13th October 2022
China is so big that it matters to everyone in private equity whether or not they have any Chinese investors or any Chinese investments. This opening 17Capital International Analysis sets out why the Chinese Communist Party National Congress which begins on Sunday is truly important to international business.

Why the Chinese Communist Party National Congress matters to Private Equity

Winston Churchill famously described Russia as “a riddle wrapped in a mystery inside an enigma.” China is considerably more complicated than that. Its history over the past one hundred years has been that of a series of convulsions, some benign, many that have not been so. It is a story that is largely, but not exclusively, conducted about and within the Chinese Communist Party. On Sunday October 16th, the 20th National Congress of the Chinese Communist Party will open. By the time that it concludes about a week later (technically it starts as the 7th Plenum of the preceding 19th Congress and becomes the 20th Congress when it ends and all the key decisions have been announced), it will set the course for China’s political system, economic outlook, and its foreign policy for much of the rest of this decade. It will indicate the extent to which Xi Jinping has obtained outright personal rule.

Once upon a time none of this would have mattered to the outside world in general and private equity in particular.

Fifty years ago, in 1972, the estimated GDP of “Red China” was smaller than that of Hong Kong (which had one two hundredth of the population of its massive neighbour). In 2022, China is the second largest economy in the world and closing in on 20% of the entire global GDP. Chinese investors are everywhere, and private equity needs to know who they are and what sort of domestic pressure they might be vulnerable to. Chinese investment opportunities are out there but private equity needs to understand the hidden terms of business and the degree of independence that exists on an exit. What is happening in China is, in short, incredibly important but often opaque.
The vital questions, therefore, which this piece will seek to answer are: Who is Xi Jinping? How did he come to lead China? What has he done so far as leader? What might he do in the next five years?

Who is Xi Jinping?

Xi Jinping is the son of Xi Zhangxun. His father had a solid party pedigree (if not of the very highest rank) and a distinguished military record. By the 1960s, he had a major role in the party propaganda department, but was a relative moderate. He would allow books to be published that others would have banned outright. He was known to be an admirer of Deng Xiaoping.

So, he was one of the first to suffer under the Cultural Revolution unleashed by Mao Zedong in 1966 in the aftermath of the disaster that was the Great Leap Forward (in reality a Giant Jump Backward that cost around 40 million lives to famine). Xi Zhangxun was stripped of office, denounced as a central figure in the so-called “north east anti-party clique” and sent to the countryside to perform menial tasks and experience the wonders of “re-education”.

At this time, the son was always destined to endure a similar torment to the father. That was the case for Xi Jingping. He became a “sent-down youth”, compelled to settle in rural Shaanxi province, obliged to undertake a variety of unappealing occupations and at one stage lived inside a cave. He kept attempting to rejoin the Communist Party and its various offshoots but was rebuffed. As long as his father was on the (lengthy) list of disapproved persons, then Xi’s own chances of being able to return to Beijing, never mind anything close to the life that he had lived before, was minimal. That meant, realistically, waiting for Mao to die and hoping that the Cultural Revolution expired with him. That is what finally took place in September 1976.

Enter Deng Xiaoping

Mao’s chosen successor, Hua Guofeng, was not perhaps the sharpest tool in the box but had the sense to appreciate that Madam Mao and her closest acolytes were potential trouble for him. He moved very swiftly to have the “Gang of Four” arrested, imprisoned and then put on what proved to be almost hypnotic televised show-trial. That was essentially his only achievement as the supreme leader. Within two years he had been comprehensively outwitted by a revived Deng Xiaoping.

Deng was a figure of real stature. He had a past to be proud of. He had become a member of the Party in 1924. He was hence part of a small set of elders later to be known as “The Eight Immortals” for their long association with the Party and its coming to power. He would be purged no less than three times and his son paralysed at the hands of a Red Guard mob during the Cultural Revolution. Once Deng finally reached the top, it would allow for a comeback for those like Xi Zhangxun.

Deng fired on all cylinders. He started by reversing the collectivisation of agriculture, permitting peasants who could exceed their quota to sell any surplus to the State or via a market. He then liberalised the environment for academics and intellectuals. He promoted the “one child” policy (which had some very awkward side-effects later, but dealt with an immediate demographic crisis), he reached out to the United States and was open to foreign investment. He turbocharged the economy through the establishment of Special Economic Zones. One of his allies most closely associated with this was Xi Zhangxun. This would prove to be very helpful to his son later. Deng managed to do all of this while holding very few formal titles.

He ran the Central Leadership Advisory Group and was Chairman of the Central Military Commission. He was manifestly in charge, but he championed collective leadership and distributed other roles to a set of supporters, including Hu Yaobang, and later Zhao Ziyang, both considered to be progressives. Xi Zhangxun was not at that level, but he was on the next rung down. Deng had managed to strip back the Maoist State, while taking care not to be too overtly hostile to the founding father.

