China Change

Home » Economy & Development

Category Archives: Economy & Development

Open Letter: A Call for Investigation Into HNA Group’s Activities in the US and Likely Corrupt Ties With Top Communist Party Leaders

China Human Rights Accountability Center, August 15, 2017

 

We are writing this open letter to express our deepest concerns about the highly suspicious activities of the HNA Group (HNA) in the United States, including the lack of transparency of its ownership, the unclear nature of its plan for charity work, and allegations of large-scale corruption. Based on the mandate of the Global Magnitsky Human Rights Accountability Act, other relevant laws, and in the service of public interest, we strongly urge Congress and relevant administrative agencies to investigate and uncover the true nature of the HNA Group, its asset sources, and intended uses in the United States.

Headquartered in the capital city of Hainan Province, an island off mainland China between the South China Sea and the Gulf of Tonkin, HNA Group started in 1992 as a state-owned enterprise doing business primarily in airlines and tourism. It was re-incorporated around 2000 and began expanding its assets rapidly and mysteriously.

In the last decade alone, the HNA Group transformed itself into the largest acquirer of foreign assets in the U.S. and one of the largest worldwide. The HNA Group is heavily funded by Chinese state-owned bank loans, which have enabled it to leverage into completely unrelated business sectors. With acquisitions, its rank in the Fortune Global 500 list climbed from No. 464 in 2015 to 170 in 2017, and is projected to reach the top 100 in 2018. It is reported that HNA Group’s current total assets exceed $150 billion.

HNA’s ultimate target is to be top 10 in the world, according to its CEO Adam Tan. HNA’s sprawling portfolio now includes Ingram Micro, Avalon, Deutsche Bank, and Hilton Worldwide, to name a few. Its transactions and activities involve former White House Communication Director Anthony Scaramucci and other high profile luminaries including George Soros, David Cameron, and Nicolas Sarkozy. However, HNA remains behind a heavy veil, despite its incomprehensible success. It failed to make any clarifications when various journalists repeatedly raised questions about its ownership structure or how it made its fortune.

We are writing this letter out of concern over what appears to be one of the most generous donations to a U.S. foundation in the history of philanthropy, and its potential connections to unprecedented massive corruption.

On January 31,2017, New York Times first reported that HNA’s largest single shareholder was Guan Jun (贯君), a mysterious man in his 30s who is alleged to be tied to China’s anti-corruption czar  Wang Qishan. In June, the Financial Times also reported that Guan Jun purchased 29 percent of the company last year from Hong Kong-based businessman Bharat Bhise.  Neither HNA nor Bhise revealed how the stake changed hands up to this transaction.

Only after the Chinese and foreign media began to focus on HNA’s ownership did the company finally release an open letter on July 24 to its employees, associates, and consumers; but even then, it did not list Guan Jun as the largest shareholder. When probed about the disappearance of Guan Jun’s share by a reporter from China Business Network, HNA said Guan is a “private investor” who owned some of the company’s shares, which has now been donated to the Cihang Foundation in New York.

This was confirmed by another Financial Times interview with HNA’s chief executive Adam Tan, who told the British newspaper that a Chinese citizen had donated $18 billion of the ownership of HNA—29 percent of the shares of the HNA Group of China—to a private foundation based in New York: the Hainan Cihang Charity Foundation, the company’s charitable arm in the United States. According to HNA, 53 percent of the company is owned by Cihang foundations, including a 22.8 percent stake held by a sister charity in China. The foundation registered with the New York Department of State on December 7, 2016, and it is currently applying for federal tax-exempt status with the Internal Revenue Service. The foundation says it will support a number of efforts, including anti-poverty work. Suspiciously, its three initial directors are all top executives of HNA, as reported by Wall Street Journal.

To put the size of the donation into context, a single donation of $18 billion will make the New York Cihang second only to the Bill Gates Foundation, the largest private foundation in the world. Cihang foundations — the New York Cihang and Hainan Cihang — now hold tens of billions in total assets.

What was not explained, however, was how the donor Guan Jun, a man in his 30s, acquired such a large share of one of China’s biggest companies in the first place. According to Hong Kong corporate filings, Guan Jun’s registered residential address is a simple apartment in what New York Times reporters found was a dingy, trash-laden building in Beijing, while his business address was registered in the “Oriental Aphrodite Beauty Spa”, a street-side salon in a residential neighborhood in western Beijing. Both proved to be very dubious; Guan does not appear to be the owner or resident of those locations. When asked some of these questions by the Financial Times in a telephone call, his answer was “It is inconvenient to answer any of your questions.” This has been his only comment on the record.

In the interview with the Financial Times, Tan made the surprising admission that Guan, and another shareholder, Bharat Bhise, had never really owned the shares, “but had just held the stake for us.” This claim is inconsistent with the HNA spokesperson’s statement. It remains to be examined how these shares were obtained from HNA, a former state-owned enterprise that had undergone government-managed privatization. HNA’s true relationship with Guan Jun also remains unsettled — HNA claims he does not work for the company, but according to media reports, he serves as co-chairman with the son of HNA’s Chairman Chen Feng in a peer-to-peer financing platform owned by HNA.

Doubts about the company’s unclear ownership structure and claims of corruption allegations have recently caused Bank of America to decide not to do any business with the Chinese conglomerate. Meanwhile, the European Central Bank is reportedly investigating HNA’s nearly 10% stake in Deutsche Bank. On top of this, the New York Attorney General pointed out that the group had not registered in the state as a charity, as required by law, and asked it to do so within 20 days or explain why it has not done so.

Although Chinese citizens were prohibited from asking questions about HNA and its business and political affiliations, there is little doubt that this conglomerate needed close ties with senior leaders of the Chinese Communist Party to achieve such spectacular growth.  There is no other possible explanation for how HNA could obtain a seemingly unlimited line of credit from all major state-owned financial institutions in China. Most Chinese people are prohibited from knowing the nature of the HNA transactions. Those who are aware of the hidden fact are outraged by such an abnormal transfer of assets — possibly a grand embezzlement of public wealth — but they are too afraid to protest or speak up because they fear the potential backlash from the individuals who genuinely control the HNA assets, who are likely connected to the very top of the communist regime.

For Congress and the administration, HNA’s unprecedented, massive corruption and dubious transfer of large assets to a U.S.-based “charity” should sound an alarm: Cihang foundations control over 53% of HNA, making Cihang a shell holding company of HNA, one of the top companies in the world, not a charity.

We suspect that HNA’s largest shareholder Guan Jun may have acquired his 29.5% share ownership by siphoning public assets through government manipulated privatizations, because public records provide no evidence that he purchased these shares fairly.

Consistent with Guan Jun’s murky identity, only very high level political privileges can explain why HNA was able to grow at a parabolic rate, fueled by bank lending and easy access to hard currency, despite China’s tight capital controls. In addition to alleged connections of Guan Jun with Wang Qishan, HNA’s chairman of the board, Chen Feng was a former PLA officer, worked under Wang Qishan for a project of the now defunct China Agriculture Trust Investment Co., and has “been a delegate to three national congresses of the Chinese Communist Party since 2002, spanning the presidencies of Jiang Zemin, Hu Jintao and Xi Jinping”, as reported by Nikkei. HNA’s business took off when Wang Qishan became Hainan’s Party chief in 2002. In Chen Feng’s most recent public appearance, he accompanied Xi Jinping on Xi’s state visit to the U.K in 2015, where he was received by then-Prime Minister David Cameron on the same stage with Xi.

HNA bypassed scrutiny while acting as a state sovereign investment company. On the other hand, given the opacity of the ownership and its special connections, we are concerned that it could very well be controlled by individuals and families connected with the top of the Chinese Communist Party (CCP), operating through a shadowy Guan Jun. Cihang will provide a shelter for CCP leaders’ families to retain their wealth, which they could only have obtained through corruption. Cihang may thus become a beachhead for the CCP to influence the U.S. government and public.

