As one astute commentator on Lardy’s book noted, the general explanation for Xi’s policy stance, that he didn’t understand the benefits of free markets, was wrong. In fact, the opposite might be true: that Xi understands markets more than well enough to know the threat they pose to single-party rule.

L’Oreal, Walt Disney and Dow Chemicals in China now all have party committees and display the hammer and sickle on their premises.

Xi’s interventionist instincts have had profound ramifications in China and abroad, and solidified his critics’ narrative about him in other areas. For example, when US officials were pressed in early 2019 to provide evidence that Huawei, the Chinese telecommunications giant, had facilitated spying on the United States and its allies, they said there was no need. Beijing had already made their case for them, first with the party’s systematic infiltration of private companies, and second with the passage of a new national intelligence law in 2017. The law states that "any organisation and citizen" shall support and co-operate "in national intelligence work". The director of America’s National Counterintelligence and Security Centre, when asked about China’s entrepreneurs, cited these two policies in assert- ing that "Chinese company relationships with the Chinese government aren’t like private sector company relationships with governments in the West".

From such conclusions, important policy changes flow. The United States and European Union were immediately gifted an excuse to limit Chinese access to their markets, technology and companies. Australia has cited the same intelligence law to keep Huawei’s 5G technology out of its future mobile networks. Gordon Sondland, Donald Trump’s envoy to the European Union, gave such sentiment a hyperbolic spin to argue that Europe should do the same. "We want to keep critical infrastructure in the Western world out of Chinese malign influence," Sondland said. "Someone from the Politburo in Beijing picks up the phone and says 'I wanna listen in on the following conversation, I wanna run a certain car off the road that’s on the 5G network and kill the person that’s in it', there’s nothing that company legally can do today in China to prevent the Chinese government from making that request successfully."

Until recently, such a statement would have been laughed out of court. No longer. Nor would Washington have contemplated the policy of "decoup- ling" the US and Chinese economies, shorthand for the administration’s commitment, through taxes, tariffs and other punitive measures, to disentangle its companies and their technologies from China’s supply chains. As Henry Paulson, the former Goldman Sachs chief, erstwhile US treasury secretary and long-time China bull, said in a speech in November 2018: "I see more clearly than ever the prospect of an economic Iron Curtain – one that throws up new walls on each side and unmakes the global economy, as we have known it."

The relationship between the party and private sector companies is, up to a point, flexible and fluid, certainly more so than with state companies. The party doesn’t habitually micromanage their day-to-day operations. The firms are largely still in charge of their basic business decisions. But pressure from party committees to have a seat at the table when executives are making big calls on investment and the like means the "lines have been dangerously blurred", in the words of one analyst. "Chinese domestic laws and administrative guidelines, as well as unspoken regulations and internal party committees, make it quite difficult to distinguish between what is private and what is state-owned."

The answer to the question "does the party control a company?" is that it is impossible to tell. In the current environment, however, fewer foreign governments want to give Beijing the benefit of the doubt. If there was any question as to who was in charge of the economy and business, Xi’s local and overseas critics alike only had to take the Chinese leader at his word – that in private enterprises, as with state-owned firms and every institution in China, the party was the ultimate authority.

If any Chinese leader appreciated the value of business, it should have been Xi. From 1985 to 2007, Xi served in two provinces, Fujian and Zhejiang, becoming the governor of the former and party secretary of the latter. Both provinces stand out in China as thriving bastions of private enterprise. Fujian was also the premier gateway for investors from nearby Taiwan, starting in the 1980s and accelerating after WTO accession. Like leaders of Fujian before and after him, Xi regularly hosted Taiwanese entrepreneurs and lobbied them to put money into the province. Zhejiang is home to a number of China’s most famous and successful private companies, such as Jack Ma’s Alibaba in Hangzhou and Li Shufu’s Geely, the car manufacturer that bought Sweden’s Volvo, in Ningbo.


In the early optimistic glow of Xi’s ascension to the leadership, the Western media naturally latched on to his provincial pedigree to talk up his appreciation of markets.