Tiananmen Square 1989

The great black spot, however, was the Tiananmen Square massacre of June 4th, 1989. It had been triggered by the death of Hu Yaobang. Its aftermath was enormous. Zhao Ziyang, who had openly aligned with the student protestors, had to be forced out as General Secretary. The identity of his replacement would speak volumes about whether the Party would continue down Deng’s path or go back to that of Mao. Deng managed to move Jiang Zemin, the Shanghai Party supremo, who was independent of but sympathetic to him, into this key position but the whole system wobbled. Deng Liqun, a full-on leftist, was waiting in the wings if the Party decided to purge his namesake yet again.

Deng put China into permafrost for three years. Once he was confident of his position, he carefully started to resume his reforms but with the emphasis on economics and not political liberalisation. He also intervened to ensure that while Jiang Zemin would serve out the remainder of what would have been his predecessor’s full term and would be allowed to be re-elected twice after that, there would be no further extension. It was China’s version of the 22nd Amendment to the US Constitution passed in 1951 after Franklin Roosevelt’s tenure. Additional checks and balances were also installed.

The events of 1989, though, still left deep scars. One of those within the Party who had been against them was Xi Zhangxun, who had been even closer to Hu Yaobang than he was to Deng. He was not exactly purged but “retired” in 1993 (in effect eased out of his official positions) and removed from Beijing but in comfortable conditions where he would live for almost a decade until dying in 2002.

The rise of Xi Jinping (Part I)

Father and son split over what had been witnessed in Tiananmen Square. There is no evidence that the younger Xi was ever tempted to offer a principled stand against Deng because of it. He wanted to pursue a political career through the Party and was therefore content to take the Party line on it. He was determined to get ahead and within 25 years he would be in a position to assume power.

His ascent was not smooth nor was it inevitable. He had a number of assets and advantages. He had a reasonably famous family name, even if not of direct descent from one of the “Eight Immortals.” He worked very hard and acquired a reputation for competence. He had something of the common touch to him. He appears to have been sincerely opposed to corruption and not corrupt personally.

His other stunningly vital ally was his wife, Peng Liyua. For much of the time after their marriage (his second) in 1992, she was more famous than he was. She was the daughter of a leading figure in the military who had been purged during the Cultural Revolution, condemned as one of the “five black elements” and sent, with his children, to the “cowshed” in the countryside. He and she were treated even more harshly than the older and younger Xi had been. When he was later rehabilitated (under Deng), she was able to come back to the capital and demonstrate a startling talent, that of singing. She became a television sensation with an impressive ability to hit notes of great height. There is no US or European figure to compare her with completely, but Barbra Streisland is a respectable fit.

So, Xi started to rise but it was not all straightforward. He began in Hebei province, the region that largely surrounds Beijing. He stood for the Central Committee in 1997 but came 151st in the content for 150 openly elected slots. This embarrassment was resolved by an extra place being invented for him. He moved on to take the helm of Fujian province, on the south coast of China. From there he would take over in Zhejiang province, its eastern neighbour. After that was a short stint in charge of Shanghai. He was closing in on becoming the Party leader heir apparent to be selected in 2007.

Waiting in the wings

The role of heir apparent has proved a very vulnerable one in Chinese Communist Party politics. It was no guarantee of ultimate victory. There were a number of developments that could have put pay to his aspirations and opened the door for a new candidate to emerge as an alternative. The Beijing Olympics of 2008, of which Xi took office for the final stages, could have undermined him if they were considered to have been a failure, but they were deemed to be a triumph for the country.

As matters evolved, three different crises occurred which could have proved politically fatal for Xi. They are partly interconnected and explain why he has become the leader that he would turn into.

The first were a set of riots by the Uighers of Xinjing province in July 2009. This area, in the very far north west of China, has never been easy for Beijing to administer.  The uprising was eventually suppressed, but there is no doubt that the Party was shaken. It boosted spending on the security services by a considerable margin and publicly blamed foreigners for having whipped up discontent.

The second issue to emerge was ideological in character. In 2012, the Development Research Centre of the State Council and the World Bank released a report entitled “China 2030: Building a Modern, Harmonious and Creative Society”. The Left of the Party hated it. Some 1,644 economists wrote an open letter condemning its heresies. Xi had to distance himself from the study.

The final threat was more personal. It was the meteoric rise of Bo Xilai as a candidate for leader. Xi had a number of reasons to fear him. Bo’s father, Bo Yibo, was one of the Eight Immortals, indeed the last of them to die in early 2007 at the age of 98. Bo was hence a proper “princeling” which Xi was not. He was a highly charismatic figure with a flair for positive self-publicity. He was making a splash in charge of Chongquing from 2007 onwards. He was also becoming a darling to the Maoists.

