The Party: The Secret World of China's Communist Rulers

by Richard Mcgregor

  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.

  As late as 2008, the top of the list remained a dangerous place. The richest man in China, Huang Guangyu, head of a national appliances chain-store network, Gome, with an estimated fortune of $6.3 billion, was detained for alleged insider trading in November 2008. The first reaction to the arrest of people like Huang was not, ‘what did he do wrong?’, but ‘who did he offend?’ The high-profile arrests of rich businessmen and women, however, overshadowed a more important development. Entrepreneurs had been starved of bank capital, fenced out of some of the most profitable sectors of the economy, often forced into unholy alliances with state partners and sometimes sent to jail. Despite these setbacks, private wealth had gradually become an indispensable part of the Chinese landscape.

  For many entrepreneurs, inclusion on the list had an up-side. In the right circumstances, with a protective local government, the list could enhance an entrepreneur’s social standing and perhaps boost their credit rating. When I visited the Shagang steelworks in Jiangsu in 2002, just ahead of the publication of the list that year, the PR man for the private owner of the mill, Shen Wenrong, complained bitterly about the attention the annual list drew for his boss. I told him not to worry. The latest list due out a few days later had Shen down about thirty to forty places compared to 2001. I assured him his drop down the ranks would ensure he got little press attention in the coming year. On hearing this, the mood of Shen’s assistant instantly changed. He was indignant, exclaiming: ‘But we have been making money faster than anyone else!’

  As the entrepreneurs got richer, their political antennae sharpened. The smart entrepreneurs moved closer to the Party, and, by and large, the Party moved closer to them. Entrepreneurs like Wang Shi, who had been involved in political strife in the past, tried to erase their sins from the public record altogether. Wang, the head of China Vanke, the largest housing developer in the country, is a swashbuckling CEO in the mould of Richard Branson, producing books in his spare time about climbing the Himalayas and trekking across central Asia. In 1989, when he was thirty-eight, his pioneering fervour had taken him on a different trek, to the front of a march of his employees through Shenzhen in support of the demonstrators in Beijing. Wang was blacklisted by the local government for his role in the protests and reportedly jailed for a year.

  Wang initially spoke openly about 1989 in the years after his release, saying he regretted marching. In interviews with Time magazine in 1997, and the Washington Post in 1999, he said he had been wrong to lead the protests. ‘As chairman, I was a symbol, not an individual. I should have stepped down if I wanted to protest,’ he said. By the time he was interviewed for a lengthy profile in the New York Times in 2008, and had become one of the wealthiest people in the country, he claimed to have no memory of the episode at all. Through a spokes-person, he insisted he had never marched. The whole episode had been airbrushed out of his life altogether.

  In late 2008, Wang summed up the rules he had learnt for doing business as an entrepreneur in China. From the moment he established his private business, he said, he had been careful to take on a government shareholder, to give his company a ‘red hat’. ‘You take too much, the state is unhappy, and you take too little, you get upset with yourself,’ he said. When this first state shareholder was replaced a few years later, he made sure his new partner was state-owned as well. The first rule, he said, was that you will not develop quickly without a ‘red hat’, or a state partner. And second, you had better be careful about making it big without one. He had no need to articulate the third rule, which he had learnt in the wake of 1989: to stay out of politics altogether.

  The symbolic turning point in the relationshi
p between the Party and the private sector was Jiang Zemin’s 2002 announcement at the five-yearly party congress that entrepreneurs could officially join the Party. Many had already been signed up by branches which could see the value of having wealthy business people on their books. Others had been members before going into business. About one in five of Hoogewerf’s list were already party members. Jiang had long backtracked from his previous opportunistic denunciations of entrepreneurs as avaricious peddlers. As the private economy grew, the machine politician in him could see the benefits of a public embrace of entrepreneurs. Accustomed to keeping its role in government and state businesses backstage, the Party nevertheless saw political benefit in advertising its penetration of the most dynamic part of the economy. Hanging the party plaque out on the front stage of a private company reminded all who was ultimately in charge.

  The consecration of this trend by Jiang was immensely significant, and also hugely controversial. The diehard leftists, a vociferous minority who periodically released bristling petitions attacking the retreat from traditional socialism, could be relied on to oppose Jiang’s initiative. This time, they were joined by Zhang Dejiang, then party secretary of Zhejiang, provoking a rare public split in the ruling elite. Before the decision was announced, Zhang said it was ‘crystal clear’ that entrepreneurs should not be allowed to join the Party, because they might take over local party organizations. ‘Zhang laboured over his position on this issue, and then came out against entrepreneurs, only to be embarrassed by Jiang Zemin arriving in Zhejiang soon after and telling him he was going to let them into the Party, no matter what the opposition was,’ said Wu Xiaobo, a Chinese author of best-selling books on private business.

