them—it is how the system really works.
“What moves this structure is not a market economy and its laws of supply and demand, but a carefully balanced social mechanism built around the particular interests of the revolutionary families who constitute the political elite,” explain Carl Walter and Fraser Howie in their award-winning book on the Chinese economy,
“Failure to grasp the impact of unbridled Western-style capitalism on its elite families in a society and culture lacking in legal or ethical counterbalances is to miss the reality of today’s China. Greed is the driving force behind the protectionist walls of the state-owned economy inside the system and money is the language.”
Unlike their Russian comrades, China’s red oligarchs didn’t get rich in a one-off privatization of the country’s natural resources. China hasn’t had a mass privatization moment, and it lacks Russia’s vast oil and metal wealth. Instead, China’s rent-seekers prospered through privileged access to the two essential economic goods the state does control: land and capital. A preponderance of China’s plutocrats, including Wu Yajun, the country’s wealthiest woman—and, of course, one of the delegates to the 2012 National People’s Congress—have made their fortunes in real estate. Because land use is still closely controlled by the state, that is a business which inevitably involves close ties with the government. And almost all businesses need credit. For all China’s success in nurturing private business, more than 90 percent of loans in the country are still made by state-controlled banks. To borrow, you need a favorable relationship with the state and its mandarins, something the bosses of state-owned enterprises, who are simultaneously business executives and senior government officials, have automatically. As Walter and Howie, who have worked in Chinese finance for decades, explain: “What would the chairman of China’s largest bank do if the chairman of PetroChina asked for a loan? He would say: ‘Thank you very much, how much, and for how long?’”
The subtle hand of the Chinese government in appointing its rising class of plutocrats—according to Hurun, there were 271 billionaires in China in 2011, and the cutoff to make the list of the one thousand wealthiest Chinese was $310 million—is perhaps most apparent in the emergence of red dynasties, whose scions are known as the “princelings.” These are the sons and daughters of today’s Chinese leadership, and often the grandchildren of the leaders of the Maoist revolution. They form an important political faction in the Chinese Communist Party, and many of them are plutocrats. Li Peng was China’s premier from 1987 to 1998. Today, his family are utility tycoons. His daughter Li Xiaolin, who has been called “China’s Power Queen,” serves as chair and CEO of China Power International Development, and his son Li Xiaopeng managed Huaneng Power International, the country’s largest independent power generator, before entering politics in 2008. Zhu Yunlai, son of Zhu Rongji, another former premier, who was in office from 1998 until 2003, is a senior executive at CICC, the Chinese investment bank, which counts the illustrious private equity firms KKR and TPG among its shareholders. In rent-seeking societies, the plutocrats are appointed by the state. Who better to appoint than your own children?
Another sign of the political nature of wealth in China is Beijing’s ability to defrock its oligarchs. That reversal of fortune is often dramatic—a strong predictor of China’s future jailbirds is its current rich list. In 2002, Zhou Zhengyi, who made his fortune in Shanghai real estate, was identified as the eleventh richest man in China, with a fortune of $320 million; in 2003, he was imprisoned on corruption charges. In 2008, Huang Guangyu, the Beijing- based founder of the GOME retail chain, was named the second-richest, by
The dramatic denouement of the March 2012 NPC is that now the biggest monkey is directly in the state’s sights, too. Bo Xilai, the charismatic former chief of the thirty-four-million-strong Yangtze River megalopolis of Chongqing, was one of the leading elite critics of China’s rising inequality: on the eve of the NPC he told reporters in Beijing that the country’s Gini coefficient had exceeded 0.46 (it is 0.45 in the United States) and warned: “If only a few people are rich, then we’ll slide into capitalism. We’ve failed. If a new capitalist class is created then we’ll really have turned into a wrong road.” But at the same time, Bo was a princeling—his father was Bo Yibo, one of the Eight Immortals of the Communist Party—and the patriarch of a clan with wealth as well as political power. His son Bo Guagua reportedly drove up in a red Ferrari to pick up a daughter of then U.S. ambassador Jon Huntsman for a date. (Guagua denies driving the Ferrari; the Huntsman daughter says she can’t remember the make of the car.) Guagua was educated at Harrow, the British public school with an annual tuition of $50,000; Oxford, where he helped organize the Silk Road Ball; and Harvard. Bo’s wife, Gu Kailai, is a lawyer who ran a lucrative international law firm, Kailai, and an advisory firm called Horus Consultancy and Investment. Since Bo Xilai’s fall from grace, the family’s documented fortune is now pegged at $136 million and the figure seems to rise every day.
In early March 2012, Bo was one of China’s rising leaders—he was seen as a strong candidate for membership in the Standing Committee of the Politburo, the nine-person body that rules China. Over the next five weeks, in the most dramatic political fight in the country since Tiananmen Square, Bo went from princeling to pariah, first losing his job and then facing investigation for “suspected serious violations of discipline.” Gu, his wife, has been charged with murder. The fall of Bo Xilai is partly a tale of red capitalism intrigue and skulduggery—the attack on the Bo clan began with the mysterious hotel death of a British national who worked with Gu and alleged efforts to block investigation of it. But it is also being read as a fight between the red oligarchs, personified by Bo, and the reformers, who are fighting for a more transparent and competitive system. As Stephen Roach, the former chairman of Morgan Stanley Asia who now teaches at Yale, told me, “The emphasis once again is shifting much more back to the reformers…. [Bo Xilai’s sacking is] very powerful evidence in favor of returning to this pro-reform, pro-private-enterprise, pro-market-based direction that China has been on for the last thirty-two years, barring a few pretty obvious bumps in the road from time to time.”
Professor Roach is right. Bo Xilai was China’s most visible advocate of state capitalism, a system rife with opportunities for rent-seeking. His downfall has been part of a wider drive to make the Chinese economy more fair and open, most notably Premier Wen Jiabao’s striking attack on state banks, an important source of wealth for the red oligarchs. As Wen told an audience of business leaders in remarks broadcast on China National Radio, “Let me be frank. Our banks earn profit too easily. Why? Because a small number of large banks have a monopoly…. To break the monopoly, we must allow private capital to flow into the finance sector.”
But as in the other emerging markets, and indeed in the West, too, understanding China’s great political struggle as a fight between venal red rent-seekers and virtuous market reformers doesn’t tell the entire story. Some of the most successful princelings are the children of some of China’s most effective market reformers, and even the entrepreneurs whose fortunes are largely based on creating real value needed a helping hand from the state to survive and thrive. To paraphrase Proudhon, in a country like China, where money and government are so intimately intertwined, all fortunes required a little rent-seeking.
RENT-SEEKING ON WALL STREET AND IN THE CITY
On January 22, 2007, Mike Bloomberg, the mayor of New York, and Chuck Schumer, the senior senator for the state, released a study they had commissioned from McKinsey, the world’s leading management consultants. The report, titled “Sustaining New York’s and the US’ Global Financial Services Leadership,” warned of impending financial crisis and offered detailed guidance on how to avert it.
Less than seven months later, the greatest financial crisis since the Great Depression did indeed begin, when BNP Paribas, the French bank, froze withdrawals from three of its funds, a step we would see in hindsight as the opening shot in the economic Armageddon of 2008.
But this is not the story of two Cassandras and their unheeded cry that Wall Street’s bubble was about to burst. Instead, the Bloomberg/Schumer report focused on a very different danger: the risk that London, or perhaps Hong Kong or Dubai, might soon eclipse New York as the world’s financial capital. Were that to happen, Schumer and Bloomberg warned in an op-ed published in the