Bo’s fall, however, was as fast as his rise. It was in 2012, the year of which, in that November, the Party would settle on a new General Secretary and Chairman of the Central Military Commission. Lurid suggestions of corruption started to be made of Bo (they probably had some legitimacy). In a very strange twist to the plot, Bo was linked via his wife to the murder of Neil Heywood, a British businessman with whom she was known to have had dealings. Bo was arrested, imprisoned, put on trial, expelled from the Party and sentenced to life imprisonment. He is still in jail somewhere.

It was batten down the hatches once more for Xi as the pivotal Party Congress drew closer. He was ensuring that absolutely everything would run smoothly. It went exactly the way that he wanted it. He had two of the three key positions. He would add that of State President in March 2013, a post that was supposed to come with a term limit of two five-year periods in office.

The rise of Xi Jinping (Part II)

It did not take long for the primary hallmarks of what would be Xi’s rule to become apparent. The first was an incredible centralisation of authority in his own hands. Whereas Deng had eschewed titles, Xi collected them like some people seek out postage stamps. He is known as the “Chairman of Everything”, running four of the eight most significant formal committees and inventing others such as the Leading Group on Overall Reform which cut across conventional Party and State structures. On March 17 2018, the National People’s Congress re-elected him as State President, but without the prohibition against him seeking any further extension of his tenure. On Christmas Day 2019, a moment when we now know that COVID-19 must have been sweeping across and beyond Wuhan, the Politburo officially named him as “the People’s Leader”. Only Mao has ever had that accolade before. All of this has been accompanied by a creation of a serious cult of personality.

Person and Party

It is not only structures but ideas that Xi is interested in controlling. The Party ideology has been rewritten around his instincts. China will still push for economic expansion but not political liberty. The media is more closely supervised. China under Xi aspires to become a sophisticated player in science, technology and innovation (along the lines of Japan) and not simply the manufacturer of cheap clothes and toys. Foreign policy has become much more nationalistic and assertive.

Xi is also fascinated by the Internet and has proved adept at co-opting it. In 2014 he established (and, of course, chaired) the Central Leading Group for Internet Security and Informatisation. In 2018, this was subsumed into a new Central Cyberspace Affairs Commission (which he leads).

Xi still has his populist inclinations. His drive against corruption is real and is strongly supported by the vast majority of the population. It can also, though, be the alibi by which local parties are purged and officials live under the constant possibility that they might be arrested and imprisoned. He has also been more sensitive as to the unequal distribution of wealth that quasi-capitalism has created and has sought the means to tame markets if they threaten to cause social instability. That too is probably popular with the bulk of the people. He was also the figure who finally allowed the “one child” policy to be dropped in favour of a “two children” agenda. That is surely popular as well.

The crucial element here is that previous Chinese leaders from Deng onwards were subject to checks and balances, a strong element of collective leadership and term limits on the office of President. This was one-party rule, not one-person rule, which had been tested to destruction under Mao. It meant that everyone in the system knew that there would be a transition after ten years and when it would happen. That would ensure that even a strong leader became weaker as his time ran out.

The rise of Xi Jinping

This is no longer the case. The 20th National Party Congress will almost certainly re-elect Xi as State President. The crucial issues on which we should have a better steer by the end of October are:

  • Will he receive additional titles to the ones that he currently holds? If he does that would be a clear indicator of a determination to move further and faster towards one-person rule.
  • Will he seek additional amendments to the Party Constitution and to its Guiding Ideology? This too would suggest that he intends to serve more than one additional full term in charge.
  • Who will be chosen to serve on the Politburo and, even more significantly, its Standing Committee? Will they represent a cross-section of views or be his personal acolytes?
  • To what extent will his recent emphasis on “common prosperity” mean a further clamp down on the country’s most successful private companies and individual entrepreneurs? A recast balance within “market socialism” has huge implications for the global economy.
  • Will this be the moment when Xi sets out a new doctrine for foreign policy which would almost certainly enhance the already sharp tensions between China and the United States?

There is a spectrum of potential outcomes here and few clues have been offered in advance of the National Congress. At a minimum, however, the Party will formally endorse the less sympathetic approach to private capital and the more forceful emphasis on “self-reliance” in its dealings with the outside world that have been seen ever since the COVID-19 crisis erupted (the virus is still a major fact in daily Chinese life). At a maximum, the Party may hand its leader authority unknown since Mao and make it clear that capitalism has to operate within far more constrained circumstances and that something close to Cold War conditions between Beijing and Washington will soon be with us.

Despite all the other difficulties and distractions that LPs, GPs and portfolio companies have to consider at the moment (rampant inflation, energy supplies, the war in Ukraine), the seemingly obscure deliberations and decisions of around 2,300 Communist Party delegates this month might well turn out to be the most important single event not only of this year, but of this whole decade.