Yukyung Yeo is an Associate Professor of the College of International Studies at Kyung Hee University. She received her Ph.D. from the University of Maryland-College Park in 2007. Before joining Kyung Hee University, she worked at the City University of Hong Kong as the post-doctoral fellow during 2007-2009 and an Assistant Professor during 2009-2011. Her research interests include institutional changes in the socialist market economy, political control of the CCP over business, and foreign economic policies. She published several articles and book chapters, including “Complementing the Local Discipline Inspection Commissions of the CCP: Empowerment of the Central Inspection Groups” (2016), “Contextualizing Corporate Governance: the Case of China’s Central State Enterprise Groups” (2013), and “China’s Perforated Investment Control, 1978-2013” (forthcoming). Her first book manuscript, From Planner to Regulator: How China Governs Strategic Industries, is currently under review.

Introduction

In deepening the post-Mao economic reforms, one of the most notable changes has been the transformation of the Chinese state from planner to regulator in governing the economy. However, instead of shifting in the direction of a minimalist government or independent regulators, this study argues Chinese state regulation, that has been underpinned by informal institutions and the party organizations combined with formal institutions, has remained resilient. Moreover, the pattern of selective industrial management and the ensuing internal variance in the forms of regulation reflect that there are many political economies in China. This study attempts to explain what generates such varied forms of state regulation, and then deals with two additional issues: one is whether this varied pattern of industrial regulation in China is compatible with the broader socialist regulation patterns found in other post-socialist contexts, such as Vietnam; and the other issue is whether the implications of this paper’s findings suggest future evolution toward a liberal market economy with independent regulators and autonomous business, or the consolidation of state capitalism as an alternative path.

State-Business Relations in China’s Strategic Sectors

Reforming an economy often implies replacing an old system with a new one. Economic reform in a socialist regime thus may mean replacing a set of institutions of the planned economy with market institutions, for most institutions of the planned economy are incompatible with the systems of market-oriented one. For example, microeconomic as well as macroeconomic institutions, particularly fiscal and monetary systems, should be adjusted into market-oriented ones to become global market actors without incurring or confronting risk. Despite increasing market liberalization in China, however, central control remains robust as long as the sectors are crucial to the national economy. In doing so, both informal institutions and the party organizations, though often dismissed, play key roles in regulating the markets and the businesses inside. The predominance of state ownership in the leading industrial sectors leaves little space the private firms to influence the policy-making process. By the same token, business associations that are supposed to represent the interests of industries and firms find it hard to function properly and play a meaningful role. In this sense, either business associations or public-private linkages, which are interrelated constituent dimensions in examining state-business relations in general, are not very useful in explaining the state-business relations in China’s leading strategic industries. Moreover, since this paper aims to examine how the state exerts regulatory control over business rather than how business influences state policies and regulation, more attention is paid to elucidating the means of state regulation and accounting for the causal variables that produce the internal variance across the sectors. The overriding norm and roles of informal institutions and party organizations in both government and business are discussed in the following.

The View from the Center

In China, there is one widely shared political norm: the strategic importance of the eyes of the central leadership may invite the central regulatory oversight, regardless of inherent industrial characteristics or institutional constraints (e.g., property rights), even though the central party-state lacks the formal authority; informal institutions have emerged to do so as discussed later. However, China’s industrial management shows that centralization of the regulatory authority did not lead to the creation of one set of rules for new markets; rather, a diverse set of institutional arrangements came into being. In other words, the forms of central regulation vary across sectors. The first intervening variable is the conception of control. In China, the notion of a need for tight state control over economic lifelines, such as top-tier industries, has resulted in the application of a highly centralized form of regulation (hard regulation). On the other hand, when delegating authorities to local and foreign investors is a development strategy, the form of central regulation tends to be soft. The dominant mode of property rights is another key intervening variable in making different forms of central regulation among strategic industries. The leading mode of ownership is important because it influences the balance of power between central and local authorities in governing the businesses of involved industries. The final intervening factor is the governing structure; the decentralized authorities and enterprises (that is, the lack of formal authority) are likely to lead the center to rely more on “informal” institutions for direct supervision. Hence, the business and market of highly decentralized strategic industries (for example, the automobile sector) are under central regulatory control but through an informal channel. Those three variables together have created a new form of (central) regulation in China’s leading economic sectors, such as soft vs. hard central oversight. This pattern has been generated by China’s “selective regulatory control” in its leading industrial sectors. What is more, the importance of informal institutions has received scant attention in conventional theories of regulation and regulatory politics, which may lead us to dismiss the underlying incentives of political behavior and leave us unable to explain institutional outcomes. Hence, the patterns of regulation in China can be summed up with the following key elements: the regulatory control from the center through informal institutions under the leadership of party organizations.

