1 Introduction

Cambridgethe Red Flag University in China Press 978-1-108-47492-4Qi Zhang , Mingxing — Liu Revolutionary Legacy, Power Structure, and Grassroots Capitalism Under Excerpt More Information 1 Introduction 1.1 Introduction No matter how much Karl Marx abhorred capitalism, one of his observations was indeed correct: capitalism entails secure private ownership of the means of production which is separate from the producers (Marx 1990). Contemporary social scientists go a step further by pointing out that the rise and development of capitalism largely depends on well-functioning institutions that can constrain predatory behavior by governments and safeguard property rights—features that are often found in well-functioning democracies (Acemoglu, Johnson, and Robinson 2001; Ansell and Samuels 2014; North and Weingast 1989). Insights about the importance of the security of property rights for capitalism are echoed by the development of the private sector in China since the late 1970s,1 when the market-oriented economic reforms were officially launched. As of 2005, there were 29.3 million private businesses, employing over 200 million people and accounting for 49.7 percent of GDP (China Daily, December 14, 2005). By the end of 2014, there were 19.8 million firms of various ownership, with registered capital totaling 136 trillion yuan. Among these firms, there were 16.54 million private businesses (i.e., 85.8 percent of the total number of firms), with registered capital worth 69.3 trillion yuan (i.e., 50.8 percent of the total registered capital).2 These figures reflect 1 Unless specifically stated, in this volume the private sector refers to domestic privately owned enterprises; it excludes Sino-foreign joint ventures or firms owned by investors from Hong Kong, Macau, and Taiwan. 2 Cited from Zhang Wei (2015, 6). It is worth noting that there are no official Chinese statistics about the size of the private sector. There are a number of estimates, depending on how private firms are defined and what data are used. For a relevant discussion, see Huang (2008). 1 © in this web service Cambridge University Press www.cambridge.org Cambridgethe Red Flag University in China Press 978-1-108-47492-4Qi Zhang , Mingxing — Liu Revolutionary Legacy, Power Structure, and Grassroots Capitalism Under Excerpt More Information 2 Introduction improvements in the institutional and business environments for the private sector. Regardless of the numbers, however, the private sector still lives under the shadow of a strong party-state, either the sovereign state or its local agents, which intentionally renders the private sector subser- vient to the state sector and entices predatory governmental officials to abuse their public power to encroach on private interests, e.g., the demolition of the homes of villagers and urban residents and illegal seizures of the assets of private entrepreneurs. Worries began to spread among investors, scholars, and policymakers in 2004, as macroeco- nomic policymaking was primed to look out for state-owned enterprises (SOEs) and other national champions deemed by the central government to be strategically important to the state, at the expense of private companies. This trend is referred to as guojin mintui (国进民退), literally translated as “while the state advances, the private sector retreats.” Two well-known examples illuminate the weakness of private ownership vis-à-vis the state. One is the case of Jiangsu Tieben Iron Co. Its founder, Mr. Dai Guofang, was supported by the local government in Changzhou city to initiate a large investment project to produce steel and iron. However, in 2004 the project was halted by the central government, which was making efforts to rein in excessive investments in order to slow down the overheated economy. Officials from nine ministries launched a probe into the company and determined that Dai Guofang and other executives, in their efforts to promote progress, had violated several rules, including those governing land-use rights and financing. The official Xinhua News Agency published a long list of Tieben’s wrongdoings that had been discovered by government inves- tigators. Although many of these problems were actually tied to local government officials who had circumvented central-government land and lending rules by subdividing land and issuing project loans based on small individual plots, it was Dai Guofang and some of his deputy executives who were detained in April 2004 for alleged crimes such as bribery, tax fraud, and cooking the books to obtain bank loans. It was only after Dai had been in custody for two years that his case was reopened in 2006. However, by then the prosecutors had reduced the charges against him to forging receipts to evade taxes, and even the tax fraud allegations did not stand up under close examination because the receipts used as evidence were actually forged by one of Tieben’s © in this web service Cambridge University Press www.cambridge.org