Sun Dawu, founder of the large private farming group Dawu Agricultural and Animal Husbandry Group, has long been a thorn in the side of the Chinese authorities. But the 18-year-old sentence imposed on the self-made 67-year-old billionaire this week, along with lengthy sentences for his son and two younger brothers, suggest it is not the man. Private wealth is under attack in China.
The election of Donald Trump presented a level of challenge to the Chinese system not unlike the break-up of the Soviet Union. The “Orange Revolutions” electrified the official Chinese class, which responded with a wide range of measures in the mid-1990s to tighten central control. Today, the global monetary expansion after 2008 has created a new political monster. Trump and, arguably, less abrasive but equally stubborn tycoons like Jack Ma and Sun Dawu pose the threat that the mere act of raising money could catapult someone to the pinnacle of political power.
Xi Jinping has never approved of private wealth anyway: it creates alternative centers of power. Private kingdoms that were overthrown under Xi include the Dalian Wanda Group, Anbang Insurance, the HNA Group, the Tomorrow Group and now Ant Financial. The rise of these private behemoths has eroded multiple forms of state power: controlling loans, controlling returns on investment and, most importantly, controlling outbreaks of civil discontent that can spread virally on platforms like WeChat and Weibo.
The retaliation that inevitably follows government criticism betrays that this is competition. Real estate developer Ren Zhiqiang has been jailed for 18 years after publishing an essay criticizing the government’s handling of Covid. Jack Ma was not detained until after a speech in Shanghai criticizing financial regulations. Sun Dawu’s real crime was to petition the authorities in Hebei Province about a land dispute. What did these three have in common? Their platforms and megaphones were won in the private market and global capital markets, and not via a lifelong rise in the Chinese Communist Party hierarchy.
The political and bureaucratic challenges taken together mean that the Chinese government believes the time has come to move on to private business. Why now? For nearly two decades, portfolio investing has been a value agnostic route to aggregating far more capital than foreign direct investors can bring. But portfolio investors have become more demanding, demanding audit records, limited currency convertibility and, most importantly, transparency. After the financial crisis, a panicked China flooded its domestic market with capital to replace declining export demand, creating a real estate and construction juggernaut that rocked executives into believing that external demand and external capital may no longer be needed. Chinese leaders now seem to believe (contrary to the evidence) that they are doing well without international markets.
“Private property” has never really been a concept. In China, what is represented as ownership of capital, for example, is really just a means of passing on rights of use. The main difference is that user rights are revocable, and revocable without a clear process, as we have seen in the swift and opaque dismantling of some of China’s largest “private” foreign investment firms. We have always understood that things like land in China are made available through use rights, not beneficial ownership in perpetuity. We should not be too surprised that the same “rights of use” clause applies to wealth in all its forms, including that acquired in foreign capital markets.
This inordinate government power to make or break a business means that China’s top executives devote most of their time and effort to government relations. This means guessing what policies government officials might want and finding ways to transfer money and other benefits to particular government officials.
After serial studies throughout the reform era showing how much state ownership has plummeted, after all the celebration of the markets on Mao, we need a new paradigm, be it for Huawei , Alibaba or China National Petroleum Corp. They are all business-oriented organizations that are tolerated as independent entities as long as they serve the needs of the Chinese state, needs that are increasingly political in scope. In trying to contain this dynamic in bilateral deals, US trade negotiators are mistaken in thinking that they can reorient China towards a more familiar and desirable system of market forces to push reform forward. They would be well served to read Deng Xiaoping’s clear statements that capitalist tools (and market forces) would be used temporarily, only until China nears its goal of sophisticated socialism with Chinese characteristics. .
The privatization of the economy was a major element in the hope that an evolved and enriched China would be more like us. This perception has undoubtedly been maintained well beyond its expiration date. Now the next expiration date is upon us.