Analysis

What Xi Jinping means for your business

  • Asia Pacific
  • China
China: What Xi Jinping means for your business


Xi Jinping has arguably changed China more than any leader since the reform era began in the late 1970s. Much of what is happening in China today would have happened regardless of the leader due to its size and growing wealth, but Xi has provided direction and a compelling vision for the future.

With high economic growth rates, rapid infrastructure development and modern living standards (combined with visions of political and social control) China now offers a refined model of ‘modern state-led capitalism with Chinese characteristics’ that is unique – an attractive mix to many emerging market leaders. As this model is promoted by Chinese leaders this is becoming a global competition for market dominance in developing countries, especially in certain key sectors such as SMART infrastructure, high-speed rail, payment apps and satellite navigation.

Xi Jinping and his administration are pursuing five key strategies in developing this new China model, which presents significant challenges and opportunities to foreign companies wanting to do business in and with China.

1. Reinserting a reinvigorated Party into daily commercial life

As the son of an early revolutionary (a ‘princeling’), Xi believes the Party is central to China’s continued success and stability. An unprecedented anti-corruption drive has seen thousands of Party members removed or jailed. The Party is now leading policy in a way not seen since Mao’s time. Party cells in corporations are now mandated (a tip: you already had the representatives even if you didn’t know it) and tasked with promoting ‘Xi Jinping thought’ and driving Beijing’s agenda – an initiative that is somewhat contentious even in China.

What does this mean for your business? This means Party and state priorities are driven down to the working level in the country’s local and foreign businesses. State-owned enterprises will, of course, be the primary agent of change, and often they are your biggest competitors or clients, so you need to understand their new priorities. But even privately owned businesses are on the hook, especially the bigger ones in sensitive areas like new technologies. It will be increasingly necessary for foreign investors in China to be perceived to be supporting national goals championed by the Party and this needs to be factored into your strategic planning. But don’t be unnecessarily concerned about Party cells being established in your company – as a client of ours said, ‘It’s much better to be upfront and be able to engage than to have everything hidden.'

 

2. Recentralizing government to increase efficiency and implementation

Since Mao’s death, China had been run on a broad consensus basis. Power was devolved from Beijing to the provinces and to government bodies beyond the Party. This allowed for rapid economic growth, but also stalled reform and encouraged bureaucratic infighting and corruption on a grand scale. When Xi took over five years ago, he instituted a number of ‘leading small groups’ to address issue-specific reform challenges (i.e. state-owned enterprises, healthcare, banking, etc.). Since March 2018, these groups have been merged into a re-organized bureaucratic structure streamlined by sector and focused on regulation and reform. If you think you could count on that latest initiative being watered down or never get the ‘chop’ of approval, think again. Once fully operational, these structures are intended to circumvent time-consuming consensus and as a result changes are expected to come very rapidly and often without much prior notice.

What does this mean for your business? Any complacency means being caught flat-footed when rapid changes to policy and regulation occur. Companies can no longer focus government relations merely on gaining market access, relying on a retired Ministry of Commerce official sitting in the corner office. Rather, companies need to engage with government for the purposes of risk management, proactively reaching out to officials at multiple levels across the bureaucratic structure to understand policy and regulatory changes, and make adjustments before they take place. This is an excellent example of how strategies used years ago when entering China will not work now.

 

3. Refining a strategic national industrial policy for a transitioning economy

Even casual observers of China are awed by the speed and scope of its economic development, not least because it is a society that is rapidly going cashless thanks to popular mobile payment apps. But the old model, which was successively driven by foreign investment, foreign trade and, most recently, heavy capital investment, is no longer sustainable for a number of reasons: debt, demographics and environmental degradation to name a few. With Made in China 2025, Xi and the leadership have developed a strategic, long-term, robustly funded plan to vault China into the next era. It focuses on China becoming independent with home-grown technology and launching manufacturers into high-tech production. The government is providing generous financial incentives to a large swath of commercial sectors and emerging technologies from air compressors to AI, robotics to high-speed rail to guarantee dominance in key sectors that Beijing has identified as crucial in its effort to become the leading, global economic power.

