September 14, 2017 10:00 am JST

Minxin Pei: A reckoning looms for China's billionaires

Retreat of pro-market reform and arrests of tycoons bode ill for high-profile businessmen

Jack Ma Yun, founder and chairman of the Chinese e-commerce giant Alibaba Group Holding, recently caused a stir when he claimed that a planned economy is now possible thanks to big data. Liu Qiangdong (also known as Richard Liu), founder of JD.com, a rival of Alibaba, went a step further, saying he had experienced an epiphany that "communism can be realized in our generation" because robots would be doing all the work of humans.

You do not have to be an economist to find it odd that Ma and Liu, respectively China's second- and 26th-wealthiest people according to the Hurun Rich List 2016, would endorse the core ideas of an ideology that has produced misery in countries where it has been tried, including China under Mao Zedong. It is inconceivable that a planned economy, even with the help of big data, would have allowed Ma to turn himself from an English teacher into a technology billionaire. As for Liu, he probably needs a trip to North Korea to see what communism is really like.

Although it is easy to debunk the outlandish claims made by celebrity tycoons, a more difficult question is why such smart businessmen would risk their reputations with statements that are sure to invite public ridicule. Although we may never know why Ma or Liu chose to extol the planned economy and communism, or whether they believe what they say, we may have a better appreciation of the existential challenges facing them if we take a closer look at the profound changes in China's political and economic environments in the last five years.

One of the talents that successful entrepreneurs need is a keen sense of risk. So when tycoons like Ma and Liu begin to praise communism, it is a safe bet that they have smelt something in the air that prompts them to profess an ideological allegiance to the government.

In all likelihood, politically astute tycoons know that China has, indeed, entered a "new normal" period. For those unfamiliar with the official Chinese lexicon, "new normal" refers to the current period of moderate economic growth. For tycoons who have been watching the political shakeout of China's top elites, along with changes in official rhetoric and economic policy, the new normal represents a dramatic -- and worrying -- shift in the mindset of Chinese leaders.

One of the more evident changes is in official rhetoric. During most of the post-Mao era, the Chinese Communist Party has maintained, more or less consistently, a rhetorical commitment to making the economy more market-oriented and open to the outside world. Even though they have often failed to turn this rhetoric into policy, official media and top leaders have seldom veered away from their reformist rhetoric.

This is no longer the case. In the fall of 2013, Chinese entrepreneurs were delighted when a newly appointed administration under President Xi Jinping unveiled a bold blueprint for economic reform that reaffirmed the CCP's commitment to the market. However, in the last four years, pro-market rhetoric has been gradually replaced by more statist pronouncements in the official media.

Nowhere is the shift toward statism clearer than in the reform of state-owned enterprises. Instead of launching a bold initiative to privatize these inefficient and loss-making behemoths, the Chinese government has endorsed a new strategy of "righteously making SOEs strong, outstanding and big," as declared by Xi in July 2016.

Chinese tycoons might not have been so alarmed now if the initial pro-market rhetoric had not been accompanied by changes in government policy. After the meltdown of a stock market bubble in July 2015, however, Beijing's economic policy became unmistakably market-unfriendly. The futile bailout of a collapsing equity bubble, at a cost of trillions of yuan, was the first rude shock to China's business community. It was soon followed by a botched technical change in China's exchange rate policy. In response to the subsequent depreciation of the yuan, Beijing reversed its much-applauded reform of making the Chinese currency more market-driven and international.

The government's retreat only succeeded in undermining confidence in its commitment to reform and the prospects of the Chinese economy. Investors, including China's well-heeled households, began to head for the exit. Chinese tycoons led the charge. Private conglomerates such as HNA Group, Anbang Insurance, Dalian Wanda, Fosun International and many others went on an overseas acquisition binge. In less than two years, China's foreign exchange reserves shrank from $4 trillion to $3 trillion.

WRONG REMEDY If anything, Beijing's remedy for capital flight has made things worse. Instead of boosting confidence in the economy by adopting promised but unfulfilled reforms, Beijing has further tightened capital controls and made it nearly impossible for private companies to make overseas investments freely. To demonstrate that no tycoon is too big to jail, the Chinese government in June detained Wu Xiaohui, Anbang's chairman -- who is married to a granddaughter of the late paramount leader Deng Xiaoping -- without any accusations of wrongdoing, or even confirmation of his detention.

Wu is not the first Chinese tycoon to disappear. Guo Guangchang, the chairman of Fosun and another multibillionaire, was briefly hauled in by the police at the end of 2015. The most bizarre incident occurred at the end of January, when Chinese security agents kidnapped Xiao Jianhua, a Chinese billionaire protected by a team of female bodyguards, from his luxury apartment in Four Seasons hotel in Hong Kong. Although Beijing has refused to acknowledge that it has Xiao in custody, or to disclose his alleged misdeeds, the most reasonable guess is that Xiao, who had built close business relationships with many top leaders and their families, has fallen prey to the power struggle raging in Beijing ahead of the 19th CCP congress, scheduled for the fall of this year.

These recent developments -- a resurgence of orthodox communist rhetoric, retreat from pro-market reforms and secret arrests of tycoons -- must have struck fears into the hearts of Chinese business titans. No one needs any further proof that a new order now rules China. Tycoons can no longer count on the political protection they have cultivated, through sweetheart business transactions, with members of China's political ruling class, many of whom have been purged or sidelined. A change of political regime is always followed by a shakeout of the old economic order. For those at the top of the new political order, the logic of redistributing the wealth of the cronies of their political rivals to their own friends and supporters is simply too powerful to resist.

Economically, China's prospects will do little to bolster the spirits of the tycoons. Most amassed their fortunes during China's credit boom. Now that growth is falling and debt is rising to unsustainable levels, the smartest thing to do is to get out when they are still ahead. Unfortunately for them, capital controls have made it much harder and more dangerous to diversify assets out of China.

Faced with these existential challenges, Chinese tycoons seem to have adopted different survival strategies. Some have chosen to keep a low profile and hope to ride out the storm. Others continue to seek safe havens for their wealth. A third group, represented by tycoons like Ma and Liu, has apparently decided to hitch its fate to the new order.

It is easy enough to say something pleasant to those in power (although one has to wonder whether there is a single Chinese leader who still believes in the superiority of a planned economy and the viability of communism). But no one knows which of these strategies will succeed, since political winds in Beijing can shift quickly and unexpectedly. In this environment, perhaps only the lucky can survive.

Minxin Pei is a professor of government at Claremont McKenna College and author of "China's Crony Capitalism" (2016).

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