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.

Another issue is that, even if it can be established that a successful Chinese company is unambiguously privately owned, the management will nevertheless be extremely sensitive to the political environment in which they operate well beyond similar concerns enterprises in Australia face.

Whether or not a private entrepreneur is a genuine believer in the ruling party in Beijing – most, in my experience, are at best indifferent – he or she will nevertheless find it in their own personal interest as well as of their company to form close ties with the Party. In many cases, they become party members themselves.

A general rule of thumb is that the larger and more successful a Chinese entrepreneur's business, the most likely it will be co-opted in some way by the ruling party. The decision-making of management will, at the very least, be driven in part not wanting to make enemies of powerful people in Beijing.

One other point is that Chinese private companies are very sensitive to popular nationalistic sentiment on issues – often stirred up by the authorities – and in some cases may also genuinely share the same views as Beijing. It was revealing, for example, how many of China's leading 'private' technology companies, Baidu and Tencent, late last year took a very public stance in favour of China's ownership of the contested Diaoyu/Senkaku Islands. Clearly leading Chinese private hi-tech companies are not averse to taking actions in support of the stance of Beijing that go beyond pure commercial decision-making.

China is, of course, not the same thing as Huawei. Just as in many cases it may not be possible to establish any direct involvement in day-to-day management of a private company by Beijing. But it would be unwise to think that management of these companies are not very careful to make sure they do not take actions at odds with established Party positions.

For example, if our longest serving foreign minister were to establish the Alexander Downer Society for Religious Liberty in China, how long do you think his directorship at Huawei Australia would last?

As is the case with investment from Chinese state-owned enterprises, I would argue the key question is not whether a private company is controlled by Beijing. This should be assumed at least in some respect in both cases.

Rather, the issue is whether the particular investment made can be said to be a national security risk. In many cases, outside of sensitive industries, it will not be an issue.

Equally, Australia's corporate and political leaders should not kid themselves that the character of Chinese 'private' companies are really much like what they have had experience dealing with in their careers to date.