Informal Institutions

Indeed, increasing research on informal institutions reflects one undeniable reality: “many rules of the game that structure political life are informal – created, communicated, and enforced outside of officially sanctioned channels.” This is particularly astonishing in many developing and post-socialist countries, in that patterns of clientelism and patrimonialism coexist with new democratic and market institutions but still remain overriding. For example, the existence of blat in Russia or sticky government-business relations in China exhibits the importance of unwritten rules in accounting for political behavior and economic outcomes. To clarify, informal institutions in this study are defined as “socially shared rules, usually unwritten, that are created, communicated, and enforced outside of officially sanctioned channels.” In effect, informal rules have received little attention in the field of institutionalism (such as historical or rational) mainly because much literature posits that formal rules primarily influence the shaping of incentives and expectations of the actors. The study of regulatory politics and reform is no exception. Much of the literature has analyzed formal institutions, focusing on advanced industrial countries. Both neo-liberal and neo-corporatist statist models have suffered from not seriously taking into account the factors underlying informal rules and procedures and their influence on the performance of formal institutions and other involved actors. As Helmke and Livitsky aptly point out, “such a narrow focus can be problematic, for it risks missing much of what drives political behavior and can hinder efforts to explain important political phenomena.” As research on the regulatory politics of the automobile industry has detailed, formal institutions are limited in explaining the mechanism of regulatory institutions for China’s highly decentralized automobile industry and its businesses, where central oversight is often exercised by informally shared rules and procedures. More advanced institutional analysis, therefore, demands careful attention to both formal and informal rules. By considering the informal channel of a centrally organized regulatory body, xunshizu (巡视组), some have found how informal regulation from the center is designed and employed in order to complement formal institutions at the local level. Indeed, this informal regulation from xunshizu provides local authorities with incentives that constrain political behavior to co-opt with local state firms with regard to the mismanagement of state assets. What is more, the use of informal channel tends to make central regulation indirect and soft when compared with regulatory oversight by formal institutions. In fact, informal regulation in Chinese political economy is often exercised by party organizations that retain powerful political control over both government and state firms in China but are largely dismissed in neo-liberal and neo-corporatist/statist models.

Party Organizations

How do the party organizations, which have deeply penetrated government and business, affect the patterns of regulation in the leading industrial sectors? Arguably, the Chinese Communist Party (CCP) continues to play an important supervisory role in economic reform and using state assets. The question, then, is how the CCP exerts its control in regulating leading industries and their businesses? How do they affect the patterns of regulation for them? Indeed, the party organizations are major challenges to conventional frameworks that fail to integrate these key political institutions into the analysis. Two party organizations serve party interests. First, “leading small groups (领导小组),” as a kind of joint party-state organizations consisting of high-level officials in a given sector, oversee finance, telecommunications, electricity, and many other industries. That is, on top of a regulatory institution in each industry, leading small groups set the overall development directions and rules for markets. In this way, regulatory agencies are far from independent of this party-state influence. The other is its Organization Department (中组部), which is deeply involved in the appointment of high-level officials in regulatory agencies and top executives in state-owned industries. By using a system of rotation, the Organization Department attempts to maintain the party’s control over both regulatory agencies and major state firms. Strong representation of corporate leaders in the Central Committee of the CCP also indicates how the party has penetrated deeply into business groups under the guise of increased corporate autonomy. Therefore, the tools of leading small groups and the appointment power of the Organization Department have enabled the party to maintain its firm grip on most strategic industries. As a result, contrary to conventional wisdom that emphasizes the independence of a regulator from both government and industry, a highly interdependent relationship among government, industry, and regulators has been crafted in China. The party organizations, such as leading small groups, the Organization Department, and xunshizu, sit at the center in regulating the markets. In short, various party organizations generate interdependent state-industry, more precisely regulators-state firms, relations through three tools of control. This reflects one reality that a conventional dichotomous approach, such as market vs. state, is highly limited to account for the transitional economies armed with resilient political-economic legacies.

Comparative Perspectives: Party-State Regulation in Vietnam

A more nuanced perspective on the patterns of “selective industrial management” in China can be gained through a comparison of the underlying norms and institutions in other post-socialist countries, particularly Vietnam, which has adopted similar pathways of reform within resilient socialist institutions. Indeed, comparing China with Vietnam is part of an effort to see whether China’s selective industrial regulation followed by internal variance is compatible with broader socialist practices found in other post-socialist countries like Vietnam. This will enhance the construction of a general account of the changing nature of the state from planner to regulator under resilient socialist political-economic institutions. By placing China in the post-socialist context, we can examine if the patterns of selective industrial management, the key argument of this study, are to be seen as the common practices in post-socialist regimes. Existing studies argue that regulators in socialist regimes are strong states that through the past planning bureaucracies have carefully designed the rules and formal and informal institutions to mold market forces to the party-state’s goals of economic development and the party’s legitimacy. Vietnam and China are commonly treated as more alike than different in their formal institutional composition...(Continued)