During the fifth hour of the blockbuster congressional hearing on TikTok on March 23, U.S. Representative Dan Crenshaw (R-TX) posed a question to the company’s weary chief executive, Shou Zi Chew.
“Do you agree that TikTok is controlled by the CCP?” Crenshaw asked. “No,” Chew responded, shaking his head.
“I thought you’d say that,” Crenshaw replied, before arguing that the fact that the Chinese government now holds ‘golden shares’ in TikTok’s parent company ByteDance, in practice makes the two companies virtually indistinguishable from the Chinese Communist Party (CCP).
“ByteDance owns TikTok… And the CCP owns ByteDance because the CCP owns everybody in China. So by law they can make them do whatever they want. And they say that by law you can’t tell anyone about it. So they can make you hand over that data,” Crenshaw said.
Chew called Crenshaw’s remarks inaccurate, arguing that the golden shares had “nothing to do with TikTok.” TikTok and Crenshaw did not respond to The Wire China’s follow-up questions on their exchange.
Crenshaw’s focus on ‘golden shares’ illustrates how these instruments have become a new line of attack for critics of China — those convinced that the country’s economy is run from the top, with Beijing able to direct nominally private tech companies to do its bidding and freely use their data for surveillance and other purposes.
For sure, the Chinese government’s use of golden shares, officially known as ‘special management shares,’ has grown in recent years, amid the government’s efforts to rein in the power of the country’s largest tech companies. The typical procedure involves a government entity taking a small stake — often about 1 percent — in companies, along with a seat on the company’s board and some veto power over its decisions.
… privately-owned companies will continue to do things that displease the CCP. If they did exactly what the party would like them to do, they wouldn’t make any money.
Victor Shih, a Chinese politics professor at the University of California San Diego
Others argue that the use of golden shares is uncommon in China, and that Chinese tech firms still have substantial strategic autonomy. Moreover, some analysts say the presence of state officials on the board, via the golden shares, could help them gain valuable insights into the government’s priorities, as well as its regulatory boundaries.
“Golden shares give the Chinese government a lot more latitude over technology companies,” says Victor Shih, who teaches Chinese politics at the University of California, San Diego. “But privately-owned companies will continue to do things that displease the CCP. If they did exactly what the party would like them to do, they wouldn’t make any money.”
THATCHER’S GOLD
The concept of ‘golden shares’ was born in the U.K. in the 1980s, during Prime Minister Margaret Thatcher’s drive to privatize state-run industries. The shares were designed to ensure the government retained special rights to veto takeovers of major companies like defense contractor Rolls-Royce deemed not to be in the national interest.
Their usage spread to Europe and other countries in the 1990’s, but has since gradually diminished – and was even banned in parts of the EU – for giving governments too much power over the private sector.
Chinese leader Xi Jinping reintroduced the concept shortly after taking power in 2013. At first, Xi’s vision for golden shares appeared to match Thatcher’s original idea, as a way for the government to keep some control over state firms, even as it reduced its day-to-day influence over their operations.
The government’s approach has since morphed into using golden shares as a way to expand state control rather than to liberalize, especially when it comes to reining in an increasingly powerful tech sector.
China’s government first proposed the idea of golden shares in 2016: The following year, the Ministry of Finance and the Cyberspace Administration of China (CAC) — China’s main tech regulator — created the China Internet Investment Fund (CIIF), a private equity fund that established small stakes in 40 Chinese tech companies from 2017 to 2021 including Kuaishou, Sensetime and Alibaba.
The majority of these stakes do not actually equate to golden shares: To date, CIIF’s investments in ByteDance, Weibo, Kuaishou, and Full Truck Alliance have been confirmed or reported as being golden shares. In January, the CIIF also took out golden shares in Alibaba subsidiary Guangzhou Lujiao, a powerful firm whose portfolio includes streaming service Youku and mobile browser UCWeb. Chinese regulators have also discussed taking out golden shares in a Tencent subsidiary.
The board plays a much stronger role in the management of Chinese companies than it would in the West. That suggests to me that [the government] has a deep control interest with these shares.
Chris Marquis, a Chinese management professor at the University of Cambridge
“It is not easy to know the precise number of firms that have special management shares, because it can be difficult to determine the rights attributed to specific investments,” says Curtis Milhaupt, a corporate governance professor at Stanford Law School. “But as far as we know, the number of golden share investments is quite limited, and specifically applies to data-oriented internet platform companies.”
Still, for the firms that do have golden share investments, having a government official on the board is a major change given the powers they have to veto decisions. “The board plays a much stronger role in the management of Chinese companies than it would in the West,” says Chris Marquis, a Chinese management professor at the University of Cambridge. “That suggests to me that [the government] has a deep control interest with these shares.”
INTERACTIVE EFFECTS
Could there be an upside for tech firms to have golden share investments? One argument in their favor is that after enduring a years-long crackdown, filled with disappearing executives and billions in fines, a closer relationship with regulators via golden shares could help tech companies run their businesses more predictably.
“Companies can expect better communication upfront with authorities regarding key regulatory issues and the rationales behind them,” says Bruce Pang, chief China economist at investment management firm JLL. “It lowers the risks of being fined and getting rectification orders.”
Some experts meanwhile argue that golden shares may not be that impactful, given that Chinese tech companies have long operated in a tightly-controlled environment and have needed to closely follow government directives in order to survive.
“It is not clear if these private companies will behave much differently because of the golden shares,” says John Zhang, director of the Penn Wharton China Center. “They all had a strong sense of state power to start with.”
Others say the state’s increasingly powerful role in tech companies threatens to undermine their long term success. “These entities are the real innovation and economic engines of China,” says Cambridge’s Marquis. “But state control of companies lowers productivity, lowers economic performance, and lowers innovation.”
In Beijing, increasing reliance on golden shares may primarily be seen as a means to shore up the state’s strength amid increasing tensions with the U.S.
“Xi wants more state control of the tech sector just in case the U.S. and China move into an escalating conflict,” says Alfred Wu, a Chinese politics professor at the National University of Singapore. “Tech security is one of Xi’s biggest concerns.”
The fundamental fear is that the Chinese government is willing and able to call upon its companies to do things that are hostile to U.S. interests.
Jon Bateman, a senior fellow in technology at the Carnegie Endowment for International Peace
As the recent TikTok hearings suggest, it is this aspect of golden shares which most worries U.S. lawmakers, who worry that they provide the CCP with a backdoor means to influence and leverage companies that operate between the U.S. and China for its own purposes.
“The fundamental fear is that the Chinese government is willing and able to call upon its companies to do things that are hostile to U.S. interests,” says Jon Bateman, a senior fellow in technology at the Carnegie Endowment for International Peace. “As long as China has a latent power to make companies do things that could be very threatening to the United States, even if the circumstances are difficult to imagine, there are people in the U.S. who won’t accept that.”
Bateman says Beijing’s actions could ultimately push the U.S. government to look to exert more control over its own tech sector as a means to compete with China.
“There’s an interactive effect between each country exerting more state control over its technology industry,” says Bateman. “If Washington perceives that Beijing is exercising more influence over the Chinese tech industry, then Washington will feel that it needs to step in to either protect or guide its own tech industry in response.”
Grady McGregor is a staff writer for The Wire China based in Washington, D.C. He was previously a staff writer at Fortune Magazine in Hong Kong, writing features on business, tech, and all things related to China. Before that, he had stints as a journalist and editor in Jordan, Lebanon, and North Dakota.