On Party Business

Capital allocation in China is not politically neutral. The large commercial banks are state-owned, and all banks operate under significant political direction. The clearest beneficiaries are state-owned enterprises. They are far less likely to have credit rationed, and have received more lending than their commercial performance would merit, before,² during,³ and after⁴ the 2008 financial crisis. Some of this reflects state banks signalling alignment with political goals. Some of it is just commercial logic: why lend to a private firm that might fail when you can lend to a state enterprise that will almost certainly be bailed out? Just as how, in the West, no one ever got fired for buying IBM, no Chinese bank employee is ever reprimanded for lending to a state-owned enterprise.

State-owned companies do occasionally go bust, and regularly face restructuring. But the flow of credit to firms the Party considers strategically crucial is remarkably resilient. China First Heavy Industries has posted losses for three consecutive years, carries an asset-liability ratio of 86 percent⁵ against a manufacturing sector average of 57 percent,⁶ and is undergoing its fourth restructuring of this century. Its previous crisis, in 2015–2016, followed a corruption scandal that ended with its CEO taking his own life.⁷ A private firm in this condition would be bracing for collapse. China First Heavy Industries borrows at 3 to 4 percent and is going nowhere.

Large private firms that have established themselves as national champions also receive support, though the sequencing matters. Huawei is the best-documented case. As it grew from a major player in Chinese telecoms to a globally significant company across the 2000s and 2010s, it benefited from state-backed financing, often indirectly (usually through low-cost loans extended to its domestic and international customers to purchase Huawei equipment.) This was not support handed to an unproven startup. By the time Huawei received this kind of backing, it had already demonstrated it could compete globally.⁸ The Party was amplifying a winner, not picking one from scratch. For most Chinese firms—smaller, private, not yet proven at national scale—political alignment does not unlock preferential credit. The credit system rewards those who have already shown they matter.

Credit allocation matters for big firms. But for firms of all sizes, it is the Party's market shaping that most determines which businesses thrive in China. This is where sensitivity to Party signals becomes not just helpful but essential.

Zhang Chuanwei did not decide to enter wind power in 2006 by accident. In 2005, Beijing mandated that all wind turbine projects use equipment with at least 70 percent domestic value added.⁹ Grid companies were required to purchase all renewable power produced, at guaranteed national prices.¹⁰ These rules did not hand Zhang a business; thousands of other entrepreneurs, backed by local governments across the country, rushed into the same space. But they created the conditions in which a business like his could be built. They also explain why the local government in Zhongshan was willing to rezone his land (from industrial to commercial, thereby increasing its value), effectively handing him a substantial subsidy. Backing a strong local company in a nationally strategic sector served the career interests of local officials as much as it served Zhang.

The subsidies did not last. Over the following years, grid purchase requirements were relaxed and price supports wound down.¹¹ Most of Zhang's competitors went bust. Mingyang survived because it had become genuinely competitive during the years when the market was shaped to allow that. It began by acquiring intellectual property from Germany's Aerodyn; today it is expanding abroad using its own designs, refined over two decades of iteration. The Party created the game. Zhang won it on his own merits.

The same pattern ran through electric vehicles and batteries. From 2001, Beijing funded EV and hybrid research.¹³ From 2009, it began offering subsidies for domestic EV sales¹⁴ that increased over time, combined with local content requirements and rules obliging foreign firms to transfer technology to Chinese partners. Thousands of firms entered, state-owned and private alike. The subsidies were gradually withdrawn. Most firms failed. The biggest winners were CATL in batteries and BYD in vehicles—both originally private electronics companies that identified the EV opportunity early.

Both now play an outsized role in global supply chains in their respective sectors. They succeeded in intensely competitive markets. But those markets were created by the Party.

This is not random. Chinese leaders have declared the importance of technological development for decades,¹⁶ and Xi Jinping has described the high-tech sector as "the main battlefield" between superpowers.¹⁷ The Party has a clear plan, advancing through target technologies from new energy through semiconductors, EVs, robotics, AI, and quantum, with the five-year plans setting the cadence. The record is mixed—after forty years of effort, China still cannot sell a commercial airliner abroad, and the returns on decades of semiconductor investment remain uncertain. But in sectors where the playbook has worked, a handful of winners forged in brutal domestic competition now dominate global supply chains.

The Party's influence through capital and market shaping is structural and largely impersonal. It also has a more direct mechanism: the party cell embedded within firms themselves.

By law, any company with three or more Party members—roughly seven percent of China's population holds membership—is required to maintain a party committee. Before Xi Jinping, this was laxly enforced. Since his consolidation of power, it has become near-universal among significant firms. Officially, party committees transmit Party policy, conduct political education, and monitor alignment with central directives. In state-owned enterprises, and often in practice at large private ones, their remit extends to approving personnel appointments, major projects, and significant expenditure.

Direct evidence of party cells overriding commercial decisions at major private firms is limited. In part this is because it rarely needs to happen: when most of your senior leadership are Party members, they already know what the Party expects. At Mingyang, the point is made explicit; Zhang Chuanwei serves simultaneously as CEO and as head of the company's party committee. The cell is not the primary instrument of Party influence. But it is there, and it closes any remaining gap between the firm and the system it operates within.

Western and East Asian firms that entered the Chinese market willingly and made enormous profits now complain about unfair Chinese competition. Firms like General Motors willingly shared electric vehicle technology with Chinese counterparts in the early 2010s. By 2023, the CTO of Ford was driving a Chinese electric car.¹⁸

But the firms now complaining had already made their choice, and the alternative was probably worse. When the Party identifies a sector as strategic and creates the conditions for Chinese firms to dominate it, staying out does not neutralise the threat. It only means losing the ability to shape how it affects you.

In 2011, Elon Musk dismissed BYD by asking, "Have you seen their cars?"¹⁹ Today BYD is the largest electric vehicle manufacturer in the world, and nearly half of Tesla's vehicles are made in China.²⁰ Volkswagen initially came to China for cheap manufacturing and market access. Now it treats China as essential to staying at the cutting edge of the industry, investing heavily in its innovation centre in Hefei.²¹ It has become so integrated into the Chinese EV ecosystem that it is now a target of EU tariffs on Chinese-made vehicles.²²

Rejecting engagement with the Party would once "just" have meant absence from Chinese markets and inability to access Chinese supply chains. Now, at least in electric vehicles, it means absence from the frontier.

That will not be true in every sector. The Party's backing is not a guarantee of success. But its planners have shown they can create world-leading industries through sustained political commitment, and they have shown it in the sectors—clean energy, batteries, electric vehicles—that sit at the centre of the twenty-first-century economy. For firms in those industries, not engaging with China is not a neutral choice. It is a decision to cede the frontier.

Recognising this, however, does not mean rushing in. It does mean understanding the political context as well as the commercial one. Markets operate, firms compete, and entrepreneurs succeed. But they do so within a framework the Party defines. Whatever you believe about the interests of your company or your Chinese partner, the Party's interest will always come first.