If this is the case, such an entity would be liable for examination per the Global Magnitsky Human Rights Accountability Act, passed in December 2016 (NDAA 2017, section 1261-1265) as the law aims at sanctioning officials or their senior associates who have committed “expropriation of private or public assets for personal gain, corruption related to government contracts or the extraction of natural resources, bribery, or the facilitation or transfer of the proceeds of corruption to foreign jurisdictions.”

Therefore, we ask the U.S. Congress and the administration to support the following:

  1. Conduct an independent investigation into all transactions and assets held by HNA and its U.S. -based business affiliates in connection with alleged corruption by CCP leaders;
  1. Conduct an independent investigation of the source of funding for HNA and Cihang’s U.S. operations in connection with alleged corruption by CCP leaders;
  1. Hold an open hearing through the U.S. Congress regarding the above investigations;
  1. Suspend approval of HNA’s application for the tax-exempt status until the completion of the above investigations;
  1. Suspend approval of all HNA’s business mergers and acquisitions in the United States until the completion of the above investigations;
  1. Audit HNA’s U.S.-based companies, NY Cihang Foundation, and Guan Jun’s donation and suspend their operations in the U.S. until the completion of the above investigations.

 

Contact: Fengsuo Zhou, Email: zhou@h-china.org

 

China Human Rights Accountability Center was formed in January 2017 by a group of mostly U. S.-based Chinese activists to promote and assist the implementation of the Global Magnitsky Human Rights Accountability Act.  

 

Paul Mooney, Shanshan Zou, Sandra Fu contributed to this letter.

 


Media coverage:  

Financial Times: HNA chief shrugs off regulatory and ownership concerns

https://www.ft.com/content/d9bc0760-70d0-11e7-aca6-c6bd07df1a3c

Financial Times: Who owns HNA, China’s most aggressive dealmaker?

https://www.ft.com/content/8acfe40e-410b-11e7-9d56-25f963e998b2

Financial Times: ECB probes HNA and Qatar Stakes in Deutsche Bank

https://www.ft.com/content/1e9ca0e2-6ba9-11e7-b9c7-15af748b60d0

New York Times: Behind an $18 Billion Donation to a New York Charity, a Shadowy Chinese Conglomerate

https://www.nytimes.com/2017/07/26/business/hna-group-billion-donation-new-york-charity.html

New York Times: HNA dealing with Scaramucci, first report of Guan Jun

https://mobile.nytimes.com/2017/01/31/us/anthony-scaramucci-business-white-house.html

Regulatory filing of AID in Hong Kong, a HNA shell lists Guan Jun as shareholder

http://www.hkexnews.hk/listedco/listconews/GEM/2016/0330/GLN20160330275.pdf

Wall Street Journal: HNA has deepened the uncertainties around the New York foundation that is its biggest shareholder by changing its reason for not registering yet with the state.

https://www.wsj.com/articles/hnas-new-york-charity-wont-take-outside-money-for-now-1501893615

Bloomberg: Bank of America Halts Deals With HNA Amid Debt Concerns

https://www.bloomberg.com/news/articles/2017-07-19/bank-of-america-said-to-halt-deals-with-hna-amid-debt-concerns

Wall Street Journal: HNA’s Biggest Shareholder Doesn’t Really Exist Yet

https://www.wsj.com/articles/hnas-biggest-shareholder-doesnt-really-exist-yet-1501159085

Bloomberg: Don’t fly in the dark, HNA

https://www.bloomberg.com/gadfly/articles/2017-06-06/chinese-cash-magnet-hna-must-clear-the-murk-to-reach-its-goals

Bloomberg: HNA’s NYC Charity Owner Told by A.G. to Register With State

https://www.bloomberg.com/news/articles/2017-07-27/hna-s-nyc-nonprofit-owner-told-by-state-to-register-as-charity

HKEJ: The ties that bind: HNA’s Chen Feng and his rise to power

http://www.ejinsight.com/20170522-the-ties-that-bind-hna-s-chen-feng-and-his-rise-to-power/

Fortune: You’ve Never Heard of HNA Group. Here’s Why You Will

http://fortune.com/2017/07/24/fortune-global-500-hna-group-china/l

Nikkei: Questions mount over HNA’s financial engineering

https://asia.nikkei.com/Features/Company-in-focus/Questions-mount-over-HNA-s-financial-engineering

Why HNA is on a buying binge?

https://www.xcnnews.com/rd/159722.html

Hainan Cihang registration at New York Department of State:

https://appext20.dos.ny.gov/corp_public/CORPSEARCH.ENTITY_INFORMATION?p_token=05E802F662B75268CF28BB101283266F719FCDDE5829066C371B474E3012B58C9173744907E7B39478A94A75F692D9BC&p_nameid=DAB0EBE0256869E8&p_corpid=94B8FB0CF3559FCA&p_captcha=12422&p_captcha_check=80F162C216CC3291&p_entity_name=%63%69%68%61%6E%67&p_name_type=%25&p_search_type=%43%4F%4E%54%41%49%4E%53&p_srch_results_page=0

Cihang’s tax filing, 2016

http://990s.foundationcenter.org/990pf_pdf_archive/820/820700090/820700090_201612_990PF.pdf

Global Magnitsky Human Rights Accountability Act

https://www.congress.gov/bill/114th-congress/senate-bill/284

 

 

 

 

The Death and Life of Middle Class Politics in China

Observing Recent Events, Especially the Death of Lei Yang

By Wu Qiang, June 13, 2016

 

As public contention surrounding the death of Lei Yang’s continues to grow, something new is developing in China’s political scene: the middle class is speaking out and asserting its own demands, even as the rights defense movement continues to suffer a sustained crackdown.  

 

吴强 (2)

Dr. Wu Qiang (吴强)

Four recent deaths in China sparked widespread public attention. The first, on April 12, was the that of Wei Zexi (魏泽西), a university student in Shaanxi Province, who perished from a rare form of cancer after following recommendations for a hospital from China’s largest search engine, Baidu. It turned out that the facility was part of the so-called “Putian network,” a clique of corrupt businessmen with their origin in a township in Putian, Fujian Province, who peddled quack treatments. The incident exposed the unethical ties between Baidu and hospitals in China. Then on May 5, Chen Zhongwei (陈仲伟), a doctor in Guangzhou, was hacked to death by a patient in his own home. Two days later, the 29-year-old Beijing environmental worker Lei Yang (雷洋) died in police custody shortly after being apprehended on the street by plainclothes police. On May 10, the 36-year-old Zhengzhou resident (and Masters degree holder) Fan Huapei (范花培) was so enraged by the forced demolition of his property that he lashed out at, and killed, a local official—he was soon after shot to death by police.

All these deaths triggered protests of varying scale, with anger and discontent directed at a search engine company, the healthcare system, the military, and the police. Beneath it all is the deep sense of anxiety of the Chinese middle class, worrying about its personal safety, health, and livelihood. To this author, what’s notable is that fact that these events have sparked unprecedented and new forms of organization and protest, with China’s social elites taking the central role.  

The most representative instance is the protests that burst into public view following the death of Lei Yang. Lei graduated with a Masters degree from Beijing’s elite Renmin University of China in 2012. On his way to the airport to pick up relatives in the evening of May 7, he was arrested near his home by several plainclothes police officers. Soon after, he mysteriously died in their custody. Later, local police said that they had been carrying out an “anti-prostitution” crackdown, and thought that Lei Yang had just exited a brothel. They broadcast the testimony of an on-duty police officer, as well as a “prostitute,” on state television to back-up this story, and also claimed that all of the surveillance cameras in the vicinity had been damaged. The body-cameras on the police who interacted with Lei Yang were also broken, they said. And when it was found that even all recording on Lei Yang’s cellphone had also somehow been removed, they said they had nothing to do with it. The brutal acts of the police, their blatant coverup, and weak defense, infuriated Lei Yang’s friends and schoolmates.

