China’s New Way to Control Its Biggest Companies: Golden Shares, Wall Street Journal, Mar. 8, 2023.
By Lingling Wei
The state takes company stakes that are often small but give it a board seat and power to ensure that corporate behavior hews to the party agenda
In its uneasy dance with China’s private sector, the Communist Party is moving away from a public battle with some of the country’s biggest companies. Instead, it is inching toward a quieter form of control.
At the center of the effort is a push by various levels of government to take stakes in the private companies that have long driven Chinese innovation and job creation.
The government stakes are sometimes very small, like the 1% holding that a fund of Beijing’s cyberspace watchdog recently took in the digital-media unit of e-commerce giant Alibaba Group Holding Ltd. But they tend to give the government board seats, voting power and sway over business decisions. Colloquially, they are known as golden shares.
For the companies, there is little choice: Selling such a stake to a government entity that seeks one is crucial for staying in business. For the state, the stakes mean more direct involvement in some of China’s most high-profile companies—digital cornerstones of Chinese life and, in some cases, darlings of global investors.
The government originally conceived these stakes with a different intention, according to officials and government advisers involved in policy discussions. Chinese leader Xi Jinpingincluded the idea of small government holdings in private companies in a reform agenda issued in 2013 with the express purpose of reducing the state’s role in the economy.
The idea back then for golden shares—“special management shares” in the official lingo—was to have the state give up its majority ownership in media and other firms to private investors without fully losing control, according to the 2013 document and people involved in policy discussions.
How Beijing has since used golden shares encapsulates the evolving relationship between Mr. Xi, China’s most powerful leader since Mao Zedong, and its business sector. That complex relationship got a new jolt in recent weeks, when a prominent tech banker disappeared, sparking alarm in the business community. And concerns about state involvement in private companies have continued to strain business ties between China and the U.S.
One result of the new normal of subtle influence is that the boundary between the party-state and the private sector is getting increasingly muddled. That reverses a trend dating to the late 1970s, when Chinese leader Deng Xiaoping had the party-state step back from business control and let entrepreneurs flourish.
“The blurring of the line is pushing policy makers in the U.S. and other countries to take a broadly restrictive position on Chinese companies,” said Scott Kennedy, a China expert at the Center for Strategic and International Studies, a Washington think tank focused on international relations. “The burden of proof is on the private companies to show they’re not agents of the state.”
The unclear boundaries came to the fore early last month when Washington and Beijing sparred over a Chinese balloon the U.S. shot down after it floated over the American heartland. Washington described it as a spycraft used by the Chinese military; Beijing said it was owned by a private company and was for weather research. The episode exposed interplay between China’s private companies, universities and the People’s Liberation Army that the U.S. says is the basis for a high-altitude spy-balloon program.
The state-private fusion also relates to U.S. allegations that Chinese companies are providing surveillance equipment to Russia for its war in Ukraine. Describing the dynamic to CBS News last month, Secretary of State Antony Blinken said, “In China, there’s really no distinction between private companies and the state.”
When Mr. Xi came to power in late 2012, he saw little contradiction between trying to bolster market forces and strengthening the party’s hold on power, figuring that what was good for the economy was good for the party.
In the first few years, he took a relatively hands-off approach to private businesses. Other senior leaders such as Premier Li Keqiang, who is stepping down this month, encouraged companies such as Alibaba and Tencent Holdings Ltd., owner of the ubiquitous WeChat app, to expand.
As the companies grew bigger and more powerful, Mr. Xi became wary of their widening reach. In late 2020, he unleashed a sweeping regulatory assault that has left tech companies and their kingpins, most notably Alibaba’s flamboyant co-founder Jack Ma, much diminished.
With its economy in trouble after the recently lifted strict Covid-19 restrictions, Beijing has switched to saying it will be more supportive of the private sector. For instance, it has signaled that its clampdown on large tech companies is being wound down.
Mr. Xi is settling into an approach that lies between active encouragement of enterprise and a public battle against what he sees as capitalist excesses—a middle course centered on the government having a long-lasting grip on the private sector.
Chinese authorities have since 2016 discussed taking shares in online media companies in return for licenses to expand. Such transactions sped up over the past two years.
Beijing has turned to golden shares to gain influence at companies that challenge the party’s ability to control public opinion, such as operators of news and content sites. It has taken small stakes in U.S.-listed Sina Weibo, 36kr and Qutoutiao and in Kuaishou Technology, the Hong Kong-listed operator of a short-video app. Representatives of the companies declined to comment.
The stakes in subsidiaries of Alibaba and TikTok parent ByteDance Ltd. have allowed the government to get in on—and police—the growth of the tech behemoths. The Cyberspace Administration of China is talking to Tencent about investing in a subsidiary. A person close to Tencent said such an investment wouldn’t affect its global business.
Golden shares have become a useful tool to keep companies like these in line with party objectives without the need for the state being a major stakeholder. Many of the firms involved count on capital from foreign investors, who worry about getting entangled with the Chinese state at a time of high political tensions.
