Commentary: Wahaha Saga Exposes Cracks in China’s Mixed-Ownership Model

1. The article opens by highlighting the turmoil following the death of Zong Qinghou, founder of Wahaha Group, a major Chinese beverage company. Zong’s passing has intensified succession and control struggles within the company, confirming long-standing predictions that Wahaha’s stability depended heavily on his presence. Despite these upheavals, Wahaha’s largest shareholder, Hangzhou Shangcheng Investment Holding Group—a local state-owned enterprise—has notably maintained silence, even amid the resignation of Zong’s daughter, Zong Fuli, from her executive roles[para. 1][para. 2].

2. Wahaha, established over 40 years ago, serves as an important case in China’s mixed-ownership reforms. Zong’s takeover in 1987 ushered in modern corporate governance blended with an SOE-style employee shareholding structure, balancing state, employee, and market interests. Under Zong’s leadership, Wahaha became China’s top beverage company by revenue. However, contradictions inherent in the structure, especially around ownership and control, remained hidden until recently with Zong’s death sparking renewed issues of succession and “absent ownership” (the phenomenon where state shareholders are passive), leading to governance risks such as insider control and profit diversion[para. 3][para. 4].

3. The article provides background on China’s state asset management system. The ambiguous definition of state ownership as “ownership by the people” has led to weak managerial incentives. Over decades, reforms introduced structures such as shareholding systems and delegated agency, legally clarified in Article 246 of the Civil Code, which states that the State Council represents state ownership. In practice, management of these assets is delegated to agencies like the SASAC or local government authorities, who are meant to maximize public benefit but often do not fulfill this role fully, as seen in Wahaha’s case[para. 5][para. 6].

4. Since the 1990s, Wahaha’s largest shareholder has been local-government-backed Hangzhou Shangcheng Investment (46% ownership), while the Zong family and employee association hold 29.4% and 24.6%, respectively. Despite this, Zong retained operational control, with management and employees effectively controlling over half the voting rights. Profitable business lines were spun off into family-controlled ventures, with state representatives remaining mostly silent on these practices. Even when rumors emerged of trademark transfers to Zong Fuli, the state shareholder did not give a public response; Wahaha’s core business now represents only a symbolic asset within the wider Zong family empire[para. 7][para. 8][para. 9].

5. The central governance problem is the conflicting roles of local governments as both shareholders and recipients of tax revenue. In practice, governments prioritize stable tax income from local registration and spin-offs over extracting dividends from Wahaha, leading to regulatory passivity. This creates a direct conflict of interest: local authorities may value short-term fiscal gains above long-term asset preservation, especially when entrepreneurs control decisions affecting tax flows[para. 10][para. 11][para. 12].

6. To address these dysfunctions, the article suggests mandatory public disclosures for large mixed-ownership firms, paralleling those for listed companies and financial institutions. Lack of information enables both state agents and entrepreneurs to mismanage or misappropriate assets. Existing internal checks, such as employee associations and Party committees, often fall under management influence. Enhanced transparency and improved dividend-distribution mechanisms could restore public trust and supervision, clarifying responsibilities and reducing state asset losses[para. 13][para. 14][para. 15][para. 16][para. 17].

7. The conclusion argues for a return to the constitutional principle that state assets serve the people at large. Increasing transparency and public accountability in state asset management would raise public awareness and encourage business leaders to balance private interests with the public good[para. 18].