On May 11, an open letter of protest signed by alumni of Renmin University’s class of 1988 (the year of entrance) quickly went viral. A string of open letters by other alumni classes soon appeared online, including a joint declaration by alumni of the class 1977 and 1978.

Directly and unequivocally, these letters questioned the Chinese police’s use of violence and abuse of power, and for the first time brought into the open the collective sense of deep unease and personal insecurity felt by China’s middle class—in particular the fear that even their own basic physical safety isn’t protected. They also called for an independent, transparent investigation into Lei’s death. The alumni of the Class of ‘88 described the death of Lei Yang as “the random, willful killing of an ordinary, urban, middle-class person.”

At the end of that letter appears one of the strongest remarks of the last decade: “The death of Lei Yang is not an accident, but a structural tragedy. We ask that the highest authorities conduct an independent and fair investigation into Lei’s death; we demand that the murderers be punished and that law enforcement be rectified and disciplined. We must have the most basic, dependable safety, civil rights, and urban order. Short of this, we, who are not too old to give up on the future, will not let the issue go. We won’t tolerate evil indefinitely.”

A week later, the protest brought two public responses by China’s paramount leader Xi Jinping, one of which demanded that the government treat China’s middle class properly, the other demanding that law enforcement be regulated.

These episodes do not really, in fact, sit neatly within the established paradigm for understanding Chinese politics: they rupture the superficial harmony and stability between the Chinese society and government, and demonstrate a transformative contention between old and new forces, furnishing observers with a new framework for understanding events. The situation parallels the philosophical-spiritual analysis laid out in the book “Event: A Philosophical Journey Through A Concept” by philosopher Slavoj Žižek, where he refers to the creation of a new political subject. China’s newly rising middle classes are, through their participation in these incidents and the solidarity that inheres in that participation, reconstituting their own subjectivity. In the context of three years of iron-fisted rule under Xi Jinping, this is without doubt an extraordinary challenge and shift.

It’s true that this series of incidents is still playing out, the outcome is still uncertain, and the public’s attention will likely to shift to new topics as they burst forth, but events like the death of Lei Yang may be moving China’s political tectonics, and may be the only path for pushing change in China’s stiff and ossified political system.

Behind these incidents is the display of the unprecedented power of China’s newly risen urbanized classes. They mobilize and stage protests via alumni groups on social media platforms, and unite two generations of China’s educated class — the 1980s generation and the  post-Tiananmen generation — in their demand for justice. This is a new form of Chinese politics, or put another way, the rise of a middle-class politics in China.

Even though these are small actions in the post-Tiananmen market reform period, they have already created many precedents: The first successful mobilization using alumni networks; the first cross-generational mobilization of alumni including both elites within the official system and social elites; the first instance in which an elite university has been involved in the expression of the collective fears and anger of the new middle class; and the first large-scale direct resistance to police order, which throws down a challenge to the core of power and authority in China: the police, and police violence.

Considering the large-scale self-organized protests across China in May against “reducing Gaokao admissions” that included self-immolation and expressions of extreme discontent with the current education system, we can safely declare that this is the first time since the Sun Zhigang incident in 2003 clearly signalling that China’s middle class is no longer rejecting political resistance. Because of Lei Yang’s death, the social capital formerly deployed in the reproduction of elite status (in this case alumni ties) was instead mobilized, politicized, and transformed into a new tool of middle class protest. Afterwards, participants felt a clearer sense of group identity, clearer political demands, and on the basis of their collective anxieties, used social media to further mobilize, eventually forming a protest coalition.

What’s even more significant about this is that the new form of middle class politics has arisen in the three years that the Xi Jinping regime has been dealing heavy, incessant blows to China’s civil society. This includes the Southern Weekend incident in the beginning of 2013, the “internet cleansing” campaign that shortly followed, the forcible shutdown of independent NGOs and then the arrest of NGO leaders, rights lawyers, women’s rights activists, and labor leaders, and in the strengthening demands in the ideological sphere for loyalty to Xi and the Communist Party, and rejection of Western values.

While the rights defense movement has spread like wildfire in China over the last decade, the middle class participants have been limited to rights lawyers, a small number of intellectuals, journalists operating at commercial media, and NGO workers. In the burgeoning middle class in China, these people represent a very small number. They advocate primarily for the rights and interests of those in society’s lower strata, as well as minority groups, using their professional capabilities to provide assistance, and supporting self-organized activities like “protests according to the law.” However, these “downwards from the middle” rights defense efforts  — which include the flourishing of NGOs, philanthropy aimed at helped those at the bottom of society, and limited “surround and watch” (围观)  protests, where activists congregate where events took place — have all slowly been receding in the last few years, as the Xi Jinping regime unfolds a campaign of targeted repression over fears of a “color revolution.” Institutionalizing suppression, the Law on the Management of the Activities of Overseas NGOs within Mainland China, which was promulgated on April 29, 2016, not only severed the ties between Chinese civil society and the international community, but also isolated the middle classes and their NGOs from the lower social strata.

It was just as the rights defense movement in China was being terminated by force that the string of incidents over the last month indicated a new phase of development: the political resistance of the Chinese middle class, using an entirely self-mobilized organizational model, has emerged as a player on the political scene. Importantly, they’ve begun to display an identity and set of demands that have already, at a certain level, exceeded what would be expected of a group that is tacitly reliant on the system (because they, as a class, are the petty bourgeois that has arisen from the coming together of the bureaucratic class and the market economy). They’re also building on the foundation laid by the rights defense movement over the past 10 years, and even that of the earlier 1989 movement, with a new process of internal class mobilization.

Compared with the rights defense movement’s attempt, from the outside, to mobilize the lower classes, China’s middle class possesses more robust resources for a movement — whether financially, ideationally, or rhetorically. As to whether they’ll be able to better use new media and technology and organizational forms, the extent of their convictions and willpower, and whether they’ll be able to stage still more protests and acts of defiance — all that, of course, will only be known as we observe the struggles that are sure to follow. The one thing that we can be sure of is that the string of incidents over the last month has established a new framework for political resistance in China, and moreover, has begun to change the self-awareness of the middle class.

That is, they’ve learnt that the bonds of the middle class traditionally used for maintaining class identity and social reproduction can also be transformed into a force for mobilization and resistance. It’s only the diehards in the rights defense movement, who arrogate to themselves the right to speak for the lower classes, and who’ve been suppressed by the authorities, who not only can’t imagine the changes that may result from this new politics, but who also persist in discounting the significance of the middle class and middle class politics.

As the size of the middle class increases, and the the pace of urbanization speeds up, the Chinese government’s basis of legitimacy is quickly turning into a question of whether it has the continued support of the middle class, and whether that middle class has sufficient household consumption. All that is happening at a time when the Chinese economy continues to decline, or faces a prolonged “L-shaped” period of stagnation. With all this in mind, we can safely predict that middle class political resistance is going to emerge as a major force in China. A political opposition may emerge out of the demand for equal rights to education, personal freedom, and civil rights, competing with the Communist Party for the role of middle class’ protector, thus influencing China’s political future.

 

Dr. Wu Qiang (吴强) holds a Ph.D. in political science from the University of Duisburg-Essen in Germany. He is a researcher of social movements and a freelance writer.


Related:

Minxin Pei: China’s Middle Class Is About to Demand Big Changes, May 26, 2016

Also by Wu Qiang on China Change:  

In the Wake of the Sino-American Summit, the Potential for a New Cold War, October, 2015.

Urban Grid Management and Police State in China: A Brief Overview, August, 2014.

 

原文 中產階級的死與生──雷洋案後維權運動的終結》. China Change translated an earlier version of the article.

 

 

 

China’s Future: Unstable and Unsettled

By Mo Zhixu, published: April 6, 2016

Authoritarian resilience has always been an illusion.  

