White cat, black cat, red cat

T.Note n. 67 (CMBP Series #9)

Paraphrasing a famous quote by Søren Kierkegaard, Steve Jobs once said “You cannot connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in the future”. This appears to also be the case with a series of seemingly unrelated business incidents that have taken place in China and made headlines worldwide.

Over the past few years, several rounds of large state-arranged corporate mergers have been taking place, with decisions often being taken behind closed doors and implemented against the will of the merging companies. Each time, the main goal has been to avoid having these companies competing against one another and to transform them into global champions. This year, the situation got into fifth gear with a series of events concerning Anbang, a poorly managed insurance giant that in previous years had recklessly pursued acquisitions both in China and overseas, leading to the company being nationalised in order to avoid bankruptcy. Many if not most multinationals are under increasing pressure, as they are pressured to host Communist Party branches within them and let them have significant influence over key corporate decisions. At the end of last year, in strikingly under-reported news, Chinese authorities announced the possible introduction of measures requiring domestic tech firms to offer a stake vested with special rights to the Chinese government, allowing it to control key corporate decisions as well as supervising technology and intellectual property rights; all this has occurred in a context in which Chinese tech firms and the venture capital investors backing them have become key players worldwide. The fact that there has been no sign of implementation since these announcements has led commentators to draw drastic conclusions, either predicting the imminent nationalization of the Chinese tech sector or hinting that China has come up with obscure plots to crush Silicon Valley through a sort of ‘venture capital dumping’. Although they are the kind of headlines that will certainly attract readers, such statements seem to be oversimplifications of a highly complex reality.

To Western observers, these interventionist and mercantilist measures may appear anachronistic and potentially dangerous. Looking at them from China’s perspective, however, they are consistent with – and almost inevitable in the context of – the Chinese authorities’ historical and political view of the economic order. While the previous leadership sent out contradictory signals over the direction the Chinese economy would take (exemplified in the ambiguity introduced by Deng Xiaoping with his famous quote on the irrelevance of whether a cat is white or black), the current leadership seems very clear: China’s economy is not and never will be even close to those of Western countries, and the expression ‘market economy with Chinese characteristics’ points to the fact that Chinese characteristics are and will remain predominant over those of a market economy. Even more so than in the field of political and social reform, in the globalised domain of business and corporate affairs the current leadership in China has put in reverse the modernisation and liberalisation machine that, albeit at variable speed, has pushed Chinese firms from the context of a centrally planned socialist economic system to the forefront of the world business stage in less than three decades. This was mainly enabled by the state’s decision to retreat and let companies spread their wings. Now that they have learned how to fly, however, the current leadership wants to take back control (if not all, at least most). It may appear to many to be a sign of backwardness and conservatism, but it should be seen instead as a confirmation of the Chinese leadership’s growing confidence that it is capable of creating a whole new political and economic model.

Considering the financial headlines discussed above from this perspective, the connection between them appears clear: Chinese firms – regardless of their size, ownership structure, industry or type – should not consider themselves to be fully autonomous entities with profit maximisation as their main goal. Instead, they are asked to contribute to the achievement of the Chinese Communist Party’s core national goals. In order to ensure they do, domestic firms must know that they can ­– at any stage of their life – be forced to merge with other firms (often their main domestic competitor), open their capital to state-backed investors, accept that internal Party units may form and participate in making key corporate decisions, and be ‘persuaded’ to make certain investments against their will. All this is part of an unwritten but increasingly evident commercial code.

A situation of this kind raises important questions: is the situation going to escalate further? Will Chinese firms, particularly tech companies, be capable of resisting, or willing to resist, this trend? Is there any risk that these policies will backfire? Will European, American and other Western authorities start to consider and treat most, if not all, Chinese firms as state-owned enterprises (SOEs)? If successful, might this model be replicated by other countries?

All these questions are ones that politicians, officials, managers, entrepreneurs, bankers and other actors in the global business community should start asking themselves. Discovering the answers will require deep investigation and, more importantly, patience. As an American businessman and a Danish philosopher both told us, only in the future will we be able to connect the dots appearing before us now. What appears clear today, however, is that Chinese leaders have developed the confidence and creativity to reinvent Deng’s dilemma: white and black cats are fine, as long as they catch the mouse and get a coat of red paint.

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