What does this mean for your business? This means an increasingly uneven playing field with Chinese competitors moving quickly from ‘good enough’ to being able to provide premium products that compete with any multinational. Made in China 2025 will benefit your domestic Chinese competitors, who will have the opportunity to reap the benefits of tremendous resources – funding for investment, special projects and R&D, tax relief, subsidies – and be favored in the government’s effort to identify opportunities for industrial consolidation and create champions. Some of our clients are scrambling to readjust market strategy after key sectors were suddenly declared off-limits to foreign suppliers. Foreign companies are likely to face a more aggressive regulatory enforcement environment and decreasing access to the China market.

 

4. Regulating and enforcing (with Chinese characteristics)

Streamlining regulation, the government entities responsible for enforcement and regulations under which they operate have been a focus for President Xi. Part of the structural changes introduced in early 2018 included the creation of two super-regulatory bodies with immense powers: the National Supervision Commission, which sits at the highest level of the government and is responsible for enforcing Beijing’s edicts and regulations across all levels of government; and the State Administration for Market Regulation (SAMR), which is a ministry-level organization that combines anti-monopoly, anti-unfair competition (including commercial bribery), pricing, food and drug, labor, environmental protection and intellectual property regulators into one powerful body. The SAMR represents the streamlining of supervision, investigation and prosecution, and poses the risk that companies are more likely to face increasingly sophisticated enforcement on multiple fronts.

What does this mean for your business? The long Chinese tradition of broad laws, written vaguely and selectively enforced, is coming to an end. China is increasingly a place where companies are expected to operate according to promulgated regulations or suffer penalties for non-compliance – in other words rule by law (as opposed to rule of law). While this may simplify things and provide greater clarity, some of the consequences are already evident in the ongoing barrage of anti-competition, environmental and workplace safety enforcement – not only has enforcement been sudden and rapid, in some cases it has resulted in immediate shutdowns or detention of factory managers in severe cases. This crackdown isn’t temporary; it will be a regular feature for businesses operating in China. Companies need to look at their China strategies and operations from the regulators’ perspective and identify threats and vulnerabilities in this new environment.

 

5. Reasserting China’s role as an emerging regional and global power

As a natural progression to its rapid growth, demand for global commodities and its role as the world’s largest trading economy, China is increasingly a regional and global actor in a way it has not been for centuries. It has reclaimed and militarized large parts of the South China Sea, launched its Belt and Road Initiative (BRI) to extend infrastructure (and influence) across Eurasia and the Indian Ocean (gaining the controlling interest in 75 ports across 35 countries in the process), and installed its first foreign military base in Djibouti. Approval for global mergers must now be sought in Beijing as well as Brussels and Washington DC, and some companies have had to scupper global M&A strategies when they couldn’t obtain China’s approval (e.g. Qualcomm and NXP). China has also created a series of ‘parallel international institutions,’ including the Asian Infrastructure Investment Bank (AIIB), the Shanghai Corporation Organization, and the ‘16+1’ grouping with the states of Eastern Europe. In short, China is intent on setting its own global agenda and a more Sino-friendly world order.

What does this mean for your business? With economic clout and an expanded international presence comes influence, so just as Britain and then the US dominated markets and set global standards in past eras, so too will China in this century. This will naturally cause friction with other countries but it also represents a significant opportunity. China’s planned investment in the BRI alone will allegedly total over USD 1 trillion and some foreign companies are already reaping the commercial benefits of supplying this initiative, often via their China operations. But corporate headquarters have to be aware and stay attuned to the changing nature of China’s influence and sensitivities (e.g. the recent dispute with international airlines over nomenclature referring to Taiwan) as well as the opportunities China’s expansion presents.

 

Conclusion

The news today is filled with breathless and dramatic accounts of the changes in China and China’s increasingly active engagement with the world, many times ending with zero-sum predictions of a decline in reach and success for multinational businesses. We do not believe this is a foregone conclusion; however, threats to multinational companies abound if they blindly carry on doing what they have been doing for decades. China is in the process of creating an alternative ecosystem and a systemic challenge to capitalism as practiced in liberal-democratic societies: a state-led, regulatory-driven model governing companies, capital, society and data that will require foreign operators to adapt to a new playbook. The result is that your future China business may not resemble the rest of your business in key aspects, nor will it necessarily be similar to the business models you used when your company first entered China.

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