 

Ten Years

Movie “Ten Years”

 

On March 6, 2015, the Wall Street Journal published a piece by George Washington University Professor David L. Shambaugh entitled “The Coming Chinese Crackup.” In it, he pointed to five indications that China’s political system is seriously falling apart—a view that attracted widespread attention for some time after its publication.

Ever since 1989, many have predicted the impending collapse of Chinese Communist rule. But there are two reasons why Shambaugh’s piece was so noteworthy. First, Shambaugh has enjoyed good personal relations with leading Party officials. His books have been published in Chinese translation, and state media have often quoted his views. In January 2015, the China Foreign Affairs University under the Ministry of Foreign Affairs named him second on a list of “America’s Most Influential China Experts.” Second, Shambaugh previously held a more positive assessment of the prospects for Chinese Communist rule. Like Columbia University Professor Andrew J. Nathan, Shambaugh was seen as one of the main proponents of the idea of “resilient authoritarianism.”

Over the past several years, these two leading American China experts have undergone a huge change in their evaluations of where China is headed. In January 2003, Nathan published an article entitled “Authoritarian Resilience” in the Journal of Democracy. In it, he wrote: “Under conditions that elsewhere have led to democratic transition, China has made a transition instead from totalitarianism to a classic authoritarian regime, and one that appears increasingly stable.” And in his 2007 book China’s Communist Party: Atrophy and Adaptation, Shambaugh argued that the Party had, through learning and adaptation, developed a capacity to overcome or contain many of its problems, including corruption.

Over the past several years, these two scholars have flipped their positions on the stability of Chinese authoritarianism. Shambaugh’s Wall Street Journal piece in 2015 was not only a re-evaluation of his personal views; it was also read as a signal that mainstream Western academics had begun to shift their views on the future of Chinese Communist rule. In that piece, Shambaugh wrote: “[Xi Jinping’s] despotism is severely stressing China’s system and society—and bringing it closer to a breaking point. . . . Its demise is likely to be protracted, messy and violent.”

In his most recent book, China’s Future (published in March 2016), David Shambaugh continues to echo the positions he raised one year earlier and explains in greater detail how he arrived at his conclusions. He writes that, if China continues on the path of rigid authoritarianism that it has followed since 2009, it will inevitably fall into the same middle-income trap that has snared the majority of developing economies. Chinese society will become increasingly unstable and unpredictable, and without political liberalization at some point something will cause a “sudden rupture.” This is obviously completely at odds with the earlier idea of a resilient authoritarianism with capacity for adaptation.

Before Shambaugh, Andrew Nathan wrote in 2009 in “Authoritarian Impermanence”: “The most likely form of transition for China remains the model of Tiananmen.” I’ve noticed that more and more political scientists have been expressing similar views. For example, in “The Twilight of Communist Party Rule in China,” published in the November 2015 issue of The American Interest, the Chinese-American political scientist Minxin Pei wrote: “The Communist Party’s post-Tiananmen survival strategy is exhausted, and its new strategy is likely accelerating the party’s demise.” Mainstream western scholars have indeed changed their views on the future prospects for Chinese Communist rule.

The Resilience Illusion

To a certain extent, it’s true that the Chinese Communist Party possesses a capacity to learn and adapt. Ever since Mao Zedong’s death, the Party has left behind the traditional planned economy and pursued a different model of development. This pragmatic effort isn’t without concrete goals. At first, the Party tried to learn from then-authoritarian regimes in Taiwan, South Korea, and Singapore, as well as from the East Asian authoritarian development model represented by the long-term one-party rule of the Liberal Democratic Party in Japan.

In 1989 the Party crushed the massive democracy movement, and in the same year Eastern Europe and the Soviet Union underwent tremendous political changes. Given the fates of these other Communist states, many were pessimistic about the prospects for the Chinese Communist Party’s regime. However, the Party never stopped its experimentation and efforts at adaptation. Spurred on by the collapse of Communist regimes in the Soviet Union and Eastern Europe and, after Deng Xiaoping’s landmark “Southern Tour,” the Party accelerated the pace of the market reforms and opening to the outside world that it had begun in the 1980s.

Contrary to many predictions, the Chinese Communist regime emerged from the assault undamaged. It successfully became part of the international economic order and achieved sustained economic growth. During this same period, there was a peaceful handover of power from Jiang Zemin to Hu Jintao. As China was experiencing miraculous economic growth, the government bureaucracy seemed to be growing more specialized and responsive to society’s demands, even if there was also more and more corruption. Although the same period witnessed the repression of the China Democracy Party, a dissident opposition party, and Falun Gong, economic growth brought performance legitimacy that increased the degree of support for the Party. With the arrival of autonomous cultural consumption and the Internet age, people began to feel that things had begun to loosen up. In sum, to many observers the Chinese Communist Party had effectively used adaptation to “re-consolidate itself.” As Andrew Nathan concluded in “Authoritarian Resilience”: “[China’s] particular authoritarian system . . . has proven resilient.”

What’s more, to many observers, the Chinese Communist Party’s resilience gave it the potential to become, through further transformation, even more open and develop into a semi-democratic or freer single-party regime. Shambaugh wrote that the Party could take steps to govern in a more active and dynamic way and adopt a more open stance toward reforming its leadership and governance. Such steps would include further privatization of the economy, especially privatization of large state-owned enterprises, as well as liberalizing the land market. It would also include further development of rule of law in order to promote economic growth and innovation.

In this view, political transformation would take the form of party-building measures centered around the “Three Represents” policy, enabling members of the newly emerging social class like private entrepreneurs, technical professionals, and managers to become part of the political system and even join the party. This would not merely change the Party’s methods and style of governing, but also change its composition and direction. To a certain degree, this is similar to how, in the 1970s after losing its seat at the United Nations, the Kuomintang embarked on a new strategy of “Taiwanization.”

Within China, many people also believed that the Party could achieve the “transition from a revolutionary party to a governing party” through opening and proactive reform. Market reforms and opening up to the world would inevitably bring growth of the private economy and a newly emerging middle class, and it would also lead to the growth of social organizations, including NGOs. Eventually, pushed forward by these new social forces, a transformed Party would, together with these social forces, carry out a gradual, interactive, and stable transformation of all society, including transformation of the political system.

Ironically, however, these observations and predictions lost their interpretive power almost as soon as they were put forward.

First, those anticipated reforms never took place. In the economy, the 1990s policy of retaining ownership of large state-owned enterprises and selling off underperforming ones was replaced by a policy of building up bigger and stronger state-owned companies. Not only was there no further privatization of the state sector; we actually saw a resurgence of the state sector and a retreat of the private sector.

There was a similar phenomenon in terms of rule of law. Instead of moving in the direction of more emphasis on rights, rules, and limits on government power, statist tendencies re-emerged in the form of the so-called “Three Supremes” (in which judges were told to consider the supremacy of the Party’s cause, the people’s interest, and the constitution and law in deciding cases). Even more disappointing is that, after the transfer of power from Jiang Zemin to Hu Jintao, the “Three Represents” policy that had inspired so much hope quickly ceased to get much attention and was relegated to a kind of ornamental existence.

Second, even those things that were seen to be the basis of authoritarian resilience turned out to be not as stable as they had seemed. The Bo Xilai affair demonstrated that struggles at the highest levels of power have not disappeared as a result of fixed terms of office. Since the 18th Party Congress, Xi Jinping’s strong anti-corruption campaign has not only firmly established his own personal authority, but also to a certain degree weakened the system of collective leadership and destroyed the consensus within the bureaucracy that economic growth could be a source of both political legitimacy and personal gain. At the institutional level, the post-1989 unity among elites that was so crucial to the regime’s survival and the bureaucratic driving force based on performance legitimacy both quickly became things of the past.