Cambridgethe Red Flag University in China Press 978-1-108-47492-4Qi Zhang , Mingxing — Liu Revolutionary Legacy, Power Structure, and Grassroots Capitalism Under Excerpt More Information Introduction 3 upstream suppliers. Nevertheless, Dai Guofang was still sentenced to six years’ imprisonment.3 The second case is that of Wuhan East Star Airlines. Its boss, Mr. Lan, had started East Star Airlines, one of the first private airline companies in China, to complement his real-estate, tourism, telecom, and other businesses. As a result, he became one of China’s most high- profile entrepreneurs. In 2005, Lan Shili, with a net worth of 2 billion yuan (around US$300 million), was ranked number seventy on Forbes’s list of entrepreneurs in mainland China. However, Lan’s business expansion was hit by the 2008 financial crisis, leaving him with a sea of debts and forcing him to take out high-cost loans from the Rong Zhong Group, a private loan shark, by signing a mandatory equity-transfer agreement that stipulated that if Lan Shili did not pay back the money within two years, he would have to transfer his stake in East Star Airlines to Rong Zhong. At this time, however, the vice governor of Wuhan city requested that Lan Shili sell his major stakes to the China National Aviation Holding Company, a national cham- pion, because its investments were regarded by the city government as administrative achievements. When Lan Shili refused the deal, China National Aviation Holding Company suspended takeoff clearances for East Star Airlines and Lan was soon imprisoned for alleged tax evasion. In August 2009, China National Aviation Holding Company was forced to file for bankruptcy.4 This stifling atmosphere culminated in Chongqing’s “Smash the Black” campaign from 2007 to 2011. After Politburo member Bo Xilai was sent from Beijing to assume the position of party secretary of Chongqing city in 2006, he began plotting his return to the center of power. Bo took advantage of the resentment of the masses toward how the political elite had become rich and he mobilized the masses to smash 3 For a detailed account of the Tieben case, see “Economic Shift Rouses Defunct Steel City,” February 6, 2011, at http://english.caijing.com.cn/2009–02-06/110 053406.html, accessed April 20, 2018. 4 For a detailed account of the East Star Airlines case, see “East Star’s Lan Shili: ‘Entrepreneurs Have to Be Bold to Do Big Things,’” March 24, 2014, at www .forbes.com/sites/knowledgewharton/2014/03/24/92014/#405d11b28f42, accessed April 20, 2018. Also see the lecture by Chen Youxi, “Shichang jingji de queli yu jingji xingfa chonggou” (The Relationship between the Market Economy and Economic Crimes in Criminal Law, 市场经济的确立与经济刑法的重构), March 14, 2014, at www.glawyer.net/article/205.html, accessed April 20, 2018. © in this web service Cambridge University Press www.cambridge.org Cambridgethe Red Flag University in China Press 978-1-108-47492-4Qi Zhang , Mingxing — Liu Revolutionary Legacy, Power Structure, and Grassroots Capitalism Under Excerpt More Information 4 Introduction the city’s “bad elements,” including corrupt and non-co-operative officials as well as private businesspeople. Based on his attacks on these “mafia forces” and his state-centered economic scheme, Bo devised his so-called “Chongqing model” in the hopes of winning a seat on the Standing Committee of the Politburo. To be sure, among the countless victims of the “Smash the Black” campaign, private entrepreneurs were attacked mercilessly, as many were charged with illegal actions, such as organizing mafia groups, and as a result they received unduly heavy and illegal punishments. As one blog post in the Wall Street Journal points out, In the course of the campaigns in Chongqing, more than 3,300 people were detained, many were tortured, and the former police chief along with 12 alleged triad leaders were executed. In addition, hundreds of millions of yuan were reportedly confiscated from private enterprises. In one case, the bank accounts of a real estate developer were allegedly seized and the funds were transferred to an account controlled by the police and then on to companies controlled by the police ... In another case, noted Beijing rights lawyer Li Zhuang was sentenced to prison for trying to defend Gong Gangmo, a businessman accused of having ties to organized crime. Gong was convicted of gang-related crimes, sentenced to life imprisonment, and, according to Li, over 100 million yuan of his assets were confiscated. Li quoted unofficial estimates of over 900 million yuan ($147 million) as the value of confiscated assets that “flowed into state coffers during the Chongqing crackdown.”5 The above examples suggest that even today, the legal and institutional environments surrounding the private sector and private entrepreneurs are far from ideal in the sense that private investors often face discrimination and restrictive state policies.

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