Yet a deeper dig into Xi’s past statements and writings on the economy displays an official who has been a dogged and diligent supporter of party orthodoxy on the economy at every turn. Xi might have taken big risks in domestic and foreign policy but on the economy, he was not one for ideological experimentation. In the Politburo, as vice-president from 2008 to 2013 and as the leader of the party school for most of the same period, there is little evidence of him straying from his core beliefs about the need to consolidate and strengthen party control inside businesses. Xi has always talked about development being balanced between the state and the entrepreneurial economy. In practice, though, that meant protecting the state sector to ensure it wasn’t eaten up by entrepreneurs in places such as Fujian and Zhejiang.

By the time Xi arrived in Zhejiang in 2002, the province was already well on the way up the economic ladder. Xi, who used to write an occasional newspaper column, headed a group of officials who became known as the "New Zhijiang Army". They embraced the use of "social capital", a euphemism for private investment, to spread the risk in funding the province’s signature infrastructure projects, such as the 36-kilometre Hangzhou Bay Bridge connecting Shanghai and Ningbo. Relying solely on government investment is not enough, Xi wrote. "It is better to walk with two legs than one."

Xi has welcomed private capital for big infrastructure projects like the Hangzhou Bay Bridge but there is a bigger picture; he has always viewed the economy as a means to a political end. Reuters

But Xi’s support for mixing the duelling ownership structures was purely pragmatic. It had value, he said in another forum, because it would "improve the socialist market economic structure". Xi’s assessment is echoed by Michael Collins, Deputy Assistant Director of CIA for the East Asia and Pacific Mission Centre and one of the agency’s most senior officials for Asia, who said that in China economic reform is not an end to be achieved itself. "The fundamental end of the Communist Party of China under Xi Jinping is all the more to control that society politically and economically. The economy is being viewed, affected and controlled to achieve a political end."

By 2012, when Xi came to power, the landscape had changed substantially. China was initially knocked sideways by the global financial crisis in 2008, before swiftly navigating its way back to fast growth through a giant fiscal stimulus orchestrated by the government and delivered by the big state banks. In the same year, China hosted the Olympics, with Xi overseeing Beijing’s management of the event. For the party, China’s economic recovery and the Olympics were judged to be triumphs and, as such, affirmations of the governing system’s superior qualities and China’s enhanced global status.

The economy was also changing shape in this period. From around 2010, after the fiscal splurge of the financial crisis, Chinese technocrats began to focus more intently on cutting debt and lifting consumption. That meant less focus on investment and exports and, if you listened to the entrepreneurs, a greater reliance on private business to generate growth.

"Chinese consumption is not driven by the government but by entrepreneurship, and the market," Jack Ma of Alibaba said in September 2015. "In the past 20 years, the government was so strong. Now, they are getting weak. It’s our opportunity; it’s our show time, to see how the market economy, entrepreneurship, can develop real consumption." Ma may have thought that the times suited him, and to a degree, they did. His business continued to soar. But Xi was all the time making sure that the party grew in tandem with the economy, in both the state and private sectors. In retrospect, Ma’s comments look dangerously cocky.

Alibaba founder Jack Ma, pictured at the Davos forum in January 2017, developed a popularity and high profile may not have been entirely pleasing to Xi Jinping. Laurent Gillieron/Keystone via AP

Private companies are sometimes written about as if they are a new frontier for the party, but that is only half true. As early as the turn of the century, around the time Jiang Zemin secured support for allowing entrepreneurs to join the CCP, the party began to do the same in reverse. If private businesses were coming into the party, the party always made sure it had a seat at the table in the companies as well. But under Xi, the same mindset of consolidation and expansion on display within the state sector was also evident within private companies, both local and foreign. In March 2012, a few months before taking over as general secretary, Xi delivered a speech in which he stressed the need to lift both the number of party bodies inside private business, euphemistically known as "non-publicly owned enterprises", and increase the sorts of work they supervised. Around the same time, new details for "party building" in enterprises were released, calling "for the party secretary to participate in and attend important executive-level meetings".


"After seeing business threaten to take over the state in Russia, Beijing has been determined to make sure that the same disaster does not befall China."