Perhaps one ought also to consider the shocking way that China’s leaders handled the 2015 stock market crisis. Once they were treated as mythical beings, but in the end they were shown to be just as mediocre as the bureaucrats responsible for the Japanese economy. These Chinese officials who had once been considered to be increasingly specialized and in possession of unrivaled capabilities were quickly exposed as “emperors in new clothes.” This shows that the core ideas of authoritarian resilience—meritocratic selection of a group of officials whose capacity for learning and adaptation makes them responsive to society’s demands and able to promote economic development—is most likely a myth, and China’s past economic miracle was little more than being in the right place at the right time.

Ultimately, the resilience of authoritarianism would have to be based upon an ability to attract emerging social classes. But with the quiet demise of the “Three Represents” policy, the Chinese Communist Party has increasingly come to base the continued survival of its regime on the suppression of new social groups. Even if the political system can successfully achieve relative security in the short term, it will have driven these emerging social groups to grow increasingly alienated from the regime.

In his controversial 2015 op-ed, David Shambaugh put forward “five telling indications of the regime’s vulnerability.” The first is that “China’s economic elites have one foot out the door, and they are ready to flee en mass if the system really begins to crumble.” In fact, it’s not only China’s economic elites: immigration has become quite a common subject of discussion among China’s middle class, and more and more of them are beginning to take action. Even more unsettling is the increasingly heavy repression of China’s emerging social groups, with the crackdown on online expression, rights lawyers, NGOs, and religious groups growing in both scale and intensity.

Only a few years separated the appearance of Andrew Nathan’s article, “Authoritarian Resilience,” and his subsequent admission that “the most likely form of transition for China remains the model of Tiananmen.” In 2015, Shambaugh told the New York Times: “in the middle of 2009, after Zeng [Qinghong] had retired, [the Party’s direction] abruptly shifted.” It had been only two years since the publication of his book, The Chinese Communist Party: Atrophy and Adaptation. However, the strengthening of the Party’s stability apparatus after the Beijing Olympics and the increasing repression since the 18th Party Congress all demonstrate that, set against the earlier economic miracle, any resilience that China’s authoritarian system may have had now appears to have been illusory.

What Will the Future Really Bring?

How did the illusion of authoritarian resilience disappear so quickly? No doubt this is a question shared by quite a few outside observers and thinkers inside China, with each one of them likely to put forward a different answer. But in my view, there are a few fundamental reasons why the illusion of authoritarian resilience faded so suddenly.

First, the basic factors accounting for the continued survival (or authoritarian resilience) of the post-Tiananmen regime—things like elite cohesion, performance legitimacy, absorption of emerging elites, a foreign policy of “concealing one’s strengths and biding one’s time”—were all probably responses to the crisis of 1989. For example, elite cohesion was to a great degree spurred on by the sense of crisis brought on by the June Fourth crackdown and the collapsing regimes in the Soviet Union and Eastern Europe. Sensing themselves to be “all in the same boat,” these elites found temporary common cause and for a while obeyed the rules regarding fixed terms of office and collective leadership. However, this sense of crisis was bound to fade over time. In other words, these may have been short-term phenomena from the very beginning, rather than systemic phenomena.

Other things like a pragmatic foreign policy, emphasis on economic development, or co-optation of new social elites can all be explained similarly. If the basic factors accounting for the continued survival (or authoritarian resilience) of the post-Tiananmen regime were reactions to the June Fourth crackdown, then you can’t ignore the fact that the June Fourth crackdown was carried out in order to maintain dictatorship, prevent liberalization, and “refuse to give in even a bit” (“一步都不能退”). This means that so-called authoritarian resilience was, from the beginning, always bounded by the goals of maintaining dictatorship and denying liberalization. The further reforms that so many observers hoped for and the gradual transformation that some Chinese still await were in fact never under consideration by the Chinese Communist regime.

A political system with maintaining dictatorship as its goal achieved incredible economic results, and it led people to believe in the illusion of resilience. However, under the accelerating slowdown of the Chinese economy, the demands of the emerging society will increase and, under internal and external pressures like rampant corruption, quickly reveal the regime’s more repressive side. In his new book, David Shambaugh continues to believe that the “political system is the key” and that the Party can return China to the path of political reform, gradually increase political openness and change without losing control or power and thereby rescue itself from the brink of collapse.

Based on the logic of my brief analysis above, however, the basic factors accounting for the continued survival (or authoritarian resilience) of the post-Tiananmen regime from the beginning ruled out any political liberalization. So there will be never be any political reform. On the contrary, the Chinese Communist regime depends on maintaining the status quo of dictatorship. Looking toward the future, the far more likely prospect for China is a protracted and “highly unstable and unsettled” decline that Shambaugh predicted.

 

Mozhixu

Mo Zhixu (莫之许), pen name of Zhao Hui (赵晖), is a Beijing-based Chinese dissident intellectual and a frequent contributor of Chinese-language publications known for his incisive views of Chinese politics and opposition. He is the co-author of “China at the Tipping Point? Authoritarianism and Contestation” in the January, 2013, issue of Journal of Democracy.

 

————-

Related:

Miner Protests in the Northeast and the End of China’s Economic Boom, by Wu Qiang, March 17, 2016.

In the Wake of the Sino-American Summit, the Potential for a New Cold War, by Wu Qiang, October 12, 2015.

 

Alos by Mo Zhixu on China Change:

The Glory and Suffering of Pu Zhiqiang

Crime and Punishment of China’s Rights Lawyers

The Coming Information Totalitarianism in China

 

莫之許《中國未來:不穩定和充滿混亂》, translated by China Change.

 

 

China’s SOE Reform: Privatization or Taking over the Private Sector?

By He Qinglian, published: September 30, 2015

 

A flood of commentary has come out since the release of the long-anticipated Guiding Opinions on Strengthening and Reform of State-Owned Enterprises (《中共中央、国务院关于深化国有企业改革的指导意见》; “SOE Reform Program” or “Program” hereafter), jointly issued by the Central Committee of the Chinese Communist Party and the State Council. Some say that the Program is aimed at expanding and strengthening SOEs, while others say that the government is using market forces to promote privatization. That the same plan can yield two radically different suppositions is due to the Program’s strong “Xi Jinping quality”: It tries to combine the governance characteristics of both Mao Zedong and Deng Xiaoping and gain some advantage from both sides, thereby introducing a whole bunch of mutually contradictory formulations.

Key Points of the Program

The SOE Reform Program is 10,141 characters long and comprises 30 opinions in eight sections. It makes its purpose clear from the very outset: “SOEs are owned by the people as a whole . . . and are an important material base and political foundation for the development of our party and state.” This message infuses the Program throughout. Below are a few of its key points that must not be overlooked:

I. A highlight of the Program is the mixed-ownership system. Pundits have different opinions about this system based on their different understandings of the word “mixed.” Some (including foreign experts) see the word “mixed” and believe that the plan encourages privatization. But the original language in the Program says: “Actively encourage ownership diversification through introduction of other state-owned capital or various types of non-state-owned capital. State-owned capital may retain absolute or relative majority share positions, or it may be a [non-controlling] equity participant. Encourage the integrated companies to go public.”

The drafters of the Program seemed to worry that people would not fully understand their meaning, so they made a special point of noting in Opinion 2 (under the “General Principles” section): “Public ownership occupies the dominant position. It remains the basic economic system, the key point for consolidation and development. The non-public sector occupies a subordinate position.” “Upholding and improving the basic economic system are the fundamental requirements for deepening SOE reform that must be grasped.”

So, “mixed ownership” means that private companies can make cash purchases of shares in SOEs and become shareholders. But since the equity allocation ratio is based on the state-owned capital being the controlling party, private companies can only remain in a subordinate role, without any decision-making power or right to a say in matters. To prevent the public from getting the wrong idea, after releasing the program the Xinhua News Agency promptly issued a piece entitled “We Must Unequivocally Oppose Privatization” (《须旗帜鲜明反对私有化》).

