Ending the Nightmare of Private Sector ‘Crime’ in China

Chinese businesman

Business crime issues are receiving considerable attention in China these days, and two crimes with Chinese “characteristics” distinctly stand out. One type of crime involves collusion between business and government officials. Another could be called the private sector’s “crime of necessity.”

Business-political collusion has been around for millennia. But China’s current problems in this area are more complex than anything seen in a past dynasty or in another country.

Whenever a government official is accused of a crime, he or she often helps investigators by implicating a group of business leaders connected to the alleged wrongdoing. Eventually, shocking details of collusion are revealed.

Who has authority and who owns capital in China is determined by the country’s unique political, legal and economic structures. These structures foster collusion between officials and private enterprises.

The government has a huge amount of economic authority, including the right to award endorsements for countless administrative decisions. And it has a huge influence over how government funds are allocated. But great power breeds great desire. Given this situation, rent-seeking is inevitable.

Moreover, because of where China stands on rule of law and human rights, it’s almost inevitable that many independent entrepreneurs will seek protection from powerful politicians.

Several factors play into the collusion of business and political interests. One is the ability to share illegal gains. A business leader may seek to build good relations with government officials to get a piece of the power pie, and to help turn his company into a powerful enterprise.

This is in essence an operation based on a business “investment” that, while not technically bribery, basically involved a money laundering. Their operation converted assets into cash.

Typically, this sort of collusion can lead to a long-term, stable relationship based on mutual trust, since only low-key, loyal and tight-lipped business leaders can win the trust of government officials. At the same time, because of their positions, it could be said that this relationship is like that of master and slave.

Collusion also grows from the seeds of political protection. An entrepreneur who has no basic rights guaranteed by law may fawn on political elites because this is probably the only way to guarantee personal safety. But a business leader seeking a safe haven through political collusion is often badly exploited by the officials he tries to befriend. Not only that, but an entrepreneur puts himself at risk by associating with corrupt officials.

An extraordinary number of entrepreneurs are choosing to emigrate these days. They are fleeing out of concern over their finances and personal safety. When the government has all the power, it can be all too easy for an official to punish an entrepreneur. Moreover, although many people feel sympathetic toward an entrepreneur in such a predicament, public opinion often heaps scorn on a successful entrepreneur when there is suspicion of wrongdoing. Such suspicions, coupled with general animosity toward the rich, mean few if any will defend a businessman in trouble. Punishment inflicted on the businessman may even be celebrated.

Another common accusation is that a business leader “illegally obtained money from the public.”

State media said that in 2013 investigators filed cases against 64 businessmen for illegal fundraising and the other 23 for illegal business operations. And these were only the cases mentioned by media; the actual caseload is probably much larger. It’s hard to say how many small cases there really were.

It would be wrong to say that all of these cases are tied to the greed of entrepreneurs. Rather, we can say that what they did was dictated by difficult circumstances. Many were unable to obtain the investment and financing needed to run a private enterprise. Access to financial support was blocked by the state-owned enterprises (SOEs) that monopolize financial resources.

Companies in this predicament, then, are both culprits and victims of “crimes of necessity.”

Here is a summary of what has been happening to private enterprises repeatedly over the past decade. State monopolies control key industries, thereby limiting private investment. Any private firm that tries to break a state monopoly can be pegged an “illegal” business. Moreover, the state monopolizes financial channels, which means private firms have no way to access financing through the stock market or banks. As a result, they may be forced out of desperation to act recklessly. Relying solely on private financing, though, can be dangerous considering that it is illegal to “obtain money from the public” outside the regulated financial system.

An economy monopolized by the state cannot be called a “market” economy. Private enterprises accused of “undermining the socialist market economy order” are essentially being accused of “undermining the state’s monopoly on the economy.”

Here’s what I feel should be said on behalf of these firms: Monopolization is a crime and survival is a right.

Government leaders recognize the link between the rise of private enterprises and the stability of China’s political regime. So how can they help private enterprises succeed? An ideal approach would be to learn from countries with modern legal systems based on state constitutions that divide powers, thus protecting the basic rights of people and private enterprises.

Even under an authoritarian system, a sense of realism and logic binds the central government to the notion of protecting private enterprises. The reason is clear: If private enterprises are ruined, unemployment and social unrest inevitably increase, posing high risks for the regime.

The China Federation of Industry and Commerce has in the past represented private enterprises. But China’s political structure limits the federation’s power. The only way it can really help to reach a balance of power, and fulfill its role as a protector of private enterprise, is for government leaders to see the federation’s efforts in a political context.

When discussing the way forward for private enterprise, one must consider SOE reform. The challenges facing private firms, which some say pushes them to commit crimes, are to some degree caused by the pressure they’re under from state-run enterprises.

Whether SOEs are legitimate in a market economy is an important theoretical question. A popular view these days is that China must embrace technological innovation if it is to overcome the so-called middle-income trap. However, there is a sense of uncertainty involved when a country pursues scientific and technological innovation. There’s also a huge investment risk that only state enterprises, not private enterprises, can afford.

To some extent, this argument agrees with what financial writer Wang Xiaotong wrote in his 2007 book China Business Review. However, modern private enterprises, no matter their size or governance structure, are nothing like the businesses Wang wrote about that existed centuries ago. Europe’s past experience and today’s reality in China illustrate clearly that private enterprise is the main force behind technological innovation.

The real problem for SOE reform lies not in reforming technological innovation but rather in finding ways for these state enterprises to break free of political ties. SOEs function by using hidden societal and government controls. Therefore, reforming SOEs would require overhauling the entire political system.

If the state does not retreat, the private sector will not advance. Thus, from this perspective, altering the future of private enterprise will be an arduous task.

In this area, the National People’s Congress, the Supreme People’s Court and the Supreme People’s Procuratorate should learn from the State Council, which has swiftly and effectively streamlined the administrative approval system. Similarly, the legal system should be adjusted in ways that improve how private enterprise crimes are handled. Timely revisions to the rulebook would promote more rationality in criminal law. The law should not be a private enterprise’s worst nightmare.

*The author is a professor at the China University of Political Science and Law in Beijing. The opinions expressed are his own.

**Read the original op-ed at Caixin.

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