Many of the regulations issued in 2012 sounded as much like ritualistic incantations of standard propaganda as they do clear directives. They called for "uniting the masses", "building an advanced corporate culture" and disseminating the party’s policies and principles. Some reports discussed how the role of the party was to boost the firms’ profits. In Kunshan, in Jiangsu province, near Shanghai, long a hub for Taiwanese investors, officials held a national training class for party secretaries of private companies at which they described the internal committees as the "nerve endings of the CCP".

The point about profitability is important, though, as is the injunction to attend "executive-level meetings". The party wants to be part of business successes, not failures. It wants to sit alongside local and foreign entrepreneurs and share their wealth, not run their companies into the ground with socialist dictates. Increasingly, it also wants to do more than supervise companies. It wants to be at the table when commercial decisions are made, not just manage staff. "We should make money together," Lu Wei, then head of China’s party office for Internet Security, told Paul Jacobs, the CEO of Qualcomm, the US chip maker, in 2014. Lu’s comments to some extent reflected Beijing’s desire to acquire Qualcomm’s technology, a sector in which China was weak. The message, however, was clear – the fat of the land should be shared with the state.

The party’s overarching aim, though, has remained consistent: to ensure that the private sector, and individual entrepreneurs, do not become rival players in the political system in a way that threatens the single-party state. The party wants economic growth, but not at the expense of tolerating and indeed nourishing any organised alternative centres of power. In sessions on the Soviet Union ordered by Xi, officials studied not just the collapse of the Soviet Union but also its aftermath, when a new class of Russian oligarchs enriched themselves with the virtual theft of state assets. Chinese leaders watched in horror as the Soviet Union disintegrated and its assets were privatised. Having seen business threaten to take over the state in Russia, Beijing has been determined to make sure that the same disaster does not befall China.

The party’s efforts to place itself inside private companies have been, according to its own figures, very successful. One recent survey by the Central Organisation Department, the party’s personnel body, found that 68 per cent of China’s private companies had party bodies by 2016, and 70 per cent of foreign enterprises. Although these figures sound high, they don’t match the targets the party has set for itself. In Zhejiang, for example, Xi’s old stamping ground and ground zero for the struggle between the CCP and entrepreneurs, the province set a target in August 2018 to have cells inside 95 per cent of private businesses. There was a need, the survey said, to retain the revolutionary spirit inside the companies as their ownership was handed on to the next generation.

For a reliable benchmark about the power of the party in China, you only need to listen to wealthy entrepreneurs hold forth on politics. Masters of the universe in their business domains, the otherwise all-powerful CEOs go to abject lengths to praise the party. To take a few companies listed in a single article in the South China Morning Post, Richard Liu of e-commerce group JD.com predicted communism would be realised in his generation and all commercial entities would be nationalised. Xu Jiayin of Evergrande Group, one of China’s largest property developers, said everything the company possessed was given by the party and he was proud to be the party secretary of his company. Liang Wengen of Sany Heavy Industry, which builds earthmovers, went even further, saying his life belonged to the party. "They act as if they are being chased by a bear," wrote Zhang Lin, a Beijing political commentator, in response to these comments. "They are powerless to control the bear, so they are competing to outrun each other to escape the animal."

Jack Ma of Alibaba, the global face of Chinese entrepreneurship, has always managed to strike a quirkier and more independent stance than his fellow billionaires. "Be in love with the government. But don’t marry them," he once memorably said. Ma’s pithy aphorisms at home and abroad were mostly a plus for his business, but they had a downside. Ma’s high profile made him vulnerable. If there was a presidential election in China tomorrow, Ma might win, one of his former business partners told me, only half joking, adding that it was a dangerous position to be in. In September 2018, Ma announced unexpectedly that he would step down from a day-to-day role in the company the following year. Ma said he wanted to focus on education and philanthropy. An equally plausible reason for his resignation, the former business partner said, was Ma’s fear that his power and popularity had made him a target of the party. Ma has been in the party since the 1980s, although his membership was not declared until late 2018, after his retirement announcement, in an article in which the People’s Daily complimented him for his contributions to reform.