II. The Program calls for fostering “market-oriented management mechanisms” while strengthening the Party’s leadership. Marketization is mentioned a total of 14 times, as if it were a theme of the Program. But in Opinion 24 it says: “Give full play to the key political role played by the Party organization within SOEs. Unite the goals of strengthening party leadership and improving corporate governance. Put a general requirement for Party-building work into the corporate charters of SOEs and clarify the statutory role of the SOE Party organization in the corporate governance structure.”

“Party leads everything” was the lifeblood of political and economic life during the Mao era. “Marketization” has been the theme of SOE reform ever since Deng Xiaoping took over. When Zhao Ziyang was General Secretary, he worked very hard to separate government from enterprise in the hopes that it would bring an end to the misadministration that came when the party managed companies. Originally, he even planned to build on his successes in this area and promote separation between the party and the government, but all of those efforts went down the drain after the events of June 4, 1989.

More than 60 years of Communist rule has shown that, under Party control, SOEs can use the Party’s support to grow large but not strong. This is because, growing strong means that a company increases its operational capabilities and management capacity, achieves a reasonable input-output balance, and gains market share through competition, rather than monopoly. These are precisely the things that it is impossible for Chinese SOEs to achieve.

III. Private companies with “great development and growth potentials” will become the primary target of SOE enterprise reform. Opinion 18 of the Program states: “Encourage state-owned capital to pursue various ways of investing in non-state-owned companies. Fully realize the capital operation role of state-owned investment and operations companies and use market forces to make quality investments in non-state-owned companies with great development potential and strong growth in the key sectors of public services, high-tech, environmental protection, and strategic industries.”

In other words, private companies with weak prospects can rest easy that SOEs won’t come knocking at their door. But if you’re a private company with high efficiency and good market prospects, the SOEs won’t even knock—they’ll come right in and purchase some of your shares or shell resources. There will be nowhere to hide.

 Why Do the Chinese Authorities Insist on Making SOEs Big and Strong?

You can tell what a government considers its key interests to be by looking at the companies it chooses to support. Take, for example, the acquisition of the largest American pork processor, Smithfield Foods, by China’s Shineway Group. With a total of 48,000 jobs at stake, including around 1,300 newly added jobs, local residents and governments all welcomed the deal and didn’t care that the new owners were Chinese.

In China, the private sector has long provided more employment opportunities for Chinese people than SOEs. According to official statistics for 2007, SOEs accounted for only 9.2 percent of industrial jobs, compared to 44.4 percent for the private sector. In January 2011, the All-China Federation of Industry and Commerce published a report indicating that small and medium enterprises accounted for more than 99 percent of all Chinese companies and accounted for more than 70 percent of urban employment and 90 percent of newly added jobs. In 2014, the State Administration for Industry and Commerce announced that sole proprietorships and private companies accounted for approximately 90 percent of all new urban jobs nationwide.

As foreign investors have begun to leave China, rural-based laborers are returning to the countryside in great numbers and more than half of all university graduates are forced to return home and live off their parents. In principle, the government ought to encourage development of the private sector and make raising the employment rate its primary consideration. So why do the authorities instead want to make SOEs, which account for comparatively fewer jobs, “big and strong” and adopt a “reform” strategy of “advance the public sector and diminish the private sector”? It is based on the following two considerations:

  1. As the economy has begun to slide, the Chinese government is facing an enormous financial dilemma. Private companies already represent the largest share among all Chinese companies when it comes to number of enterprises, assets, or main revenues, whereas SOEs are at a disadvantage on all accounts. But when it comes to the share of taxes paid to the state, private companies paid only 13.0 percent in 2012, according to official figures, compared to 70.3 percent paid by SOEs. As original sources of tax revenue increasingly dry up, the fact that SOEs are the main pillar of public finances is a sufficient reason for the government to make such efforts to support them. Whether or not SOEs can increase the employment rate is not among the government’s primary concerns. Premier Li Keqiang has already told the hundreds of millions of unemployed to follow a path of starting their own businesses.
  1. Restructuring and listing is the Program’s ultimate goal. Currently, there is a very high rate of debt among SOEs. At the end of July 2015, the average asset-liability ratio among Chinese SOEs was 65.12 percent, with the overwhelming majority of those debts owed to state-owned banks. This kind of relationship between banks and companies ensures that if SOEs cannot perform better, the state-owned banks will also collapse.

Over more than two decades, the main way that SOEs have gotten out of their difficulties has been to follow the brilliant idea of former Premier Zhu Rongji, who first allowed SOEs to raise money by going public. But today this idea seems to have lost its magic, and the national team appears stuck after being forced by the government to take part in efforts to save the stock market. So, the SOE Reform Plan is only an attempt to come up with a new tactic: have SOEs reform and, after mixing ownership with private companies, “encourage restructuring for going public.” After the assets have been restructured, the companies can go to the markets to float IPOs under a new name.

Does the Private Sector Want to “Mix” with SOEs?

This talk of a mixed-ownership system is something the public is familiar with, having first appeared in the 2014 Guiding Opinions on Deepening State-Owned Enterprise Reform (《深化国有企业改革的指导意见》) and the public consultation draft of the Guiding Opinions on Improving the Forms of Realization of Public Ownership (《关于完善公有制实现形式的指导意见》). But private companies are not in the least bit enthusiastic. In my earlier article, “SOE Reform: Government and the Private Sector Each See Things Differently,” I explained how private companies commonly perceive “mixed ownership” as a trap. They believe that if they take part in a mixed-ownership company, the private company can’t get a controlling stake so it’s very likely to be neutralized and, in the worst case, caught with no means to defend itself.

Wanda Group Chairman Wang Jianlin (王健林) told the Sina website: “If I’m going to ‘mix,’ the private company definitely needs to have a controlling share, or at least I want relative control . . . If the SOE has the controlling share, isn’t that the same as me helping out the SOE by giving it money? Wouldn’t that be crazy of me to do? I can’t do that kind of thing.”

In the article Mixed-Ownership: Six Big Risks for Private Companies Investing in SOEs (《混合所有制:民企参股国企的六大风险》), the author got several private entrepreneurs to share their opinions about the mixed-ownership system. The main risks they raised were: (1) the people with responsibility over state assets were not actually required to take responsibility; (2) concern about loss of state-owned assets will become a high-tension line used to keep private-sector shareholders under control; (3) state-owned shareholders are much more powerful than private-sector shareholders, making it difficult to cooperate; and so on. The point is that private companies cannot cooperate with SOEs, because for them “cooperation” means getting caught in a trap.

It’s clear that even if private companies don’t want to “mix,” the government is determined to “mix” them. Chinese private entrepreneurs have weathered many storms over the years, and as soon as they saw the government getting ready to position itself for mixed ownership, they started “investing overseas” in great numbers. As the saying goes: “Of the 36 stratagems, fleeing is best.” Since August of this year, Beijing has imposed stricter foreign exchange controls. Rather than targeting those small holders of foreign exchange, the controls are aimed at those rich businessmen who are trying to transfer their assets overseas. “Shorting China” is becoming an up-and-coming crime.

To put the private sector at ease and keep them from seeing the government as the wolf dressed up in Grandma’s clothes, Opinion 16 of the Program states: “Uphold the principle of implementing policy according to location, according to industry, according to company. Decide whether to remain independent, take a controlling share, or make an equity investment based on what is appropriate. Don’t make arbitrary matches between companies or try to apply mixed ownership across the board. Don’t set timetables; move forward when the time is ripe. Reform must be carried out in accordance with law and regulation, in strict accordance with procedure, and in a transparent and fair manner. Ensure protection of the rights and interests of the various investors in mixed-ownership enterprises and root out state-owned asset loss.”

The real problem is that the Chinese government has always treated law as something used to constrain the people. Private entrepreneurs know what’s really behind this kind of reform intended to “preserve the leading position of the state-owned sector” and “root out state-owned asset loss.” Under this kind of “reform,” just watch and see whether the private companies that SOEs have taken a fancy to can avoid becoming “Little Red Riding-Hoods.”