The Cyberspace Administration and the State Council Information office, which handles press inquiries for the leadership, didn’t respond to requests for comment.
Meanwhile, the tighter government oversight set in place during the regulatory crackdown of recent years hasn’t gone away, restraining virtually all major tech sectors in China. Mr. Ma spends most of his time outside China and recently ceded control over three companies, including Ant Group, whose initial public offering Mr. Xi blocked in late 2020.
“While the period of huge regulatory waves crashing over China’s tech sector may be over, they now face a permanent rise in the level of regulation and state intervention,” said Martin Chorzempa, a senior fellow at the Peterson Institute for International Economics.
A prominent Chinese financier for private tech companies, Bao Fan, has been detained by authorities since February without explanation. The sudden disappearance of Mr. Bao, chairman and chief executive of investment bank China Renaissance Holdings Ltd., has cast a chill through the country’s already-beleaguered private sector.
China Renaissance said in a Feb. 26 regulatory filing that Mr. Bao is aiding an investigation. According to people familiar with the matter, the investigation is part of a broader probe of China’s financial sector focused on links between companies and regulators who are involved in approving initial public offerings and other deals.
Mr. Xi, who embarked on a tradition-busting third term in October, is embracing absolute party rule as the preferred means to make China a stronger rival to the U.S.-led West. The party-state under Mr. Xi’s leadership has gradually weakened the influence of entrepreneurs while ensuring their political loyalty.
The government has adopted laws and regulations to ensure its access to data collected by private companies. It has expanded efforts to influence companies’ corporate governance and decision-making. It has integrated companies into a vast social-credit system and stepped up prodding that they set up party committees.
As of last year, about 37% of companies listed in Shanghai and Shenzhen had amended their charters to formalize the role of party committees inside the companies, up from 6% in 2018, according to research by Lauren Yu-Hsin Lin at the City University of Hong Kong School of Law and Curtis Milhaupt at Stanford Law School.
Golden shares can also be a way for Beijing to try to protect companies from the fallout of deteriorating U.S.-China relations. Following former President Donald Trump’s failed effort to get ByteDance to shed its U.S. TikTok business, the leadership used golden shares to prevent technology from falling into foreign hands, according to the people involved in policy discussions.
In April 2021, a fund backed by China’s cyberspace regulator took a 1% stake in ByteDance’s main Chinese entity, Beijing Douyin Information Service Co., and named an official to its board. The move, the people said, was partly intended to make sure the government had a say in the fate of TikTok’s algorithm, the video-sharing app’s secret formula for steering content to users. Beijing wants to avoid a sale or transfer of the algorithm. The current ByteDance director named by the cyberspace regulator is an official from its bureau overseeing data security and algorithm governance.
ByteDance said its main Chinese subsidiary had to adopt a “special management share” arrangement to obtain the licenses for its social-media apps. It said that the subsidiary doesn’t have input in the parent’s global operations, including TikTok.
Last year, ByteDance changed the name of several subsidiaries, removing the word “ByteDance,” as it sought to distance the parent company from its units and address U.S. concerns that TikTok could be under Beijing’s control. TikTok has repeatedly denied that the Chinese government would ever get access to its customer data.
Beijing is currently betting on an economic rebound following the lifting of its severe Covid restrictions. On Sunday, it announced a 2023 growth target of around 5%. It has given few specifics on how it intends to bolster the private sector.
Mr. Xi has continued to stress party control over the pragmatism that long was a hallmark of China’s policy. In a Feb. 7 speech, he spoke of “Chinese-style modernization” and emphasized the superiority of the Chinese system over Western-style capitalism. In an unusually blunt speech on Monday, Mr. Xi blamed U.S.-led “containment, encirclement and suppression” for challenges at home.
On his instructions, a ministry that supervises state-owned companies is exploring ways to bulk up or create government-controlled conglomerates to advance industries such as logistics and electronics, according to people with knowledge of the deliberations.
Beijing has also refashioned the concept of “mixed-ownership reform.” The original idea, in the late 1990s, was to encourage private capital to invest in state-owned enterprises. Now the phrase is used when a big state company gobbles up a smaller private one.
Hybrid-ownership companies, with the government owning between 20% and 80%, now represent about 26% of the total capitalization of mainland-listed companies, according to Thomas Gatley, a China market strategist at research firm Gavekal Dragonomics.
In January, the regulator overseeing state assets in Mao’s hometown of Xiangtan became the de facto controlling stakeholder in Better Life Group, a developer of shopping malls, after a state-backed investment vehicle took a majority stake in the publicly traded company.
But companies that sell the government the much smaller stakes called golden shares are finding how even this way, the government is getting a lot of power over their businesses.
The director whom China’s cybersecurity watchdog named to the board of ByteDance’s main subsidiary has veto rights over content on apps including Douyin, the Chinese version of TikTok, according to people close to the subsidiary.
The director also can vote on corporate issues such as the subsidiary’s personnel decisions, compensation packages and investment or divestiture plans, the people said. “In China, it’s just normal business,” one said.