggest private companies, they believe that if we make the right connections in the party state, we can protect our business interest. And it is true to some degree that if you have political protection from individual politicians or multitude of them, your business interest is going to be protected. But when a party state comes in and asks you to do something, political in nature, there are two issues about this. When your patron, which is your political connections, they will not protect you against the party state's demand, that is political in nature. Because the patrons there go is to have economic benefits, right? Through the state business ties, they're not trying to fight the party state along with their business partners. And so the patrons will not be there to protect business when it's political, when politicization steps in. And the second thing is that for business, politicization, meaning providing political services to the party state is a very different type of corporate political activity. It's an activity unlike lobbying, unlike associational activities, unlike corruption. When it comes to political services, business don't have any control over the cost of this political service, over the timing of it, it might not happen before a major regulation is going to pass where major deal needs to happen. And they sometimes don't even have control over to whom this political service is benefiting. So political services is a really bad deal for companies most of the time. And so when they are asked to provide political services, when the costs become too high, they start to resist it. And when they resist it, their patrons are not going to protect them. And so party state and the business conflict started deep in. And then we see sometimes private business lose out and exit in this as an outcome. And this may be an impossible question. But when it comes to the decision makers in the party at the local or provincial level or even in Beijing that are deciding the fate of these firms, the degree to which they will experience politicization, who are the decision makers that matter on the party side? Who is really driving the direction of travel? Every government official who has some power over business could politicize them. Basically in my observation, it would be leaders, leaders of a county, leaders of a city, leaders of a ministry in charge of a whole sector. Almost anyone could have opportunity to politicize business. Making it perhaps even more impossible to plan as a firm. That's right. In that same spirit. I thought it was interesting that you identified in the book that state encroachment has affected almost impossibly wide range of sectors. This isn't about national security. This isn't even about economic security. If everything from gas stations to hog farms to admittedly rare earth minerals as well. So there are sometimes national security angles, but sometimes really not at all. So are there any sectors that are more or less safe that you've seen in your research from politicization? If there's one thing I learned, is that any sector could become the subject of politicization. That is a very scary finding when I realized that in the field, any sector. It depends on what the party state wants or encourages at the time. What are the factors that you see in how those decisions fall out, which sector may come into focus for those looking to seek political gains from the private sector? The two political services I described in this book, both have been under the radar so far in literature. One of them is called visibility projects. This is when the party state issues new and ambiguous policy directives. For example, let's have clean air, let's have AI and robotics industry. That will be a window to open up politicization in different sectors. The second political service I described is societal control. In sectors that are prone to project-level protests, chemical, pharmaceutical, waste and incineration that I discussed in details, these are another sector where companies could be politicized to provide societal control for the state. To dive a little deeper into those two types of political services that firms can provide, mention visibility projects. I think at one point in the book, you describe these as fundamentally contributions to officials careers in the context of a delightful term, you've used which is selectoral campaigns. I'm hoping you can talk a little bit more about this idea of a selectoral campaign for a party cadre. What does a good to electoral campaign look like? Absolutely. Selectoral campaign is a play on electoral campaign. These government officials in China don't get to stand out in an election so they have to become creative. The root cause of selectoral campaign is because the way the Chinese government officials are promoted, the entire evaluation system is actually quite fraud. There's a lot of fraud. There's a lot of gaming and then people don't know how to present loyalty and so they have to invent selectoral campaign to stand out in another way. A typical selectoral campaign will have media exposure. These government officials who are ambitious, go on the TV, go to newspaper and sing prices to their boss. That's the most important media exposure. There's office buying, which is recorded in the literature. They also launch visibility projects, which are these impressive, costly, more than necessary infrastructure building or public event organizing such as a sports event or a festival, to show that we are very competent. Look what we can do and how do everybody else in