 

何清涟He Qinglian (何清涟) is a Chinese economist who lived in China before 2001. In her bestseller The Pitfalls of Modernization (《现代化的陷阱》), she argues presciently that, as the power of local governments grows, officials who have favored reform would come to oppose further reform because it would limit their ability to trade power for money and money for power. The book was banned in China, Ms. He was forced into exile. In 2006, she published China Shrouded in Fog (《雾锁中国》) which studies how the Chinese government manipulates and, to some degree, controls overseas Chinese-language media. Ms. He lives in New Jersey with her family.

 

Related:

What’s the Murderous Intention Behind “Don’t Let Li Ka-shing Run Away”?, Xiao Zhonghua, China Change, September 19, 2015.

 

中文原文《何清涟:国企改革方案的风,姓私还是姓公?》, translated by China Change.

 

 

What’s the Murderous Intention Behind “Don’t Let Li Ka-shing Run Away”?

By Xiao Zhonghua, published: September 19, 2015

“Everyone understands that, in China, the real estate business is closely entwined with power, and it has no way to succeed without the backing of political connections. Therefore, wealth generated from real estate is not wealth generated completely from the market economy. [He] can’t exit just because he wants to.” – Luo Tianhao, Don’t Let Li Ka-shing Run Away

 

An expert at Xinhua News Agency’s “Outlook Think Tank” (瞭望智库) recently published a brilliant essay entitled “Don’t Let Li Ka-shing Run Away.” This piece has caused quite a stir in public opinion in China and beyond. As an economist who understands a thing or two about how economics works, I lament the woeful standards at Chinese think tanks and can’t imagine how such a low-quality think tank can influence and undermine China’s political and economic policy decisions. I also can’t help but speak a few words of conscience on behalf of Li Ka Shing, China’s wealthy, the Chinese economy, and China’s proletariat.

I. Who Is Running Away and Why?

Is Li Ka-shing the only one [exiting China]? Of course not! There’s no question that foreign investors are pulling out in great numbers and that domestic capital is also fleeing on a large scale. Besides being the nature of capital to chase profits, it’s also beyond dispute there are also outflows of dirty money. However, not all of the money that is leaving China is dirty.

How do we judge whether money is clean or not? If we were to say that all commercial interests with political backing are dirty, then what about all of China’s state-owned enterprises? They’re all monopolies with strong political backing, so their money is the dirtiest of all.

Naked exchanges of power for money and vice-versa are of course violations of Chinese law, so you can just launch legal proceedings and carry out investigations. If you find political rent-seeking or graft, you can make arrests, hold trials, and confiscate the illegal proceeds. Those sorts of people couldn’t run away if they wanted to, since they can always be captured and brought back, can’t they? The whole world is opposed to serious corruption and economic crimes. Aren’t we always having people arrested and brought back to China?

But isn’t it brazenly ridiculous to say that, because Li Ka-shing was a real estate developer in China and China’s real estate market “works so closely with the authorities” that you can’t get anything done without “political resources,” therefore he can’t “come and go as he pleases”? No matter what you do in China, can you get anywhere without official approvals? With the possible exception of North Korea, China is the hardest place to do business because you can’t get permission to operate or access to markets without political ties. This has been especially true over the past two decades or so. What do you think all those myriad administrative reviews and approvals are for? How did it get to the point when a new government wants to greatly streamline administration and decentralize power, there are suddenly millions more administrative reviews and approvals?

How can you pin the faults of the political authorities on the people doing business in China? You rapaciously expropriate from them while they’re in business. Then you don’t permit them to spend their hard-earned cash, so that they lack the freedom even to put their capital in play?

When your governments and officials want to get rich, you make some property deals. You make these deals without the least bit of moderation, coaxing, tricking, or forcing developers into doing the deals. Then, when those deals run into trouble, it all becomes the developers’ fault?

For many years, local officials have described their governments’ so-called investment policies with a very vivid saying: “trick-hold-chew” (or PBK for 骗、抱、啃). First, you trick them into coming. Then you hold on to them for dear life. And finally you chew them to death. Isn’t this a realistic portrayal of how property development has worked in China, along with all sort of other industries?

You shouldn’t use your power in such willful and capricious ways! When power is used too willfully, business will suffer. Today’s businessmen, no matter whether they represent foreign capital or domestic capital, are all starting to flee. That’s because the authorities are acting too capriciously. The terrorist methods used in Chongqing under the guise of “singing red songs and fighting organized crime” led thousands of business leaders to flee abroad overnight. Isn’t this enough of a lesson for you?

I’m guessing that the most important reason why businessmen—especially China’s own businessmen—are pulling out of China is not because they’re pessimistic about China’s economic prospects. Rather, it’s because they have no confidence in the direction China’s political and economic policies are headed and there’s a spreading fear of the authorities.

In fact, our political and economic policies swing periodically from left to right, and from right to left, with no one able to make head or tail of things. This is not good. I don’t think it takes any great wisdom to understand that when people are uneasy, change is inevitable.

II. Why Won’t You Let them Run?

Are you trying to attack the local landed gentry and divide up their land, like during the period of land reform? I sense that, deep down, that’s what you want to do, and you’re accomplishing to different degrees.

You’ve basically accomplished your goal already. The stock market collapse has basically destroyed the middle class, while the truly powerful and wealthy have emerged without a scratch. But I believe that’s not enough for you, so is it your next step to introduce “mixed ownership” reforms and use “public-private partnerships” to go down the old path towards communism, like you did in the late 1950s? I doubt I’m the only one speculating and worrying about this. Businessmen are all shrewd people—who can’t see that there’s something fishy going on here?

I don’t know whether or not Li Ka-shing is willing to let you “mix” with his companies, but I would never allow it. I’d rather run my company into the ground, close up shop, and go home, even though I know you’d never even have any interest in a small enterprise like mine. The simple reason is that I’ve observed your abilities and what you’ve done over the years, and I know the wolfish nature of “public-private partnerships” and what the inevitable outcome will be.

Rather than carrying out forward-looking reform of the existing system, you instead go backwards in time and loot the people’s wealth. This is not the correct path of a ruler—it’s an evil path, a road to ruin.

Don’t blame me for presuming to speculate about the “emperor’s intentions.” You don’t give a good explanation for the new “Guiding Opinions on State Enterprise Reform,” while at the same time sounding the battle standard of “Don’t let Li Ka-shing run away.” Did you really think people wouldn’t jump to conclusions about what you’re up to?

III. Preventing Them from Running Will Just Make Them Run Faster

You’ve always believed yourselves to be extremely clever and that your grip on power permits you to do whatever you liked. But let me tell you, as soon as this brazen slogan of “Don’t let Li Ka-shing run away” left your mouth, everyone could clearly see the murderous intentions lurking behind it. If they don’t run now, it’ll be too late for them! So, China’s wealthy will do everything in their power to flee abroad. If you don’t believe me, just wait and see!

Of course, you can try raiding underground banks and imposing strict restrictions on foreign exchange to block the rich from fleeing. But today China’s economy is already completely integrated with the world economy, and it’s not such a simple matter to block foreign capital from pulling out or domestic capital from fleeing.

And the currency wars are just about to break out, if they haven’t already. I dare to predict that China will definitely lose badly in the currency wars and that the Renminbi will suffer deep devaluation versus the US dollar. We’re talking an exchange rate of 10 or even more than 20 yuan to the dollar when all is said and done. Again, if you don’t believe me, just wait and see.

My prediction doesn’t require the intervention of hostile external forces or Soros-types. It’s based on recognition that the rich who hold 80 percent of China’s wealth have begun to grow alarmed at your threats and mistaken actions and have begun to flee abroad. Li Ka-shing is only one of them.

You, not others, will always be the source of your own ruin.

