June 9, 2016 6:00 pm JST
Minxin Pei

Losing the hearts and minds of the money men

The business district of Shanghai

The Western media has largely missed arguably the most important recent economic development in China: the dramatic fall of private investment. According to official statistics, nominal private fixed-asset investment grew only 5.2% in the first four months this year, half the rate of 2015. Since private fixed-asset investment accounted for nearly two-thirds of total investment before its recent decline, a sustained fall in private capital expenditures will further exacerbate China's economic slowdown.

Alarmed by this development, the State Council has prescribed a series of measures to revive private investment. In the much-noted interview published in the People's Daily on May 9, the unnamed "authority," widely believed to be the chief economic adviser to President Xi Jinping, flagged the substantial fall in private investment as the top macroeconomic risk.

There are several plausible economic reasons behind the plunge in private investment. Few sensible private entrepreneurs want to continue pouring money into the Chinese real estate bubble. Massive overcapacity has destroyed profitability. Economic slowdown has reduced return on capital.

However, there is also a political story behind the drop of private investment: China's private entrepreneurs have grown increasingly alienated from their government.

This bold assessment may be greeted with much skepticism. The conventional wisdom is that Chinese entrepreneurs, as a group, are among the greatest beneficiaries of the post-Tiananmen order. Politically, the ruling Chinese Communist Party has courted this group as a new social base of support. Economically, nearly all members of this group have struck gold in the last two decades of boom. For a small select number of well-connected entrepreneurs, they could not have become China's answer to America's "robber barons" without favors from the CCP.

Of course, private entrepreneurs have also served the party's political interests well while making themselves wealthy. Their entrepreneurship and confidence in China's future are among the most important drivers of Chinese growth in the last four decades.

However, since mid-2015, several developments have drastically altered their assessment of the current government's policies and chilled their relationship with the ruling elites.

Slow pace of reform

As businessmen, Chinese private entrepreneurs are most sensitive to the impact of government policies on their economic well-being. On this front, it is a safe bet to argue that they have been sorely disappointed -- if not thoroughly disenchanted -- by both the lack of reform and the revival of statism in economic policy in the past few years.

When the landmark document of the CCP's 3rd plenum in November 2013 was issued, private entrepreneurs had much to cheer despite many inconsistencies and ambiguities contained in the CCP's new reform agenda. Unfortunately, progress in carrying out promised reforms has been painfully slow. In particular, the discrimination against the private sector remains practically unchanged as state-owned enterprises continue to enjoy monopolistic protection and abundant subsidies from the state.

The turning point was, in retrospect, Beijing's ill-advised intervention in the stock market crash last summer. On its own, such intervention might not have directly hurt the interests of Chinese entrepreneurs, but its signal -- that the government knows best and will use whatever it takes to fight market forces -- must have shaken private entrepreneurs' confidence in the CCP's commitment to market-oriented reforms.

To make matters worse, pumping trillions of yuan into a deflating stock market bubble was only the beginning of Beijing's retreat from reform. In short order, the Chinese government shelved several financial reform plans (among them the approval process of stock market listings) out of fear of further financial instability.

The progress in restructuring the economy has been disappointing as well. Although the service sector has grown, the government has been slow in shuttering state-owned zombie companies. By keeping these companies alive through constant infusion of bank credit, Beijing has allowed manufacturing overcapacity to persist, destroying corporate profitability, the economic lifeline of private entrepreneurs who typically reinvest profits to expand their businesses.

Such a disappointing record of policy performance, one may argue, must have sowed deep doubts among private entrepreneurs about the competence of their leaders.

As entrepreneurs operating under the perennial political uncertainty of an autocratic regime, Chinese businessmen are acutely sensitive to political signals. Here, again, they find more to worry about in recent years. Among the most unsettling developments, the revival of the political rhetoric and symbols associated with the Maoist era must have repelled private entrepreneurs the most. For this group, the Maoist era represents China's economic "Middle Ages" when practicing capitalism was punished by imprisonment and worse. Any officially condoned resurrection of Maoist rhetoric and symbols could only mean a great political leap backward.

Earlier this year, Ren Zhiqiang, a celebrity real-estate developer with more than 38 million followers on social media site Weibo, was so disgusted by the official media's extravagantly slavish demonstration of loyalty to the CCP that he wrote an acerbic blog reminding the Chinese government that the people, not the party, are the real owners of the official media. When the party shut down Ren's Weibo account as punishment, many leading businessmen came to his defense.

No protection

The last straw for private entrepreneurs, it seems, is their realization that, despite all the material wealth they have amassed, they enjoy no legal protection under an autocratic regime. Most entrepreneurs are apolitical by choice. They deliberately shy away from political activities and, under normal circumstances, are not overly troubled by the CCP's human rights violations that victimize mostly ordinary citizens and dissidents.

Until recently, the CCP has handled its delicate relationship with private entrepreneurs with considerable sensitivity. Aware of the indispensable role of this group in economic development, the party has been averse to policies that could scare China's economic elites. All this has changed in the last three years. The dragonet of President Xi's anti-corruption campaign has ensnared many tycoons. While some of China's wealthiest businessmen might have colluded with corrupt officials, what has petrified private entrepreneurs is the lack of legal protection of their rights when the police come knocking on the door.

Some of them simply disappear without a trace. A large number have sought refuge in Hong Kong and western countries. In an act that must have completely shaken Chinese business elites' confidence in their own personal security, Chinese police detained Guo Guangchang, a low-key billionaire, in December last year, without providing any explanation. After his release, Guo was apparently not allowed to say anything in public about the reasons for his mysterious detention.

Not all of China's tycoons have been alienated or subjected to such rough treatment. Some well-known businessmen continue to be showered with government favors. Not surprisingly, they have reciprocated by trying to use their wealth and influence to burnish the image of the party and defend its policies. But by and large, they are a small minority. The dominant sentiment among Chinese private entrepreneurs these days is fear and uncertainty.

While it does not take long to destroy the implicit compact the party has nurtured with private entrepreneurs over the last few decades, it requires a fundamental shift in policy to restore their confidence in the current government's commitment to reform, competence, and respect for basic legal principles. At the minimum, the party needs to demonstrate convincingly that it remains committed to market reforms. It can do so by reversing the statist policies it has adopted since last year.

On the political front, the challenge will be tougher. The party must show a decisive break with Maoism and end the political exploitation of the rhetoric and symbols associated with China's darkest recent past. Above all, the party must respect the legal rights and personal dignity of Chinese private entrepreneurs.

In early December last year, Xu Ming, a 44-year-old one-time billionaire and virtual cash machine of the family of former Politburo member Bo Xilai, died of a "heart attack" in prison. When the news broke, Feng Lun, a real estate developer who keeps an influential blog, reflected on Xu's tragedy. Upset by the veil of official secrecy surrounding Xu's untimely death, Feng also railed against Bo's treatment of Xu. During Bo's trial, Xu was produced as an official witness testifying against Bo. Although his family had taken millions of dollars from Xu, Bo dismissed Xu contemptuously as a form of lowlife unfit to associate with him.

"Even a Chinese official on trial," wrote Feng, "considers private enterprise worse than a chamber pot." Feng also revealed that an unnamed Chinese tycoon once told him, "in the eyes of officials, we are nothing but cockroaches. They decide whether we live or die."

If Chinese private entrepreneurs are treated like chamber pots and cockroaches, they are not going to remain friends of the party for very long.

Minxin Pei is a professor of government at Claremont McKenna College and a non-resident senior fellow of the German Marshall Fund of the United States

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