In new guidance issued earlier this week, the Securities and Exchange Commission warned China-based companies listed in the US to disclose any “material risks related to the role of the government” in their operations. Given how the ruling Chinese Communist Party has steadily expanded its cells in mainland firms, those risks are real. But the fact is, they pose as much of a threat to China as to the companies or US investors.
In his decade in power, Chinese President Xi Jinping has reversed many of the policies adopted by former paramount leader Deng Xiaoping. One of the most consequential casualties has been the clear division of labor between the party and the state.
Shortly after Deng launched his sweeping reforms in 1979, he identified overconcentration of power in the party as one of the most debilitating pathologies of the Chinese political system under Mao Zedong’s rule.
Deng’s solution was to disentangle the party from the administration of the government. Even though Deng was a staunch Leninist, he believed that the CCP would be stronger if it were not mixed up in the day-to-day running of the country.
Xi seems convinced of the the opposite. During his tenure, the party has dramatically increased the influence of its cells within mainland companies — including on management — and pushed firms to write “party-building” provisions directly into their corporate charters. According to FBI Director Christopher Wray, more foreign companies are now also being forced to host cells to monitor their compliance with CCP diktats.
More importantly, Xi has systematically restructured China’s governance by granting the party many of the executive powers previously assigned to state bureaucracies. He has set up new national-level party commissions with exclusive authority in key policy areas such as finance, national security, foreign affairs, science and technology, and cybersecurity. Once-powerful government ministries have effectively been downgraded.
Xi clearly believes that expanding the party’s influence across China’s government and society will revitalize a regime weakened by decades of economic modernization and market reforms. More direct party control will, in theory, give the CCP greater power and thus security.
This line of reasoning may sound persuasive. Indeed, after the short-lived insurrection of the Russian mercenary Wagner Group last month, Xi likely felt vindicated. His emphasis on party control over the military and secret police makes such a rebellion virtually impossible in China.
In reality, however, seeking the party’s absolute supremacy is far more likely to produce a more inefficient, corrupt, and weaker Chinese regime.
Xi’s power move is once again concentrating executive authority in the hands of party bosses at all levels of the Chinese party-state. As Deng himself pointed out four decades ago, this creates enormous inefficiency in decision-making because those party leaders have to sign off on all policy matters.
The CCP’s specialty is making political decisions on policy and personnel. Apparatchiks lack the expertise of the technocrats who successfully guided China’s decades of remarkable growth.
In some sectors, such as monetary policy, the party’s excessive influence can be positively harmful. In the 1990s, reformers tried to limit the influence of local party chiefs over the People’s Bank of China’s provincial branches by setting up large cross-regional branches, effectively imitating the US Federal Reserve system. The result was two decades of low inflation.
As part of his drive to strengthen the party’s control over the economy, Xi recently restored the old system, potentially handing over control of the central bank’s local branches to provincial party leaders and undermining the autonomy of the PBOC.
Xi’s proudest accomplishment has been his campaign against corruption. Ironically, reasserting the CCP’s supremacy risks fueling graft. Giving party apparatchiks too much power over administrative functions creates obvious opportunities to abuse that influence for personal gain. Cases such as that of China’s first cyber czar Lu Wei, sentenced to 14 years in jail for allegedly pocketing $4.8 million in bribes, will likely proliferate once again.
As far back as 2017, the CCP declared that “party, government, military, civilian, and academic — east, west, south, north, and center, the Party leads everything.” Somewhat aspirational at the time, that statement now holds a great degree of truth. As he gears up for a long period of confrontation with the US and its allies, Xi no doubt takes comfort in that fact. It may be short-lived.