infrastructure. This is by the way why Chinese infrastructure tend to be. There's so many mega projects out there. Part of it is to help these government officials stand out. What could we almost think of this kind of political service as an authoritarian analog to campaign donations in a democratic context or is that unfair? That will be right. I will say so. However, campaign donation in China is usually forced onto companies and they don't have control on how much to donate to whom to donate at what time to donate. That is the difference between in a democratic setting. It's a great point. I think it's important to think about the authoritarian manifestation of the same kind of political phenomenon. Then you also talk about the second type of political service assistance with societal control. I wonder how you've done so many conversations with the firms themselves. How do they conceive of this responsibility, whether it's censorship, whether it's addressing protests in some way, either positively or negatively? Do they see this as a civic responsibility or something they're just stuck doing sometimes? How do they perceive it? It's something they have to do and I don't think they view it from a moral point. I think they wish. When they think about societal control, it could show up in the form of a bribe. If they are the only company that could provide societal control for the state, they love it actually because then in nature, this political service is like a bribe. I'm the only one who can give you this favor. I'll do it for you and I expect you to reciprocate and the state usually reciprocates. That's good news for the companies. What they don't like to do is when societal control is more like a regulation, meaning the entire sector, all of the companies in this sector, have to provide societal control. For example, internet censorship, surveillance, these are sectoral-wide societal control functions. When they're asked to do that, no company could actually stand out and distinguish themselves and say, we are the only one that is doing this service for the state. Everybody has to do it. It's like a regulation. They're only paying the cost for societal control, but they're not reaping the benefits. In that sense, they don't like it. It really depends on the nature of the political service. To make this a little more concrete, I'm hoping we can dive into one of your really fascinating case studies, which looks at waste treatment companies and politicization. The second chapter of your book opens with a delightful passage about the world's most beautiful waste treatment plant. Can you tell us about that Jade City treatment plant? Yeah. That one, the plan was actually a visibility project example. The government wants an outsized wastewater treatment plan to showcase urban planning and environmental initiative. The company was forced to open another new plan, even when their old plan was not even working at full capacity. They had no choice because otherwise they could lose the contract. They eventually went out and built a beautiful plan, but without the necessary invisible components that would make it actually environmentally sustainable. Eventually, this is not a sustainable plan. Local residents go out and protest the plant and the government gets the plan to pay them off. How does that go? Yeah. In that case, whenever protests happen against a certain kind of project, so wasting generation project, we know people are worried about dioxin and NIMB movement. The government will go to the company and say, be my scapegoat or be my ally. When the protest is still small as scale and the government believe they could prevent this protest of escalating, they would use a piece of strategy, which is to find a scapegoat. The scapegoat here is the company and the government would say, company where it goes to now punish you because the public is angry. We're going to shut you down. We're going to suspend your operation. We're going to find you. It could be a big fine. We're going to give some of those fines as compensation to the residents. We want you to upgrade your facilities and what not. A lot of cost increasing measures on to these companies and private companies. This is where firm ownership starts to make a key difference. Private companies are better scapegoats in China because private companies don't have institutional political capital like steel enterprises, the SOEs. Private companies usually go along with all of these requests and say, we're going to take it, blame us, find us, punish us as long as we can still stay in this business. Private companies also could supply manpower onto the street directly against the protesters. Stale enterprises, SOEs, are less willing to be scapegoats because part of it is because they don't think they need to. They are part of the state institution. Why would they get blamed by a local government somewhere? But still enterprises are better to be the state's allies, meaning when there is a need for the state to suppress the protest with violence, police, semi-armed police force, it's much better to have SOEs on the state side because the SOEs bring in political support from higher level governments to justify violent suppression. So it depends on the local governments, you know, prediction of how protests will go. They prefer to work with one kind of company or the other kind. And in general, they prefer appeasement. They don't want to go straight into suppression. And therefore, they would love to have private companies there to be the scapegoats. In all the case studies that