THIS COLUMN HAS PREVIOUSLY discussed China’s state-owned enterprises (SOEs), see China Business Law Journal, volume 8, issue 4: SOEs. The column discussed how SOEs have been the subject of much interest in recent times, partly because of their economic importance, and partly because of the ongoing reforms that have been introduced in China. It explained that SOEs first emerged in China in the 1950s after the 1949 Revolution and were initially the product of the nationalisation of private enterprises and private assets, including foreign companies.
The previous column also explained that the term SOE was a bit of a misnomer. The more accurate term is “state-invested enterprises” or “state-invested companies”. For a discussion about the difference between the terms “enterprise” and “company”, see China Business Law Journal, volume 3, issue 9: Company or enterprise? This is because not all SOEs are wholly state-owned and therefore not all SOEs were governed by the specific provisions of the Company Law that applies to wholly state-owned enterprises under the previous versions of the PRC Company Law. In fact, many SOEs are listed both in the Chinese mainland market and in other markets such as Hong Kong, in which there is a private float of a certain percentage of the share capital (often around 30%). However, in such state-owned enterprises, the state holds the majority of shares, and the state-owned shares are non-tradable; i.e., they are not part of the public float.
Further, the column noted that until the implementation of the “open door” policy in the late 1970s, SOEs dominated the economy. They were not companies in the modern sense, but instead operated as basic production units of the government and performed a broad range of functions, including commercial and social functions. They provided social benefits to employees, who stayed with them from cradle to grave as part of China’s so-called “iron rice bowl”. Subsequently, major reforms to SOEs occurred after 1992, when Deng Xiaoping made a tour to Shenzhen and reportedly said, “to get rich is glorious.” In particular, SOEs began a procedure of corporatisation, a process that was formalised in the 1993 Company Law and subsequent amendments to the Company Law in 1999 and 2005. This was part of the establishment of the “modern enterprise system” in China.
In 2023, the PRC Company Law was amended, and came into effect on 1 July 2024 (the 2023 PRC Company Law). The 2023 PRC Company Law inserted a new chapter: Chapter 7 – Special Regulations for the Organisational Structure of State-Funded Companies.
Chapter 7 applies not only to wholly state-owned companies but also to other state-funded companies. The term “state-funded company” is defined in article 168 of the 2023 PRC Company Law as follows:
“For the purposes of this Law, State-Funded Companies refer to wholly state-owned companies and companies controlled by state-owned capital, including limited liability companies and joint-stock companies funded by the state.”
The chapter contains 10 articles and covers a range of issues, including the institutions that perform the duties of investors in state-funded companies (article 169), the way in which investor rights are exercised (article 172), governance of state-funded companies by the board of directors (article 173), and the internal supervision and management and risk control systems of state-funded companies (article 177).
Article 170 makes provision for the role of party organisations in state-funded companies:
“The organisation of the Communist Party of China within a state-funded company plays a leadership role in accordance with the provisions of the Constitution of the Communist Party of China; it researches and discusses major operational and management matters of the company, and supports the company’s organisational bodies in exercising their functions and powers in accordance with the law.”
Various commentators have noted that the effect of article 170 is to codify, or enshrine in law, the leadership of the Chinese Communist Party (CCP) over state-funded companies as described by article 33 of the Constitution of the CCP. As it relates to enterprises and other economic organisations, article 33 provides as follows:
“Party committees (or Party leadership groups) in state-owned enterprises play a leadership role by setting the direction, managing the overall situation, and ensuring implementation; they discuss and decide on major enterprise matters in accordance with regulations. Primary-level Party organisations in state-owned and collectively owned enterprises carry out their work centred on the enterprise’s production and operations. They ensure and oversee the implementation of the guidelines and policies of the Party and the State within the enterprise; support the shareholders’ meeting, the board of directors, the board of supervisors, and the manager (or factory director) in exercising their functions and powers in accordance with the law; rely wholeheartedly on the workforce and support the workers’ congress in carrying out its work; participate in decision-making regarding major enterprise issues; and strengthen the Party organisation itself while leading ideological and political work, the promotion of spiritual civilisation, united front work, and the activities of mass organisations such as the trade union, the Communist Youth League, and women’s organisations.
“Basic-level Party organisations in non-public economic organisations implement the Party’s guidelines and policies; guide and supervise enterprises in complying with state laws and regulations; lead mass organisations such as labour unions and the Communist Youth League; unite and rally the workforce; safeguard the legitimate rights and interests of all parties; and promote the healthy development of the enterprises.”
It is evident that the party organisation performs a leadership role in state-funded companies as distinct from its supportive, safeguarding and facilitative role in non-public (or private) companies. Although there is a substantive difference between the role of party organisations in state-funded companies and non-public companies, in each case article 30 of the Constitution of the CCP requires a party organisation to be established if a company or other work unit has three or more formal party members:
“All enterprises, villagers’ committees, state organs, schools, hospitals, research institutes, street communities, social organisations, military units of the People’s Liberation Army and other primary-level work units should establish a primary-level Party organisation whenever they have three or more formal Party members …”
Reform concerning the leadership role of party organisations in state-funded companies began with a speech by General-Secretary Xi Jinping at the 2016 National Conference on Party Building in State-Owned Enterprises. The leadership role of the party organisation is reflected in several practical aspects, including significant corporate matters such as strategic decisions, the appointment and removal of key personnel, and the planning of major projects.
Andrew Godwin previously practised as a foreign lawyer in Shanghai (1996-2006) before returning to his alma mater, Melbourne Law School in Australia, to teach and research law. Andrew is currently Joint Associate Director of the Corporate Law and Financial Regulation Research Programme at the Melbourne Centre for Commercial Law and Honorary Associate Director (Commercial law) of the Asian Law Centre. Andrew has acted as a consultant to a broad range of organisations, regulators and governments in Australia and abroad. He served as Special Counsel and Acting General Counsel of the Australian Law Reform Commission between 2020 and 2024.
