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Chinese Communist Party Cells in Private Companies: Though Not Yet Universal, Increasingly Situated to Play Greater Roles in Corporate Governance

04/07/21 10 minute read

Private companies in China are under greater pressure than ever before to give the Chinese Communist Party (CCP) more say in corporate governance. Yet in spite of this pressure, less than half of all enterprises in China house Communist Party cells, most citing an inability to build one due to lack of party members in their organization. Even within companies that have Party cells, it remains unclear how management strategies in the Party perfected within government can be used to further control the private sector.

The shift to formalizing the CCP’s role in private companies began only recently. While CCP cells have always been encouraged in the private sector, most companies were allowed to operate in an environment of benign neglect as far as the CCP was concerned. In 2002, less than 27 percent of private companies contained a party cell, among which they held no standard corporate role.

Things began to change a few years ago. In 2018, China’s regulators made establishment of Party cells a requirement for any company to be listed on domestic stock exchanges. Around that time, Party cells within companies began advocating their boards for greater say in corporate governance. China’s top leaders have become increasingly explicit about their expectations for the Party being more engaged within private companies. Last September, the CCP’s top governing body released an opinion paper titled “Strengthening the United Front Work of the Private Economy in the New Era,” which called for CCP cells to work more to understand and interact with private companies and to help “improve their corporate governance structure.”

Though China’s top leaders clearly intend to carve out a greater role for the Party in the private sector, the reality of party management strategies combined with an historically shallow presence in the private sector make practical implementation of Beijing’s wishes difficult.

Understanding Party cells

A Party cell (or Party organization) is a small committee or group of CCP members within a given organization. Members meet regularly to study CCP-approved political theory, and may engage in other activities as directed by Party offices.

Within China, every institution — public, private, non-profit, or even social clubs — can have an internal Chinese Communist Party cell. According to the Party Constitution, any organization with three or more CCP members should establish a Party cell. For the past few decades, this requirement has not been strictly enforced in the private sector.

The Chinese Communist Party constitution gives these cells the broad responsibility of acting as a communication bridge between the company they are affiliated with and the Party. Other responsibilities include party recruitment, educating Party members on Marxist theory, and reporting illegal activities observed.

No organization is considered an exception to this rule, not even China’s government. For every governing body, there is a parallel Party committee which oversees its personnel. Government and Party are deeply intertwined both when it comes to policy creation and implementation.

The primary mechanism through which the Party exerts control over government policy is through personnel management, as the Party is charged with determining which individuals will receive promotions and leadership positions within government. This is easy to carry out as all career government officials are Party members, and top Party leaders are all career government officials.

Party organizers

Party cells function under a strict hierarchy. Smaller “grassroots” cells (which represent companies, clubs, or other non-government groups) usually report to their city or town Party committee, which in turn report to province committees, and so on. The leading authority of all CCP cells is the Standing Committee of the Central Political Bureau (known as the Standing Committee), currently headed by General Secretary Xi Jinping.

When the Standing Committee decides to pursue a strategy, they issue an “opinion” emphasizing a broad set of goals. These goals are read by province, city, and grassroots cells, which each in turn translate these broad goals into concrete actions to be carried out by their members. This system is meant to allow individual CCP cells to adapt strategies to their given resources and circumstances. Enactment of the Standing Committee’s opinions rarely leads to uniform results.

Which companies have Party cells

Party cells are increasing both in number and importance in China’s private sector, but are not universal. Many entities do not meet the threshold requirement of three Party members within their organization to qualify for their own Party cell. And, while Beijing is signalling increased interest in involving Party cells in private sector management, this role is not yet formalized nationwide.

Survey accounts say less than half of private companies have a Party cell, and companies in China’s affluent coastal regions are less likely to have Party cells. According to the most recent private sector survey collected in 2018 by the All-China Federation of Industry and Commerce, 48.3 percent of enterprises that have the option to start a Party cell have one — a rise from their first survey in 2002 when only 27.4 percent of such enterprises had a Party cell. These numbers exclude entities which do not meet the basic requirements of housing a Party cell — most importantly meeting the three Party member minimum requirement.

Entities with Party cells tend to be concentrated in regions with less economic activity, and in more traditional industries. According to the 2018 survey, the highest concentration of companies with CCP cells were in Northwest China at 58.7 percent, while Southern China has the lowest at 31.4 percent. The industry with the highest prevalence of Party cells was manufacturing with a concentration of 61.7 percent. Wholesale and retail had the lowest concentration of the industries surveyed, with only 26.2 percent reporting Party cells. Corporate governance among companies with Party cells tends to be more traditional as well. Among companies with Party cells, 80 percent are owned and governed by family owners. Only 55 percent have established a board of directors, labor union, or held shareholders meetings.

Party Cells in Corporate Governance

There is no public nationwide strategy specifying what party engagement with the private sector will look like, but anecdotal incidents indicate that Party cells within companies are increasingly petitioning for formalized roles in corporate governance, especially over personnel management and leadership positions — mimicking the role Party committees play in government.

While similar petitions are taking place across the country, the exact role and power of Party cells within each enterprise are highly dependent on individual circumstances. Some company CEOs are already Party members and may be able to formalize their company’s Party cell without much change. Other companies may have greater difficulty organically incorporating new stakeholders into the decision-making process.

Moreover, the CCP has very little experience overseeing private companies, which are different places to manage than government offices. In addition to differences in day-to-day goals and constraints compared to government, China’s private sector has a highly mobile labor force. While government bureaucrats are dependent on long-term relationships within the Party to progress in their career, private sector employees have many options to switch companies and career paths. This flexibility disincentivizes close relationships with the CCP, especially in high-skill fields located in urban areas. If an individual is denied a promotion based on objections from their company’s Party cell, that individual would still be able to seek employment elsewhere or start their own business.

Companies must also consider how their relationship with their internal Party cell will affect their company’s relationship with the local government. In regions like Northwestern China where there is less entrepreneurship, company success is much more dependent on relationships with local governments. In more entrepreneurial areas, like Southern China, government relations are still important, but not the primary determinant of a company’s survival.

Why Party at all?

There is increased focus by the Party on the private sector, because Xi Jinping is leveraging Party leadership to address a myriad of problems, from national security to birth rates.

Strengthening the Party in the private sector is likely not Xi Jinping’s primary goal, but a symptom of his desire to strengthen the Party in all facets of China’s society. This will lead to higher levels of Party monitoring of Chinese citizens’ day-to-day lives and increased party bureaucracy and coordination costs within the CCP.

If you don’t feel you have a clear picture of what to expect of CCP involvement in private companies, you are not alone. Each company you engage with will be considering their own set of relationships both within their company and with their local government when trying to gauge what sort of role — if any — a Party cell should have in their company. Some companies may have a clear idea of how to go forward, but others will still be figuring things out.

Xi Jinping and other top leadership in Beijing show no signs of slowing down their plans to increase party influence throughout the country. But the practical implications of these changes on the ground remain unclear and ever evolving.

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