• Timur von Polach

The Mandate of Heaven: How and Why does China Control its (and the World’s) Most Powerful Companies?

Timur explores how China tried to marry capitalist growth and prosperity with communist politics.

Day 27 by Rowan Walker (Instagram: @rowanewalker)

Image description: Rowan Walker's collage was made in the initial lockdown and uses a combination of imagery that evokes themes of state power, relations of power, privacy and a state of confinement. While the artwork was inspired by the lockdown, the imagery of state power is connected to the role of the Mandate of Heaven in contemporary China and its role as an international economic superpower.

Milton Friedman was described by The Economist as "the most influential economist of the second half of the 20th century ... possibly of all of it". Throughout the 1980s, the preeminent economist sang the praises of capitalism. He explained, that no other system had a comparable capacity to lift people out of poverty and drive progress. He, as many of us would, chose the United States as his primary model. However, in his book Free To Choose, the true paragon of the system was, in his eyes, Hong Kong: “The modern exemplar of free markets and limited government”. The simple tax code, barren regulation, low public expenditure, and even its first “Executive” – billionaire CEO Tung Chee-hwa - were all hallmarks of capitalism as less of an economic environment and more as a dogma. In its re-appropriation of the country, it is then an added challenge for China to subjugate this quintessentially free-market loving city-state while retaining Hong Kong’s inherent economic might and worth.

More broadly, there is an intrinsic paradox to China in the eyes of western audiences. How does it marry its communist, one-party principles with the prosperity of its companies? How does it retain tight control of its politics under the one-party system, all the while continuing the fabled Chinese economic growth curve, led by powerful companies that could eventually serve as political opponents?

For a long time, the veneer of a free market was maintained by China, for its benefit amongst other nations wanting to do business and tap into its huge market. This was typified, at the 2008 Beijing Olympics, where China portrayed the image of an amicable, open-minded and welcoming host country, at what was essentially its graduation ceremony into the world’s superpowers.

This now long-held perception of what it meant to be a Chinese company was, however, questioned and suddenly thrown into the limelight in May 2019, when then-President Trump banned Huawei products across the US due to suspected (but unproven) espionage by Beijing in its 5G offering.

As one might expect from a country whose peers historically had to employ especially Chinese-versed diplomats (called sinologists) to de-obfuscate Chinese diplomatic strategy, China’s economic system is complex. It subtly underplays capitalist bubbles under the permission of a communist government. Central to the Chinese economy are the six Chinese Special Economic Zones (SEZs), of which Macau and Hong-Kong are also both considered members. Created in August 1979, just a year after Mao Zedong’s death, due to an ailing Chinese economy compared to its Asian rivals, these SEZs provide the economically bleak communist provinces of rural China with typically inner-city, hyper-modernized, free-market relief. Here, flexible municipal policies encourage foreign and domestic trade and investment. It is no wonder, therefore, that some of China’s largest companies, including two of its three internet giants (commonly referred to as BAT – Baidu, Alibaba, and Tencent) are headquartered in SEZs (much of Tencent’s success, can, in fact, be attributed to its relocation to Shenzhen in 1984, likewise for Huawei in 1987).

A map of China’s Special Economic Zones (SEZs)

One might assume that the largest Chinese companies are simply so big due to the insularity of the world’s largest market, which is not entirely false. They gain their meteoric status through favour with the Chinese government, which eventually opens them up to global markets. However, to understand their size, one must also appreciate that Chinese companies are a complex intermesh of power and economics.

Who Owns A Chinese Company?

In the West, the question is generally not as simple as one might imagine, especially with holding companies, deliberately confusing bylaws and dual-class shares. In China, it’s even more complex.

In Huawei’s case, there is a permanent record of the company’s bylaws and shareholders kept behind glass at his Shenzhen headquarters. However, the Chinese government, CCP and National Congress are not mentioned once in this document - potentially odd for a communist state.

Let’s examine the case of Huawei LLC. It is owned by Huawei Investment & Holding. Huawei Investment & Holding itself is owned by the CEO of Huawei, Ren Zhengfei (1.15%), and The Union of Huawei Investment & Holding (98.85%). Huawei claims that this means, per its glass-shielded book, that its employees own the company, as they are also partially paid in equity. However, on closer examination, this “stock” owned by the employees is synthetic equity. This means it cannot be sold and has no power within the company, and the right to equity is revoked upon leaving the company. Balding and Clarke, in their 2019 publication on the company, saw it as “…purely a profit-sharing incentive scheme”.

