The Party: The Secret World of China's Communist Rulers (30 page)

It didn’t take long after 4 June for the resurgent conservatives to train their fire on the private sector. Chen Yun, the one-time economic planning minister and the father of Chen Yuan, declared that deviations from the planned economy model had caused ‘mortal wounds’ to the system. Jiang Zemin, barely months into his job as party secretary and still deeply insecure in his position, labelled entrepreneurs as ‘self-employed traders and peddlers [who] cheat, embezzle, bribe and evade taxation’. The chill winds were soon blowing in distant Anhui. By September that year, Nian, ‘Mr Idiot Seeds’, had been arrested too.

Nian had always flaunted his wealth, building himself a big house and parading a string of girlfriends around the district. The 1 million-plus renminbi in profits that he had stashed at his home in the early eighties, an immense fortune in those days, became so mouldy in the summer heat that he made a great show of drying the notes outside. He laid them in the sun near his factory, much like farmers in China spread their crops out on rural roads to drain them of moisture after the harvest, a display of riches that brought him even greater notoriety. But even in the dark days of late 1989, the Wuhu party struggled to conjure up a crime they could pin on Nian. They first tried to charge him with ‘embezzlement and misuse of state funds’, but this was thrown out on appeal to the provincial-level courts. Once Nian established that he owned the company, he couldn’t be charged with stealing his own funds. All Anhui had left was the charge of ‘hooliganism’, to wit, that he had conducted affairs with ten different women between 1984 and 1989. Nian was defiant throughout. Confronted with the charge of womanizing, he replied: ‘You got your numbers wrong. There were actually twelve.’ Nian was sentenced to three years in prison, but got out after just two, thanks again, he says, to the personal intervention of Deng.

For all his flamboyance, Nian had tried to do the right thing by the system. He had registered the company as a collective, because he could not get it on the books at the local commerce bureau as a purely private enterprise. He had employed some officials as well, giving the local government an interest in his venture. It won him few favours, however, when the chips were down. The officials apparently resented being made to work for their pay at all. ‘I fined any cadres who read newspapers in work hours and anyone who was late was docked 1 rmb for each minute missed,’ he said. In his absence in jail, the business collapsed and the company was shut down. Nian relaunched ‘Idiot Seeds’ when he was freed and he was still trading enthusiastically when I met him in 2008, but he never managed to re-create what he had established in the eighties.

The realization that the Chinese economy could not grow and prosper without private enterprise took nearly four years to sink in after the post-1989 backlash. Deng’s southern tour of 1992 was one catalyst, demolishing the most extreme ideological barriers in Beijing. The partial, strategic retreat of the state in China in the nineties gave insiders pole position in the mass sell-off of companies in sectors not considered strategic by the government, such as textiles, food and consumer electronics. China’s entry into the World Trade Organization in 2001 allowed efficient entrepreneurs to find new export markets. Emulating Margaret Thatcher in Britain, when she privatized council homes by offering to sell them cheaply to their occupants, city after city in the nineties in China created private property markets by selling off state housing.

But just as the 1989 crackdown transformed the Party’s stewardship of the state economy, its management of the private economy was overhauled as well. The policies which promoted the rural entrepreneurship of the eighties were supplanted by a new regime which favoured the cities, the focus of political unrest and economic upheaval. Farmers were more heavily taxed. Credit in the countryside was tightened. The big state industries which had survived the massive restructuring of the nineties retreated into the well-financed fortresses the Party had built for them. Whole sectors, mainly heavy industry, telecommunications and transport, were reserved for the state and shielded from full-blown competition.

Zhang Ruimin’s Haier was typical of the fault-lines left running through Chinese business by the political earthquakes of the late eighties. Haier, defined as a collective enterprise, in which managers and workers owned the company’s shares under the supervision of the local government, had always had strong support from the Qingdao government. The city gave the company land and facilitated credit, but otherwise largely left the company alone. To all intents and purposes, Haier had been privately, and successfully, managed with little interference from the state for many years. Many Haier managers had grown to think they were masters of their own universe and in 2004 they hit upon a plan to turn this conceit into reality. Haier proposed to take over a listed company in Hong Kong and inject into it some of the enterprise’s most valuable assets. In one fell swoop, Haier’s top managers, including Zhang, would become the largest set of individual shareholders, giving them control over the company’s operations, brands and executive remuneration, and also an international currency–shares traded in Hong Kong–to expand offshore.

