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Huawei affair -- growing Communist Party role in China's big tech

While many private companies face economic pressure, a favored few thrive

| China
Trade war's pressure on Chinese economy is adding to Beijing's control over private companies.   © Reuters

Whatever the rights and wrongs of the arrest of the chief financial officer of Huawei Technologies, the Chinese electronics group, pending extradition to the U.S., everyone concurs it was a big deal.

Meng Wanzhou's detention in early December has complicated the already feisty relationship between the U.S. and China and their fragile trade truce.

Beyond this, though, it has illuminated the role that China's big tech companies, including private businesses, play in President Xi Jinping's China, a country increasingly oriented to the primacy of the Communist Party and the state.

They seem to be in official favor even though many other types of private companies are now struggling.

Huawei is a $92 billion company in terms of revenues, with a global reach in telecommunications and networking equipment and consumer electronics. It ranks 72 in the Fortune 500 list of top global companies, is one of China's biggest brands, and outsells Ericsson in network equipment, and Apple in smartphones. This year though, it has run into trouble. The U.S. has warned its allies in the Five Eyes intelligence alliance, Canada, Australia, New Zealand and the U.K., to heed the risks of intelligence breaches, cyberespionage and intellectual property theft resulting from the use of Huawei (and other Chinese companies) as a provider.

In July, the UK National Cyber Security Centre said (diplomatically) that it was unable to provide long-term technical assurances regarding Huawei in the U.K. Earlier this month, BT said it would not use Huawei equipment in the core of its 5G network and would strip Huawei equipment from the core of its 3G and 4G networks. In August, the Australian government banned it from its 5G network amid concerns over "unauthorised access or interference by vendors, who are likely to be subject to extrajudicial directions from a foreign government that conflicts with Australian law." In November, following advice from the New Zealand intelligence services, the government banned the industry from using equipment provided by the company. Last week, a Japanese paper said that the government was poised to announce a ban on equipment purchased from Huawei, and ZTE. Germany is believed to be considering action too as regulators finalize 5G licensing plans.

Because 5G is such a sensitive and ubiquitous technology, the issue of trust in Chinese tech companies such as Huawei is paramount, especially since a 2017 National Intelligence Law gives the authorities sweeping powers to monitor and investigate foreign and domestic individuals and institutions, even requiring them to engage in or support intelligence activities. It is small wonder that several Western countries have reservations about putting Chinese companies, and implicitly the Chinese Communist Party, at the heart of their new telecommunications technologies.

It is worth asking, therefore, what exactly a private company is in China, and why most genuinely private companies are now flagging in China?

At the end of 2017, there were 65.8 million individually owned businesses and 27.3 million private enterprises, employing some 340 million people. Yet, the classification of private, especially for private corporate enterprises, remains opaque. Companies that register as private can, in practice, still be state-controlled, or collectively-owned or they can be cooperative companies, according to the National Bureau of Statistics. Some limited liability companies may have mixed private and public owners, and many may have layers of holding companies behind which is a state-owned enterprise.

This murkiness matters most in technology, security and defense-related businesses. The recent revelation that Jack Ma, China's richest man and founder and force behind e-commerce giant, Alibaba, was a member of the Party was not so much a surprise or unique but it reminded us that whenever the interests of senior executives and shareholders differ, the party always prevails. It offers protection, pressure and reward in a system in which the rules and regulations are often random or ignored. Party cells, moreover, are now mandatory in the operational management of all companies in which there are more than three Party members.

Favored companies, such as state-owned enterprises, get better access to credit, and on cheaper terms, as well as protection in the market and over regulation. They can secure other commercial benefits to the extent that they operate as agents of the state.

The private sector in China has been under growing pressure from both the slowing economy and the trade conflict with the U.S. The roots of the problem go back to a long history of unequal treatment vis-a-vis the state sector but this year, they have borne the brunt of capacity cutbacks in coal and steel, and faced severe liquidity stress as the financial crackdown weighed especially on the shadow finance sector where private companies had to turn because state banks have favored state enterprises.

They have been adversely affected by new regulations affecting e-commerce, real estate, and video gaming, for example, which penalize them at the expense of party interests. They have also experienced increasing debt ratios, rising levels of default on their bond financing, and become ensnared in the equity market slump this year.

With a rift emerging between the performance and status of private and public enterprises, Xi has tried to assure private companies of their significance and role in the economy. Yet, verbal support is not going to make up for operational weaknesses that they face, especially when the government also offers regularly a full-throated defense of state owned enterprises, and China's tech champions and the dominant roles they have been earmarked to play in the development of China's economy and technologies.

Huawei is in many ways a special company, and revered at home. It may shape China's innovation. Yet the gray lines between companies like Huawei and the party may damage their brands abroad. Meanwhile, the harder lines being drawn between millions of other private enterprises and the state sector may turn out to be ideologically correct, but commercially harmful.

George Magnus is a research associate at Oxford University's China Centre; his new book, "Red Flags: Why Xi's China is in Jeopardy" has just been published by Yale University Press.

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