IV. Aren’t You Ashamed for Making Businesspeople Fulfill Government Responsibilities?

The Xinhua think tank’s brilliant essay said that entrepreneurs like Li Ka-shing ought to take on two great “unfulfilled missions” of “giving consideration to the people’s livelihood and giving back to the poor,” on the one hand, and “doing more good deeds and operating social enterprises” on the other. I’m truly dumbfounded to see such ignorant talk come out of a state think tank.

The mission of a company is to do business, earn profits, take care of its employees, and pay taxes—that’s it. Taking care of employees and paying taxes counts as “giving consideration to the people’s livelihood and giving back to the poor.” As to whether or not to engage in charity or operate social enterprises, this doesn’t count as a company’s mission; it’s only a moral choice and ethical act taken by a company when it’s capable of doing so. Please remember, ethics and morality have never been duties, let alone a mission. Rather, they’re ideals to be pursued, and sometimes people achieve the ideal and other times they don’t.

Governments, on the other hand, are duty-bound to “give consideration to the people’s livelihood and giving back to the poor,” as well as invest in charity and social enterprises. Government has both a political responsibility and a social responsibility to do these things. What do governments do with the taxes that they collect from companies and citizens? Companies and citizens use their tax payments to fulfill their political and social responsibilities, whereas governments use their economic policies to develop the livelihood, charity, and social enterprises that they’re entrusted to take care of on behalf of companies and citizens.

How can a government be so shameless as to collect taxes without fulfilling its responsibilities, instead talking big and pushing all these responsibilities on companies?

All of these increasing burdens are making it harder and harder to run a company in China. There are so many gaps in the social security system, so you keep raising the social security levies every year, shifting all the burden on companies. When there’s inflation, you increase salaries for civil servants, forcing companies to raise wages as well, so the burden of inflation gets shifted to companies, too. Taxes only go up, never down. Even if you don’t threaten them, under such serious economic conditions it’s impossible for private companies to bear all these burdens. They can’t continue on, so their only choice is to flee. At a time like this, if you’re still thinking about plundering private enterprise, there’s only own road left for the future and that’s to go back to a planned economy.

Of course, perhaps that’s just what you’re hoping to accomplish . . .

 

Xiao Zhonghua (肖仲华) is an associated professor at Wuhan University of Technology.

———–

Related:

Li Ka-shing’s moves on China reveal good timing, WSJ, September 6, 2015.

Online criticism of Li points to break-up with leadership, South China Morning Post, September 18, 2015.

 

中文原文: 肖仲华《“别让李嘉诚跑了”暴露了什么样的杀机?》, translated by China Change.

 

“Money Flies, Heart Throbs” — Recent Chinese State Media Commentaries on the Stock Market

China Change, published: July 10, 2015

Before China’s recent, painful reckoning with the share markets, official media channels were abuzz with the limitless prospects for bountiful equity prices well into the future (“decades,” one optimistic commentator intoned.) Now, as retail investors grapple with their losses, and the full extent of the rout continues to play out, China Change here translates excerpts from Party media that helped to talk up the disastrous rally.  – The Editor

股市征战好宝书

 

We’re in an era of great change, and we can’t limit ourselves to the confines of the stock market to understand stocks. To grasp the future development of the stock market, we should see it from the national strategic perspective, and place it in the overall plan of the Chinese dream.

Looking at the stock market from a historical perspective, one should be able to see that our country’s economy and social system are facing a profound transformation. Domestic problems are intertwined and complicated. There is an enormous latent financial crisis, and the stock market must bear the great mission of dissolving this risk. Its role is to gain time for the comprehensive deepening of reform and the upgrading and transformation of the macro-economy. It serves the national strategy of China as a rising great power.

The importance of the stock market’s strategic position is ever increasing in our national strategy, and the government further recognizes its importance with every passing day. [….] With funds rushing in from society, the stock market already possesses the three key ingredients: “strategic need + policy dividends + capital boost.” Going forward, we must resolutely have a positive outlook on the stock market, and investors will be able to look forward to a stock investing opportunity of historic proportions.

Shanghai Securities Journal, November 20, 2014.

 

Via @mikko_sipila

Via @mikko_sipila

“In 1948, when America rolled out the Marshal Plan, the American dollar gradually became an international currency. From the 1930s, American stocks saw a 75 year bull market! Over the following decades the Chinese stock market will also have ample foundation and conditions to gradually relish the fruits of the great rejuvenation of the Chinese nation —“the China Dream.”

This time around, the bull market is not a “speculative market” but a “confidence market.” The enormous dividends wrought by the deepening of China’s reform and opening will be enough to support a long term, stable, and growing bull market.

China needs a bull market that surges forth and unfolds on a massive scale. In the 1990s, the A market shouldered the task of state-owned enterprise reform; in the beginning of this century, it carried the great mission of banking reform; and now, it has hoisted the great banner of bringing China through the middle-income trap—honor permits no turning back.

People’s Daily Online. “The ‘China Dream’ of A Stocks Calls for a Long Bull Market.” December 8, 2014.

 

“‘Reform Bull’ or ‘Leverage Bull’, there is truth in both. This market rise is a result of high expectations for the dividends of reform and opening up, a result of favorable policies piling atop one another. It is inevitable, and it is reasonable.”
Xiao Gang, chairman of China Securities Regulatory Commission, March 11, 2015.

 

“Confidence is more important than gold.” Zhang Qun (张群), chief market strategist in the market research team at CITIC Securities, believes that the stock market reacts before the real economy in general. Currently, measures to comprehensively deepen reform are being carried out expeditiously, and the Two Sessions [i.e. the annual assemblies of the National People’s Congress and the Chinese People’s Political Consultative Conference] have drawn the blueprint for this year’s economic development. All of these factors are injecting market confidence in the stable and healthy operations of the Chinese economy. In addition, financial leverage is also playing an important role in bringing up the stock market as large quantities of funds are being invested.

Xinhua, March 30, 2015.
The stock market hike conveys an important signal: Chinese economy is still maintaining a stable growth momentum, and its fundamentals haven’t reversed as a result of slowing down. The surge of confidence in the stock market has excited the entire society’s faith in development, and it allows the people to view the new phenomena under the new norm [i.e. China’s hoped-for ‘new economic normal’ of less fixed asset investment, more innovation, and more domestic consumption]  with peace and optimism.

People’s Daily online. March 30, 2015

via @jimeetm, h/t @prchovanec

via @jimeetm, h/t @prchovanec

We unanimously believe that the sudden drop in the stock market imposes enormous financial risks. On the less damaging side, it could lead to the “sudden death” of the stock market and cause severe casualties among the newly emerging middle class who are the nucleus realizing the China Dream. If it becomes more serious, it could trigger doubts about the China Dream, and social instability. It absolutely must not be taken lightly.

[Among our recommendations] Immediately form the Central Government Financial Committee, and establish a joint command comprised of one bank (POBC), three commissions (CBRC, CSRC, CIRC), and one office (CAC). The 1-3-1 must work as a fist under unified leadership to coordinate actions and prepare for a long-term battle. Party Central must command finance the way it commands the gun barrel. In the end, it should establish a Central Finance Commission, similar to the Central Military Commission, according to the needs of modern financial soft war.

Five Professors Call for Rescuing the Market,” Tencent Finance. July 2, 2015

 

This morning, deputy minister of the Ministry of Public Security Meng Qingfeng (孟庆丰) arrived at the China Securities Regulatory Commission with an entourage trailing behind him. They will work together with the CSRC in investigating leads on malicious short selling in stocks and stock indexes in recent weeks. This shows that supervisory organs will strike hard with a heavy fist against all illegal and irregular behaviors.

Xinhua, July 9, 2015.
————-

Related:

Plunge in Chinese Stocks Leads to Bull Market for Gallows Humor, the New York Times’ Sinosphere blog, July 8, 2015.