An Insider’s Perspective on How Political Connections Impact Chinese Family Business Succession

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The recent Panama papers leak has exposed shadowy transactions by a number of politicians and their families throughout the world. Some families hide not only their wealth but also the means through which they have built their businesses through political power and connections, meaning that many of these empires could be more pervasive than the public realizes.

Political connections are a significant and rare resource for businesses in both capitalist and socialist systems. Political power helps businesses circumvent red tape and gain state support, sometimes at the expense of society.

Political Power and Capitalism in China

In China, this is manifest in something called red capitalism. Red capitalism describes the ties and economic benefits for companies that are run by the children, close relatives, or protégés of high-level officials in the ruling communist party. These red capitalists are bound by hidden social contracts, which are passed onto carefully chosen members of next generation. Born to be red, these successors must give up certain freedoms including their own career choices to protect the interests of their businesses and political capital.

Meanwhile, over the last few decades, a number of private enterprises have emerged under the socialist economy with Chinese characteristics. According to the Chinese Family Business Report released in 2011, over 85% of these enterprises were family-owned. From these, a new class of “pink capitalists” – a term coined to describe capitalists with diluted political influence – has arisen.

Pink capitalist families are different from that of red capitalists in that any political influence they have come from the lower-rank government cadres in the family or ties that were developed between higher-rank cadres and the family. The fact that there are no high-rank officials inside the family results in a very different succession game for pink capitalist families compared to red capitalists.

Diluted in their political power, pink capitalists negotiate a looser social contract for private wealth. Their next generation members can assume more freedom from political pressure and less responsibility. In addition to entering elite universities in China, they can afford top colleges in the United States and Europe, which widen their global perspective.

This breakdown of the traditional social contract results in conflicting cultural values from the West, which offers different formulas for personal and business success. In particular, the universal value of justice in the West challenges the transactional relationships that exist between government officials and businesses for private economic benefits, a practice that has deep roots in Chinese guanxi, a basic system of social networks and influential relationships that facilitate business in a mutually beneficial manner.

“I don’t want to dirty my hands with politics,” said Huang, a next generation who left his family fireworks manufacturing company to work for a security firm. “Basically, it is not me.” The image of corrupt politics drove Huang away from succeeding the family political ties. Political power was also seen as less socially desirable in the eyes of many of Huang’s peers. This means that more and more next generation members are also exploring options to start their own businesses, which require less political capital.

“My parent runs a regional land developing company. I saw them drinking quite heavily while entertaining the government officials. I want to develop my own training institute instead. I took an internship with an institute called Wall Street English in Beijing to learn the practice,” said Zheng, a next generation member who studies in UCLA.

Even in cases where the next generation is willing to succeed the political ties, the transfer may not be as easy as one would expect. Preservation of a particular guanxi is a preference rather than a necessity for officials. Indeed, the officials often need to see the legitimacy of the next generation members and their commitment to continue the relationship like their patriarchs, meaning that legitimacy is not automatically granted but something that requires long-term observation.

According to my survey of over 100 next generation members from Mainland China, many of them found little benefit to becoming involved in politics at the early stages of their career, especially if they come from small and medium-sized family firms from villages and towns. “Too small to influence” was often cited as the reason.

In this age of pink capitalism in China, it is important to strike the right balance between business ambition and political ties. In a unique society such as China‘s, it is unadvisable that one would simply sever any and all political connection when they are so deeply interconnected with the business world.

As such, the concept of transferring family political ties should be part of the discussion between incumbents and potential successors of Chinese family businesses. Key questions to consider may include: Does the business heavily rely on existing political ties? Is family membership required in such a transfer? An honest evaluation will help the next generation prepare their career, inside or outside of the family business.

The next step is for the family to facilitate necessary political exposure in the career development process. Party affiliates such as the Communist Youth League and the All-China Youth Federation offer the next generation access to political training at different life stages.

Additionally, setting up a Party organization in the family firm can be a unique asset, should it be driven by a family member or a professional manager. But keep in mind that this can be a double-edged sword because of competing centers of gravity in the workplace due to greater influence from the Party.

Creating opportunities for successors to demonstrate their ability and commitment can also help advance their legitimacy in the business and political sphere. One symbolic gesture can be to hold corporate anniversary celebrations, where the successors have a chance to coordinate the whole affair and invite officials as speakers or guests.

It is important to help the next generation see that political power can have positive aspects as well as negative. Some family philanthropists, for instance, can deploy their family’s political influence to ensure that social causes are brought to the attention of government officials who can make a difference. Ultimately, it is how one chooses to utilize the endowed power and family values that family firms in China can shape the future.

About the Author – Jeremy Cheng is Center Manager of the Tanoto Center for Asian Family Business and Entrepreneurship Studies at The Hong Kong University of Science and Technology.