How private is private in China?

To what extent are China's private companies controlled by Beijing?

This question has assumed prominence in recent times in Australia because of the high-profile rejection, on national security grounds, of Huawei's pitch for involvement in the National Broadband Network. Huawei – often translated as "Brilliant China" or "China is great" – is arguably China's largest nominally private company.

It is a question that will arise in future as other private Chinese companies seek investment opportunities in Australia and have increasing freedom to do so (Weighing Up China's Vested Interests 6 January).

Some have suggested that Beijing does not even exert influence over China's state-owned companies. I addressed this issue previously – clearly there is a degree of control (China's SOE in Aussie Mirror 16 January).

Others protest that, even if one accepts Chinese state-owned companies are controlled by Beijing, this is not the case with China's private companies. These companies, the argument runs, are independent and should be treated and understood as analogous to private companies in Australia.

Australia's former foreign minister, Alexander Downer – a director of Huawei's Australian board – has been particularly public in insisting that because Huawei is a private company it is thus free from state control. "China may or may not be a source of risk," asserts Downer. "But Huawei is not China".

The problem with this approach is that it ignores that in China the demarcation between private commercial interests and the state interest is far from clear-cut. This is not to single out Huawei, it is a problem across the Chinese economy.

The journalist Richard McGregor, for example, in his best-selling book The Party: The Secret World of China's Communist Party Leaders makes reference to a famous dispute in 2005 between rival brokerages CLSA and UBS about exactly what percent of China's economy should be considered the private sector: CLSA said 75%, UBS said no more than 30%.

An interesting and perhaps revealing footnote to this story is that CLSA was bought by CITIC Securities, a Chinese state-owned investment company, last year.

One of the reasons it is so difficult to properly characterize some Chinese businesses as bona fide 'private' companies, is because of legal ambiguities in their underlying corporate structure.

As McGregor rightly states:

After more than three decades of market reforms, Chinese companies still come in all manner of guises and trade under an array of different business registrations to accommodate prevailing political pressures. They can be fully state-owned, collectively-owned or co-operatives; or limited liability companies with diversified share registers split between both public and private owners.