you evaluated, did you see any private companies trying to push back, trying to not accept blame when they were asked to do so? Not in the sector. The idea of the reason is, being a scapegoat brings these companies benefits. Like you swallow this better peel. You are going to be blamed. But then later, because this is, again, in nature like a bribe, right? You are the company, you are the one company that can do this for the government. The government does reciprocate. And the reciprocation comes in different forms. Sometimes it could be subsidies, other times extended contracts, sometimes cheap land access. And other times, and most of the time, the government would say, okay, we have done all of these punishment on paper to you. Now we're going to turn a blind eye to your cost-saving operation. So in environmental sectors, such as waste incineration, the company actually could indeed save cost, which is a very interesting dilemma. And the environment doesn't become better because you're saving cost. Dioxin increases. However, that's the state business dynamics. So there is, at least in some cases, a sort of transaction understood in these moments of politicization. Absolutely. Policization is not necessarily a bad news for a company. It really depends on whether it's a bribe or regulation in nature. It seems like, perhaps, over the longer term, you find the private sector tends to lose out over these journeys of politicization, but at least for moments in time can be revenue generating. That's right. That's right. Okay, so to go back to Jade City and its beautiful water treatment plant, at some point, the city leadership turns over because, of course, Codrae is always moving up and out. And then the new leadership asks for a new plant. And how does that go? Exactly. That's the problem of political services. Every new official needs their own project to claim credit. And they're not thinking about company costs. So the companies have to satisfy generations and generations. And we're talking about pretty quick turnovers. On average, 3.5 years for a city leader to be in place. And the companies have to deal with different political services over time. And in the long run, exactly as you said, they lose out in terms of cost. They have a hard budget constraint. So they exit. Looking at this whole life cycle of an attempt at a visibility project leading to public backlash, leading to basically the beginning of the story all over again. Like what lessons do you see? And do you see any feedback mechanisms for the state itself to learn lessons from these self-fulfilling cycles? The parties say I think the national government, at least, definitely knows what is going on on the ground. They know that business are being politicized. Do they want to close this window? I don't think so. Because again, the reason that, for example, in the new law this year, the law to first law to protect private economy in China, they would say we definitely support private economy, fair competition, everything. But they still have to add that line. Like the private sector has to serve the party and the people. They have to be politically sensible. And so the party state really doesn't want to shut the window of politicization because they know that they need to keep entrepreneurs in check. And maybe one day they will need the private sector to serve them. So they know exactly what's going on. But I don't think there will be any reform in curb political predation of business. So sitting back out then, what do you see as the implications of politicization of business, especially these urban utility-esque businesses that can sit at the foundation of China's development path? What is the overall implication for China's development? I think the first issue is how can the Chinese parties stay secure confidence in private investors in the long run? Once you start politicization in the sector, everybody watches that, everybody experiences it. Eventually, companies will realize it's actually not worth doing because the cost is way higher than we expected. Beyond business costs are also political costs. So there is an issue of attracting and retaining private investment. There is another issue about cost. So a lot of these political services, for example, visibility projects, they are highly costly projects because the whole point is to go beyond what is necessary. And so these costs will create problems, company debt, local government debt. How do they solve this debt problem? There is also an issue of sustainability. In other political services, for example, societal control, waste treatment and waste water sector, right? When the government and the business make a deal, and working together over societal control, the other side of the deal is usually that the government will indeed turn a blind eye to cost-saving measures in these sectors, which could hurt sustainability. These are sectors that are supposed to improve environmental quality, but they might not be actually functioning that way because of this politicization of business, because the company has to recoup cost somewhere else. And so politicization in general, I think it's not... It's going to hurt China's economy and sustainable development in the long run. And within the rough political bounds of today's China, if you could recommend to Xi Jinping, what reforms would you recommend to try to limit the negative externalities for China's overall development path, kind of address some of these challenges inherent in the careerism that these incentive structures create? What would you recommend? I