Doing Business in China - State Comes First
Patriotism before profit
Four decades after China emerged from Maoist isolation, mystery surrounds some big questions about its rulers’ views of the world. Start with a topical one: what are the true feelings of China’s leader, President Xi Jinping, towards Western-style shareholder capitalism, with its emphasis on free competition, transparency, separation between ownership and management, and oversight by impartial regulators and courts?
Listen to speeches aimed at foreign audiences, and China is an example to the capitalist world. It is presented as a champion of openness and fair play, defending free trade against populist nationalists who have fantasies of turning back the forces of globalisation. Yet at home Mr Xi spends as much time stressing national self-reliance, urging Chinese firms, officials and scientists to end their country’s dependence on foreign technologies.
Fresh confusion was caused when the government abruptly suspended what was expected to be the largest stock market flotation in history, early in November. That IPO by Ant, a financial-technology giant, collapsed after its founder, Jack Ma, publicly grumbled about cautious regulators and small-minded banks. In China, many sensed a warning from the government that even billionaires must defer to the party. On November 12th Mr Xi sent another message. He visited the eastern city of Nantong to hail a local industrialist, Zhang Jian, as a patriotic entrepreneur whose life story, from 1853-1926, should be studied by business bosses. Touring the mansion that Zhang called home, Mr Xi praised the scholar-turned-businessman for building a manufacturing empire, as well as founding schools and China’s first museum. When private entrepreneurs get rich they should become wise and socially responsible, Mr Xi said. He instructed that the site become a base for patriotic education.
It is worth listening whenever a secretive regime reveals what it values. On a damp, grey morning this week that hunch took Chaguan to Zhang’s gloomy, allegedly “British-style” mansion in Nantong, to retrace Mr Xi’s steps. Downstairs, he found a delegation of Communist Party members from the Nantong city government. They were filming their own visit for later study. In an antique-filled room upstairs, a local man, Zhang Yuanxin, did not hesitate when asked what lesson he took away from Mr Xi’s praise for patriotic entrepreneurs. A lot of business types think only about money, he explained. Now it is time for them to give back to society.
A retired engineer from a state-owned oil company, Wang Yongjian, gazed at a bronze bust of the mansion’s owner. He noted that Zhang had passed imperial examinations with such distinction that, in another age, he could have served alongside an emperor. But instead, watching China’s agonies in the late 19th century, the scholar-official plunged into business. Mr Wang compared Zhang to British inventors of the first steam engines and to Henry Ford, a pioneering American carmaker.
In reality, Zhang created little that was really new. Instead he imported and copied British looms, Dutch irrigation systems and Japanese salt-making techniques, in a bid to fight off foreign competitors. Revealingly, the exhibition in Nantong does not conceal any of this. Displays trace the entrepreneur’s journey from scholar-official, serene in mandarin’s robes, to indignant nationalist. A diary entry records Zhang’s anger at a treaty, imposed on China after its defeat in the first Sino-Japanese war, which allowed foreign firms to open manufacturing plants in the country. Zhang vows to go into industry himself to save China. Another display shows the steamships that he bought to end the shameful domination of Chinese inland waterways by foreign shipping companies. The dizzying list of businesses founded by Zhang includes cotton mills, steel mills, a bakery, a distillery and a bus company. Institutions he founded include libraries, orphanages, a boy’s school (motto: “Honesty, Loyalty, Independence, Hard Work”) and a school for girls (motto: “Domesticity, Obedience, Thrift, Gentleness”). The exhibition is strikingly incurious about the funding for this empire, beyond faded photographs of supportive officials and images of share certificates. Luckily, Zhang’s conglomerate has been thoroughly studied by historians, among them William Goetzmann and Elisabeth Köll. Their paper in 2005 for the National Bureau of Economic Research, “The History of Corporate Ownership in China: State Patronage, Company Legislation, and the Issue of Control”, describes a cautionary tale.
Serve the state, and the state will keep competition at bay
Government officials asked Zhang to launch his business in 1895 as a guandu shangban, or government-supervised, merchant-managed enterprise. These firms were modelled on Qing dynasty arrangements by which merchants were granted monopolies, for example in salt-trading, in exchange for collecting taxes and making donations to the emperor to pay for military expeditions or disaster relief. Even after China passed a company law in 1904 and Zhang’s conglomerate became a stockholding firm, he ran it as a paternalist autocrat. His first company meeting, in 1907, saw minority shareholders protest that donations to build schools should come from his own funds, not the firm’s profits. Think of your consciences, Zhang loftily retorted, ignoring them.
Neither fully capitalist nor state-owned, Zhang’s business empire was financed by equity capital but existed to serve the country. That gives Zhang enduring appeal for China’s leaders. Long before Mr Xi praised him, Mao Zedong called him one of four Chinese industrialists who should never be forgotten. Objectively, Zhang was not such a successful capitalist. Having narrowly avoided bankruptcy in 1922, he was removed two years later as the company’s head by a consortium of banks. His first external audit had revealed an opaque mess of transfers and loans to ailing subsidiaries. Today, he is a model patriot. Modern Chinese entrepreneurs may draw their own conclusions. ■
This article appeared in the China section of the Economist Magazine.
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