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China's Poly Group: The most important company you've never heard of

Is it an art auctioneer, a miner, an arms dealer, a front for the army? Probably all of the above.

“Corruption in Chinese politics is so institutionalized. Back in the ‘80s, Deng told Party veterans that their time was up. If China was to modernize then it would need engineers, scientists and bankers,” said Parris Chang, a former Penn State professor and Taiwan National Security Council deputy director.

“He told them that if they left their military and party posts, they wouldn’t be shortchanged. ‘We will have ways to compensate you, and your children.’ This is part of the symbiotic relationship between government-sponsored businesses, the party and the government itself,” Chang said. 

That’s helped fuel the emergence over the past two or three decades of a Chinese “military industrial complex,” he added.

“Poly and several others are engaged in [China’s military rise] through their arms sales and resource extractions abroad. When the US complained that Poly was selling arms to Iran, Saudi Arabia and other Middle East states, Deng asked them [Poly leadership] to come into his office and asked how much they made. When they replied that it was $2 billion, he said ‘not bad’ and the matter was dropped.”

It was the arms business where Poly first made its name — and earned a reputation for bending the rules. 

“China’s international strategy is driven by market access to natural resources. Any priority that conflicts with those imperatives, whether it's honoring its own laws on freedom of expression or adhering to international sanctions or supporting heinous regimes like Sudan, Syria or Iran, then the Chinese have a conflict that needs to be resolved internally. Unfortunately, it’s usually resolved in favor of growth and access to raw materials,” said Amnesty's Januzzi via Skype.

While companies such as Poly have long been accused of providing arms to despots and low-interest loans in return for resource concessions, some observers say that doesn’t mean these deals are always carried out with the backing of Beijing.

Derek Scissors, a senior research fellow for Asia economics at Washington-based conservative think tank The Heritage Foundation, says China’s Foreign Ministry can’t rein in most powerful state-owned enterprises (SOEs) because their connections to Communist Party and military royalty shield them from reproach. 

“Poly isn’t particularly large by centrally controlled standards, which have three of the top 10 firms in the world. They don’t seem to be very specialized in anything and that makes a lot of people suspicious that this is essentially another PLA front company,” said Scissors.
Scissors says Poly’s often go-it-alone approach and reluctance to answer to officials on the ground is “completely normal” for Chinese SOEs with powerful connections. “What’s interesting about Poly is that [state assets watchdog] SASAC has been pushing companies to stop investing overseas in non-core businesses, but it’s still allowed to be heavily involved in a series of these fad industries.”

A common, albeit mistaken, maxim of Western media is that China is a country controlled by 12 old guys in a smoky back room, where all princelings, the state and Party are connected and working together. But some China watchers say that while there are times of cooperation, divisions and competition also run deep.

“The more you get into it, the more complex these relationships are. The reason they are so complicated is that, as they were being detached from the state, there were so many different hands in the pot and everybody got a piece of the action. It’s an extraordinarily complicated process,” said Curtis Milhaupt, a China legal expert at Columbia University. He testified in February’s congressional hearings on policy options for addressing Chinese state firms at the US-China Economic and Security Review Commission.

Curtis says China was bereft of the family-run conglomerates commonly found in other parts of Asia after the Chinese revolution, so the Party and its scions have substituted these missing family groups as the new economic power elite.

“Obviously there’s a big down side to that in terms of corruption, nepotism and this black box quality that China’s SOEs have. Trying to get to the bottom of it is very tricky. But when we say that these companies are controlled by the state, it really buries a huge amount of complexity and conflicting interests,” said Curtis. 

But what isn’t so complicated is the type of support Poly’s businesses receive from the state. And when those interests collide, it’s not always the government that has the upper hand. 

“Chinese politics is so polarized and fractured. The military-industrial complex and the so-called oil lobby are very powerful. Their views and interests are not always the same as the foreign ministry so they often don’t care about what the foreign ministry thinks. The foreign ministry doesn’t make the final decision anymore. This is why they can’t deliver on some of their promises,” said Chang.