
China’s efforts to strengthen and expand Chinese Communist Party (CCP) organizations within companies is turning into one of the thorniest disputes in the U.S.-China economic relationship. American companies operating within China and American investors in Chinese companies are faced with the unsettling prospect of a CCP organization inside their company with an unclear agenda and overlapping lines of authority with the company’s managers. There is limited transparency over how party organizations make decisions, what aspects of a company they seek to control, what accountability, if any, they have to a company’s shareholders, and what information they may be sharing with outside parties.
If China refuses to correct course on this issue, U.S. policymakers will be justified in their accusations that China should not be treated as a market economy.
As state-owned enterprises (SOEs) in China underwent reforms and partially privatized via public listings, the CCP has sought to counterbalance its loss of control by strengthening party organizations within these companies. Yet this approach has not always been successful. As far back as the year 2000, President Jiang Zemin decried “lax and powerless” party organizations in SOEs.
Party organizations were even weaker in private companies. While party membership became common for many private entrepreneurs, penetration of private companies by party organizations was low and those that did exist had limited influence.
With Xi Jinping’s ascendency, there has been a resurgence of the Party’s efforts to entrench itself in all aspects of Chinese society, including the economy. Rather than reducing political intervention in the economy, Xi Jinping has revived Mao Zedong’s mantra that “east, west, south, and north, the Party leads everything.”
In this context, the CCP has renewed its efforts to establish party organizations in Chinese companies, both state and private. Since the launch of Xi Jinping’s SOE reform campaign in 2015, which cited the weak role of party organizations in many SOEs, China has made a concerted push to formally give party organizations greater influence within SOEs. For listed SOEs, a primary avenue for this effort has been to require SOEs to revise their corporate charters to formally empower party organizations. In 2018, this requirement was formally incorporated into the China Securities Regulatory Commission’s Code of Corporate Governance for Listed Companies.
Although the focus was initially on SOEs, private companies are increasingly being targeted by the campaign. By 2018, almost half of all eligible private companies had established a party organization, according to the All-China Federation of Industry and Commerce (ACFIC). The CCP is aiming for even higher levels of penetration into the private sector. At the end of 2019, the CCP Central Committee and the Chinese State Council encouraged private companies to strengthen their efforts in establishing party organizations. In 2020, the Vice Chairman of the ACFIC described private entrepreneurs as the “helmsmen of a ship” and party organizations as the “compass” that guides the ship’s direction.
The push to establish party organizations has generated a strong backlash from foreign companies operating in China. The European Chamber of Commerce has been vocal about its opposition to an expansive role for party organizations within their joint ventures with local SOEs. At present, there are only scattered reports of foreign companies in China facing pressure to establish party organizations or give existing ones more influence. However, it is difficult to gauge the true influence of party organizations because many foreign businesses may be reluctant to complain due to fear of damaging their relationship with the Chinese government.
Rather than reducing political intervention in the economy, Xi Jinping has revived Mao Zedong’s mantra that ‘east, west, south, and north, the Party leads everything.’
There is a general lack of information on the role of party involvement in most Chinese companies. Smartphone maker Xiaomi is a case in point. In 2015, the company made headlines when it announced it had upgraded its internal party organization to a full-fledged party committee, an unusual announcement for a fully private tech company at the time. A representative from Xiaomi asserted the party committee would not be involved in business matters, but that the company would “give full play to the role of the party organization in publicity, education, and cultural leadership.” When Xiaomi went public in 2018 in Hong Kong, its offering prospectus did not provide information about the party committee and the company’s subsequent announcements have revealed little more. Xiaomi became a lightning rod for attention in January 2021 when it was targeted by a Trump administration executive order for alleged ties to China’s People’s Liberation Army. Xiaomi has denied the allegation and sued the U.S. government to stop the ban. Regardless of whether it prevails in court, Xiaomi’s lack of disclosure about its connection to the CCP will continue to create a cloud of suspicion around the company.
On the issue of party organizations, U.S. policymakers are justified in taking a hardline approach and offering limited scope for compromise. If China wants its companies to be treated as market-based actors, it must make clear that they actually are complying with internationally recognized market-based norms.
In listed SOEs, the activities, membership, and expenses of party organizations should be fully disclosed to minority investors. SOEs should clarify the areas of corporate activity that are subject to control by the party organization, publicly identify the leadership of the party organization, and provide regular reporting to shareholders on its activities. By choosing to raise outside capital, listed SOEs have forgone their right to unfettered political control. Listed SOEs that cannot comply with these requirements should be converted back into fully government-owned enterprises.
For private Chinese companies and foreign companies operating within China, the CCP must make clear that party organizations have no legal basis to demand influence over a company’s operations or personnel appointments. Formal action taken to influence a company must come via official regulatory channels, not a secretive internal party organization.
The CCP has overreached beyond the legitimate purview of modern market economies by seeking to establish and strengthen party organizations in private and listed companies. If it persists with this approach, Western governments would be correct in classifying China as a non-market economy and establishing countervailing economic restrictions. If party organizations are left unchecked it could also have disastrous consequences for the Chinese economy, strangling the dynamism and entrepreneurialism out of China’s best companies.
As of March 31, 2021, Seafarer’s client accounts did not own shares in the entities referenced in this commentary.
The views and information discussed in this commentary are, as of the date of publication, subject to change, and may not reflect Seafarer’s current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Seafarer does not accept any liability for losses either direct or consequential caused by the use of this information.

Nicholas Borst is Vice President and Director of China Research at Seafarer Capital Partners. Prior to joining Seafarer, he was a senior analyst at the Federal Reserve Bank of San Francisco, the China Program Manager at the Peterson Institute for International Economics, and an analyst at the World Bank. @NBorstSF