would, first of all, if he would even listen, and then he would absolutely not like what I would recommend. I think it's not just about writing up another law and say we're going to provide private companies or shaping up the core system. I think in the end, to the core of this, Chinese parties need to reshape the incentive system for their government officials. This incentive system, like purely top down, and then it's also mixed with evaluating subordinates on both loyalty and competence, it's really not going to deliver the best government officials. The government officials will not be able to, and it's not their fault. They're not going to be able to work purely on competence, and they're not going to be able to think in the long term way. So it's really to change government officials in the incentive system, which will be a serious institutional change. So it seems like, at least in recent years, you talk about this balance between competence and loyalty and what the party is seeking to elevate. I mean, it does seem like a greater premium is increasingly being placed on the loyalty side of that, which unfortunately seems to cut against your recommendation for some reason. She seems to be in a different headspace on this. But I wonder how you see that, or if you agree with that premise, and if you do, how that may affect China's development over time, in terms of the incentives that these local cadres are facing, potentially being increasingly stacked towards loyalty. Like, is there, when it comes to things like visibility projects, is there a certain type or nature of project that we might be seeing more of or less of as loyalty takes on this greater role in the incentive system? I think the number one issue of the stressing, you know, the emphasis on loyalty is that loyalty actually goes against policy experiments. So if you tell everybody in China in the government system that you got to be loyal to the party, what they're actually doing is to tell people, do not overdo things, do not engage with new experiments, do not do bottom up policy reforms that might be good for your locality because what if the party doesn't like it, in Beijing? So what loyalty does an emphasis on it is to gradually narrow down policy options and the possible types of projects in China. It becomes narrower and narrower and eventually we don't even have good options, policy options to choose from. We'll have a very homogeneous set of policies because nobody there is overdue things. And then what will happen, the second thing is, but then people still want to get promoted. And so within this very narrow range of policy options and project alternatives, projects and policies will become more and more exaggerated and dramatic. So everybody is going to compete on here, 10 things we're allowed to do, we're going to do them a big like in the biggest scale as possible doing press. And so there will be a lot of wasteful expenditure on these unnecessary features such as what we see in visibility projects. So loyalty is going to create less policy experiments and more wasteful projects and bigger projects. Always bigger. Yeah, always bigger. The world's largest is what a lot of the government officials go for in China. So there's so many wonderful case studies in the book that capture kind of the tragedy, but also the absurdity of some of these visibility projects. I'm wondering if there are maybe one or two other stories you'd want to share to highlight some of these takeaways. Some of these visibility projects are really fun. For example, China has the largest museum in the vivid shape of a turtle and the color of a turtle and even the texture of a turtle. And I thought that was really what is the texture of a turtle? Kind of glazing like wet shells. It's super fun, right? It's entertaining. But then there are other visibility projects that make you wonder. So for example, in Qingdao, the city leader in 2006 had to decide whether to build a bridge high above the bay. It would be the longest bay bridge if we were constructed and under sea tunnel. Now all the engineers and experts were suggesting the under sea tunnel to avoid all of these weather hazards in the northern city of Qingdao and the tunnel frankly would end up cheaper than the bridge. Hey, but it's invisible. So the city leader decided that no, we're going to do a bridge and the longest bay bridge in the world back then. And quickly he realized that the bridge indeed as all of the experts say, make not much sense. So let's also do the tunnel, duplicate infrastructure, wasteful spending and eventually the public chose to use the tunnel and not the bridge. So that will be another example of visibility projects and this wasteful feature. That's fantastic. I think we'll have to wrap there. Ning, thank you so much for coming back on the show. Thank you so much. To learn more about the politicization of business in China and to gain a better appreciation for just how beautiful a useless wastewater treatment plant can be, I hope you will read Ning's new book politicization of business, how firms are made to serve the party state in China, come for the exceptional analysis of China's political economy. Let's stay for the turtles. To our listeners, we as always would love to hear what you thought of today's conversation and what issues you would like peckingology to unpack in future episodes. You can send your ideas to peckingology at csis.org. If you're new here, we hope you will subscribe and we'll be back in your feed in two weeks. 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