Shanghai tycoons
By Richard McGregor, James Kynge and Mure Dickie,
FT.com June 16, 2003
Just off Nanjing Road, Shanghai's premier thoroughfare, stands a vast development site, empty except for a few half-built high-rise flats and one or two remaining old European-style houses whose residents have held out against the bulldozers.
Until a few weeks ago, the 43,000- sq-metre development, the first of eight similarly sized plots, was a monument to the success of Zhou Zhengyi, a 43-year-old Shanghai entrepreneur who had turned a small profit from his restaurant business into a multi-million-dollar fortune in barely seven years.
With Mr Zhou now in detention as part of a corruption investigation, the property project has come to symbolise something else: the fatal hubris of China's new rich.
The scandal surrounding Mr Zhou is not an isolated one. Over the past 18 months four of China's top tycoons and three senior bankers have fallen foul of the law, decimating the upper echelons of a Forbes magazine China "rich list".
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One tycoon fled to the US. Another tried to make a career in North Korea but failed to elude police in time. A third, a senior banker, was arrested after being summoned from Hong Kong for a bogus "emergency" board meeting in Beijing.
And in Shanghai in the past month, Mr Zhou and Qian Yongwei, two 40-something entrepreneurs who have made their fortunes in the city's newly formed private property market, have come under official investigation.
The question of what exactly is ailing corporate China has relevance not only for foreign corporations that have made China the world's top destination for direct investment but also for investment bankers and fund managers who have made the multi-billion-dollar foreign listings of Chinese companies a runaway success.
The answer heard most often is that Chinese companies suffer poor corporate governance. But that is little more than a euphemism. The forces that drive a disproportionate number of China's emerging business elite to corruption are not explained by management shortcomings alone.
Rather, they are the result of a fundamental incompatibility between economic and political systems; a mismatch between the raw, 19th-century capitalism of China's entrepreneurial class and a largely unreconstructed and poorly paid communist bureaucracy that still bears the imprint of its Leninist ancestry.
For most of the past decade, private businesses have been kept in legal and political limbo. The assets of private concerns were not protected by law; entrepreneurs were not - until last year - encouraged to join the ruling party; state banks were reluctant to lend to them; and, in many ways, mandarins blocked access to markets and withheld business licences.
Shut out from legal avenues to do business, entrepreneurs resorted to less orthodox means. They raised credit from a network of "underground banks", dodged taxes and found ways to send earnings offshore.
And, when confronting the bureaucracy was unavoidable, they used their only asset - cash - to buy the influence they required.
"The front door was closed, so they had to go through the back door," says Cao Siyuan, author of China's first bankruptcy law and the president of the Siyuan consultancy. "Money and executive power became interchangeable commodities. That is what happens when you deny legal status to private businessmen; they find ways to survive outside the law."
These observations are not new and they are no longer of purely academic interest. The detention of Mr Zhou, for example, saw $550m wiped off the market capitalisation of his listed companies in Shanghai and Hong Kong in just two weeks.
Mr Zhou perfected the business model favoured by impatient entrepreneurs. Using his strong government ties, he got hold of land that he used as collateral to borrow from banks. That money was spent acquiring listed companies, providing an alluring new currency that, unlike bank debt, did not have to be paid back.
Money from the listed companies in the loosely regulated market in China in particular could be, and was, funnelled at exorbitant prices in related-party transactions to other interests controlled by Mr Zhou.
Property, however, is the key, and it is here that China's unreformed political system leaves the field most open to corruption.
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