Just as Nian’s political timing had often been awry during his career, so too was Haier’s manoeuvre to give its executives a fatter stake in the company. Around the same time, the pendulum of public debate was swinging against the privatization of state assets. An odd alliance of old-style leftists and populist commentators launched a highly charged public campaign on the issue, comparing management buy-outs of state firms to the scandalous privatizations of Yeltsin’s Russia. The government, stunned by the campaign’s popularity, was forced to respond. However grey the definitions may have once been surrounding the ownership of Haier, they were soon clarified. With no prior warning, the Qingdao agency in charge of government enterprises announced in April 2004 that Haier was owned by the state. The Hong Kong deal was killed. Haier and its managers, for the moment, were not going anywhere. The Haier case was a signal reminder that a company could be privately run one day and find itself claimed as a state asset the next.

Over the next three years, Haier’s executives fought back, using their considerable political and commercial muscle to reverse the decision. Haier’s senior managers refused point-blank to attend meetings for state enterprises convened by the Qingdao agency supervising the city’s companies. ‘If we were invited to share our successful experience, we would have first stressed that we are a collective enterprise,’ Yang Mianmian, the company president, said. When the city asked Haier to take over a failing enterprise in Qingdao, Haier resisted the plan until it died. The Qingdao authorities eventually got the message. In April 2007, with a click of the mouse, the city quietly removed Haier from the list posted on the government website of state-owned enterprises in Qingdao. Haier returned to being a privately run collective. As if to celebrate the turn-around in their fortunes, Haier soon reintroduced a share incentive scheme for its senior managers. Zhang Ruimin was left out, though, because it was not appropriate to give share options to a member of the Central Committee.

After more than three decades of market reforms, Chinese companies still come in all manner of guises and trade under an array of different business registrations to accommodate prevailing political pressures. They can be fully state-owned, collectively owned or co-operatives; or limited liability companies, with diversified share registers split between both public and private owners. Some private companies are registered as state entities or collectives, giving them what the Chinese call a ‘red hat’ and an extra degree of political protection from harassment by officials. The corporate cross-dressing complicates life for an entrepreneur, but it is common sense as well. Chinese banks, which are all owned by the state, still prefer to lend to the state, because the government will usually stand behind the debt in one form or another. By contrast, the banks have little confidence in lending to private companies, especially smaller ones. The banks may not understand or trust entrepreneurial companies or have the in-house skills to calibrate the risks in lending on cash flow rather than the security of assets. But at the end of the day, the reason is very simple. Private companies are not part of the club.

The smartest companies have become adept at having it both ways. The largest, and founding, shareholder of Lenovo, the computer firm which bought IBM’s PC business, is a state science think-tank, but the company is registered and listed overseas and largely privately managed. For a while, it was headquartered in the US. Yang Yuanqing, the head of the company, still squirms when his Communist Party membership is raised. ‘Let’s not talk politics, OK?’ he replied when asked after the IBM deal in late 2004 how he reconciled party membership with his business commitments. But Yang has also tried to keep his distance from politics. His advisers say he quietly rebuffed an invitation to join the China People’s Political Consultative Conference, an honorary body headed by a Politburo member designed to give the impression that the Party is consulting broadly through the community.

Huawei, the telecommunications equipment manufacturer and perhaps China’s most globally successful company, is careful to say it is a collective rather than a private company, a definitional distinction that has been essential to the company’s receipt of state support at crucial points in its development. In 1996, Zhu Rongji, then vice-premier, visited Huawei with the heads of four large state banks in tow. On hearing the company needed funds to compete with foreign firms in the domestic telco equipment market, Zhu ordered the banks on the spot to support the company. ‘Buyer’s credit [for local customers] should be provided!’ Zhu declared. Huawei’s status as a genuine collective is doubtful. The company has never published a full breakdown of its ownership structure. Most shares are believed to be owned by Ren Zhengfei, a former People’s Liberation Army logistics officer who founded the company in 1988, and his managers. The same murky structure characterizes Ping’an, the Shenzhen-based insurance company. Ping’an, one of China’s largest financial institutions, is classified as a private company, but the true ownership of large chunks of its shares remains unclear.