So, who actually makes up the union which owns Huawei Investment & Holding? Chinese law states that such local unions are subsets of their branches, which as you might guess, progresses up through the local and provincial unions, to The Secretariat of the All-China Federation of Trade Unions, the chairman of which (Wang Dongming) just so happens to sit in the CCP’s national people’s congress, and so it goes for all Chinese companies. It is this ownership model that also explains why the Chinese market is full of extreme monopolies (such as Tencent, Alibaba, Huawei and Baidu), encouraged by the CCP, as it can control larger market portions with less political action.

The Winding Hierarchy of Huawei Ownership

This “authorisation” of the Chinese government extends to foreign companies that want to do business in China, as they have to, by law, either use a Chinese partner or proxy. For example, Tencent’s WeChat, which acts as a Chinese bypass to the IOS rules, allows the downloading of other apps within the app, meaning it has a near-monopoly on the Chinese app market. It acts, just as the other Chinese monopolies do, as a gatekeeper to the market. Walmart, Starbucks, McDonald's, Uber and Costco have all had to partner with WeChat to even enter China, let alone “compete”.

However, the opposite is not true for Western companies. China can, and has, used its companies as a proxy to challenge America’s economic might, without any openly aggressive actions. For example, Tencent alone owns large stakes in/part-owns: Tesla, Snapchat, Lyft and Spotify.

Why Does China Act This Way?

The first and most obvious answer would be due to its core, one-party, communist ideals.

I would like to present a second, potentially culturally relevant perspective. The Mandate of Heaven was the Chinese counterpart to the European Divine Right of Kings. Its most stark, and relevant, difference here was that it did not confer an eternal right to rule and that it had no definitively hereditary properties. It instead stated that, when a ruler assumed power, they had been given the Mandate of Heaven due to their “just right” to rule. Crucially, however, the ruler could lose the Mandate of Heaven due to unjust governance. Central to the Mandate of Heaven was, therefore, the right to rebellion and for anyone to claim that the ruler had lost the Mandate of Heaven. The right to rebellion being nothing innovative, however, China stood alone in that it codified the right to rebellion within its value system. It would be akin to the American constitutional right to form militias, as part of the Christian value system it was founded upon. While this concept does not dictate the modern CCP chairman’s actions, it goes a long way to explain the mentality and precariousness associated with power, at least to a western observer, in the Confucian-centric value system that still permeates Asia. Ultimately it is a concept Xi Jinping himself may be acutely aware of, particularly given his post-party purge struggles.

By convolutedly owning every major company, the CCP provides China with the growth rate to rival many capitalist nations, while retaining a tight stranglehold on political dissent. Alibaba, arguably one of China’s most famous exports on the global stage, was deliberately made an example of how no one is above the party. As the Chinese internet retail giant grew, its founder, Jack Ma, began to make increasingly, un-CCP friendly statements, culminating in a now-infamous speech. His criticisms were mainly levelled at Chinese banks and regulations (though occasionally he also strayed into civil liberties), to which Xi Jinping is said to have personally responded by cancelling the launch of Ma’s Ant Group IPO.

The former poster boy of China’s technologically entrepreneurial spirit – Jack Ma, giving his now notorious speech against Chinese regulators and banks. After the speech, he was feared dead as he did not make another public appearance for several weeks.

The Mandate of Heaven was, historically, lost specifically through disasters (both natural and man-made). China sees a few standing before it that are far beyond the scope of its article, and by clamping down on its monopolies Xi Jinping might be shoring himself, or his successor, up for the turmoil ahead. The first and foremost being the precariousness and fragility of China’s real estate market, the cracks of which are already beginning to show.

One can therefore see that from a party perspective, China’s post-Mao style of communism manages a very real threat. By curbing the power of its companies in such a fashion, the greatest believer of Milton Friedman approved (and frequently misunderstood), American truism “The freer the market, the freer the people.” might ironically be the Chinese government.