Whether or not some entrepreneurs were intent on taking him on, Xi pre-emptively took the fight to them. In 2017, the Xi administration began a campaign to rein in swashbuckling business leaders, starting with some of the corporate chieftains who had become the standard bearers for aggressive Chinese dealmaking overseas. There was no clear pattern in the approach the government took. Some business leaders were forced out of overheated commercial sectors such as real estate. Others were told to pull back from offshore forays either because their high profile was an embarrassment for Beijing or because the government was trying to stop capital flight. Some, such as Wu Xiaohui, the chairman of Anbang Insurance Group, went the way that communist members who fall foul of the system do, vanishing without explanation into the party’s detention system. Only months earlier, Wu had been leading negotiations to spend $US14 billion on hotels in the United States, before the deal collapsed. In May 2018, the authorities announced Wu had been sentenced to 18 years in jail for fraud and embezzlement.


China’s three dominant internet companies, Baidu (a search engine), Alibaba (e-commerce) and Tencent (messaging and gaming), known collectively as the BAT, have all felt the government’s wrath. In 2018, Tencent lost $US200 billion in its market capitalisation after regulators stopped approving new online games, pushing the company out of the world’s top 10 companies ranked by their share market valuation.

The rapid growth of the BAT companies and their dominance of the internet in China has given them an outsized economic status. But their political value is just as important, as they have become indispensable to China’s surveillance state. With the mountain of data they generate, the BAT trinity are in effect turning into a real-time, efficient and privately run intelligence platform. In that respect, they are ideal private companies. They both drive economic growth and also buttress the political system.

Foreign CEOs, too, have come under pressure to give the party a larger role in their firms. Again, this is not a trend that started with Xi. Walmart, which famously won’t allow unions in its US stores, has had party cells in its companies in China since at least 2006, and CCP-controlled unions even ear- lier. Under Xi, however, emboldened officials have pushed foreign firms harder to accommodate the party and give its representatives a role in business decisions. Companies as diverse as the cosmetics giant L’Oreal to Walt Disney and Dow Chemicals in China now all have party committees and display the hammer and sickle on their premises. Executives from one European company were quoted as saying that party representatives had demanded to be brought into the executive committee and have the business pay their expenses. Like Chinese entrepreneurs, foreign businessmen and women are trying to outrun "the bear", not always with success. But the party’s persistent efforts to colonise the private sector have stoked a backlash of their own.

In late 2017, the EU business chamber in China formally complained about party organisations trying to extend their influence in their member companies, something they said would undermine the authority of their boards. "A fundamental change of this nature . . . would have serious consequences for the independent decision-making ability of these [joint venture] companies," the chamber said in a statement. The chamber’s argument, that an extension of the party’s functions had no legal basis, was met with indifference locally, at least in public utterances. "When you are in Rome, do as the Romans do," said Chen Fengying, an expert at the China Institutes of Contemporary International Relations, a foreign policy think tank. "Foreign investors should respect local rules and regulations in China."

On one level, Xi has been untroubled by the backlash over his treatment of entrepreneurs. The idea that the private sector is being overly politicised is upside down, according to his world view. Business leaders should "strengthen self-study, self-education and self-improvement", he said in 2016. "They should not feel uncomfortable with this requirement. The Communist Party has similar and stricter requirements on its leaders."

Xi Jinping: The Backlash, by Richard McGregor. Supplied

Later, in 2018, when the economy started to slow and the trade war was ramping up, Xi was much more pragmatic and solicitous. In November that year, he invited a select group of entrepreneurs, including Tencent’s Ma Huateng (also known as Pony Ma), for a meeting in the Great Hall of the People. He wanted to reassure them that they were "all part of our family". At the same time, a surfeit of stories appeared in the official media urging banks to lend private firms more money.

Not all entrepreneurs were buying the new line. One businessman, Chen Tianyong, posted a lengthy rant on social media, which he titled "An Entrepreneur’s Farewell Admonition", explaining why he had left China. "China’s economy is like a giant ship heading to the precipice," he wrote in a posting that was later taken down. "Without fundamental changes, it’s inevitable that the ship will be wrecked and the passengers will die."

This is an edited extract from Xi Jinping: The Backlash, a Lowy Institute Paper to be published by Penguin Random House Australia on July 16.

— New Statesman