The campaigns attacking Haier, and the debate over the ownership of the likes of Lenovo, Huawei and Ping’an were in some way a distraction from the bigger trends. By the turn of the century, many Chinese had begun to accumulate substantial, and visible, personal fortunes. Just as significantly, some of them began to talk about it. The emerging new class of the super-rich represented a dangerous challenge for the Party. Having wiped out private business on taking office in 1949, the Party now needed to find a way to accommodate entrepreneurs.

In the late nineties, Rupert Hoogewerf, a young Chinese-speaking accountant in Shanghai, found himself struggling, for all his knowledge of the country, to explain the ‘new China’. ‘Any reader of newspapers could tell you that GDP was going to go up. Any tourist could tell you that the landscape was changing, but again, so what?’ Somewhat of an entrepreneur himself, Hoogewerf decided to tell the story through a device long used in the west as a symbol of the entrepreneurial economy, by compiling China’s first rich list.

Such was the sensitivity surrounding wealth and the creation of new classes in communist China, a local publication could never have got away with it. The Party can be anxious about even the most anodyne acknowledgement that China has become a class-ridden society. A Shanghai vice-mayor, Jiang Sixian, told me in passing in an interview in 2002 that the city was rapidly developing a new middle class. It was a seemingly harmless remark and in fact somewhat of a selling point for the city, playing into the kind of narrative that reassures westerners that China was becoming ‘more like us’. The next day, his office called back with an urgent request from the vice-mayor: could his comments about Shanghai’s new middle class go off the record?

If the vice-mayor could not talk about class and wealth, Hoogewerf suffered no such restraints. Hoogewerf started out by cold-calling many entrepreneurs on their landlines. Most had never told their stories before and were, perhaps naively, intrigued to pick up the phone and talk to a foreigner they had never met. They would not have afforded the same courtesy to a local journalist, because they understood that the Chinese media were firmly in the hands of the state. Equally, just as many other entrepreneurs, who considered exposure of their wealth would be political death, avoided Hoogewerf’s entreaties and pressured him to leave their names off. Ren Zhengfei, the secretive head of Huawei, sent threatening letters via lawyers and PR consultants demanding his name be dropped. Miao Shouliang, who made his fortune in real estate and household appliances in southern China, lobbied menacingly to stay off in 2002. ‘He was very sensitive to upsetting anyone in the local party apparatus,’ said Hoogewerf. Once Miao had been admitted into the Party’s official advisory body in Beijing in 2003, however, he immediately relaxed and agreed to co-operate.

The lists were perfectly timed to take advantage of the emergence of a critical mass of genuine private wealth for the first time since 1949, and the parallel development of the cult of the entrepreneur. The old saying, that there were many Chinese economic miracles, but none in China itself, was no longer true. Communist China now had its own homegrown tycoons, and their wealth, families, spending habits, business strategies and investment plans were all suddenly public property. Although the local media couldn’t initiate the project, they instantly replicated the lists under the guise of reporting on their publication overseas. For the entrepreneurs, the publication of their wealth was nothing less than a test of their political relationships and survival skills. It was a test that many of the highest-fliers failed.

Political traps lay everywhere. The number three on the 2001 list, Yang Bin, holder of a Dutch passport, who was in real estate and cut flowers, made a grievous mistake by expanding his business across the border into North Korea and was arrested soon after for tax evasion. The diplomatic establishment had been furious at what they considered his infringement of their turf. Yang Rong (no relation), who had listed the first ever Chinese business on the New York Stock Exchange in 1991, fled to the US in 2003 when he was threatened with arrest by the Liaoning provincial authorities. His sins were complex but, boiled down, they were political too. First, he fell out with his one-time supporter, the Liaoning government, over plans to invest outside the province; and then he clashed with the central bank over the ownership of a large batch of shares in his company. Once his dispute with the state became public, Yang was finished.