  In Zhejiang, Zhang presided over a province which entrepreneurs had turned into the richest in the country, measured by household income. At the 2002 congress, he was promoted into the Politburo as the party boss for Guangdong, another province which owed its wealth to the private sector. But Zhang’s opposition to entrepreneurs was at least consistent with his deep communist roots. A native of Liaoning in the north-east, he had been sent by the Party when he was young to study in his province’s near neighbour, and China’s fraternal Stalinist ally, North Korea. In 2002, Zhang was hailed as one of only two members of the engineer-heavy Politburo to have an economics degree. Few realized that he had earned his at the Kim Il Sung Comprehensive University in Pyongyang.

  Zhang understood in his bones the biggest threat posed by entrepreneurs: the creation of well-funded, self-contained private networks in society and business which no longer reported to the Party, or through it. Out of sight, they could become incubators for rival centres of power. The Party had long fretted about such a phenomenon, of ‘peaceful evolution’, the process through which the Party’s grip could be slowly eroded by groups not under its sway. In the words of the head of a US direct sales company in Beijing: ‘The Party doesn’t want any large organized group outside of its ambit which can operate at scale, whether it is religious, political or just a large group. They simply do not want the competition.’

  The controversy over the direct sales industry in China is the most florid example of this largely overlooked aspect of the growth of the private sector in a communist state. The operations of direct sales companies, like Amway and Avon, conjure up in the west images of Tupperware parties and tepid suburbia. The Party, which looks at everything through the prism of the preservation of its power, saw the growth of these industries in China very differently. The arrival of the Avon Lady on China’s doorstep was very much a political event.

  For Richard Holwill, a veteran Washington lobbyist, it was like no negotiation he had ever experienced. In the late nineties, Holwill was in Beijing, representing his main client, Amway, the US direct sales giant. Sitting across the table this time was a different negotiating partner from the ones he had been used to. It was the Public Security Bureau, the police, with a list of firm demands for his company. Holwill had been in Beijing many times in an effort to prise open the potentially lucrative market for direct sales, jostling with the Commerce Ministry and other Chinese agencies which handled foreign trade issues and business registration. The presence of the police across the table was a sign that the game had changed, not just for Amway and Avon, but all direct sales companies.

  Amway had built itself into a global enterprise with a simple business model, allowing people to become distributors for the company’s household goods and personal care products and the like with no initial investment. The top sales representatives make their money not just by selling Amway goods but by recruiting others to do the same. Local governments across the country, however, couldn’t distinguish the well-established firms from the many fly-by-night pyramid schemes which sprang up in China around the same time. The most notorious was a Taiwanese company selling ‘foot vibrators’ for about eight times their normal price, forcing anyone who bought one to recruit many new people to the operation to get their money back. Chinese governments at all levels had been besieged by angry investors who had lost money after being promised an easy fortune. Some people who had been cheated and lost their life savings committed suicide. Others rioted outside government offices. Beijing reacted as the bureaucracy often does when confronted by a new problem, by simply closing the industry down altogether. In April 1998, the State Council, China’s cabinet, issued a decree, read out on the evening news bulletin of the state broadcaster, ordering all direct sales operations to cease business immediately.

  It was clear to Holwill as soon as the police began peppering him with questions that they had more on their minds than rioting and fraud. Were any of the Amway sales team members of Falun Gong, they asked. Who screened the sales agents from Taiwan? ‘The policeman told me directly, to sack all Falun Gong adherents,’ Holwill said, arguing back that sacking them would not help, as it would only inflame the US Congress. ‘I told them if we found someone who was proselytizing and doing the wrong business on company time, then we would fire them. The policeman looked at me, and said: “Just be careful.”’ The sardonic opening line of a foreign newspaper report at the time captured nicely the paranoia of the authorities about the Amways and Avons of the world. It said: ‘Does “Ding, dong, Avon calling” carry a hidden, counter-revolutionary message?’ In the eyes of Chinese security, it most certainly did.

  In China, the Party tightly controls religion, mandating only five official faiths and demanding that all services be registered with the local branch of the religious affairs bureau. Non-government organizations and private charities have struggled to gain a foothold in China for similar reasons, because the government is reluctant to register them and provide them with a firm legal foundation on which they can operate. The Party’s management of religion, NGOs and the Avon lady is founded on the same principle, to prevent them developing into rival centres of power.

  As innocent and clean-cut as the industry seems in the west, direct sales in China rolled into one incendiary package in the business arena the ingredients that so worried the Party about religion and NGOs. Evangelical-style rallies attracted tens of thousands of people, who, as part of their recruiting drives, would rise to their feet to deliver inspirational speeches about what direct sales had done for them. Herbert Ho, who then worked for Amway, recalled hearing one man at a rally complain that he had been with the Party for thirty years and ‘got nothing. I have been with Amway for three years and I have already got enough money to buy a house and send my children to college. Amway is my new home.’ Ho added: ‘This was very uncomfortable for the officials to hear. There was also a whiff of religion for them. The Chinese government does not respond well to this.’ One foreign firm had recklessly held a sales gathering on 4 June, the hyper-sensitive anniversary of the 1989 massacre.

  Some direct sales executives conceded that the police, at least on their terms, had a point. Many Falun Gong members, who had been banned from meeting each other, began to join direct sales teams. One executive said: ‘When the compa
ny held large meetings, they [the Falun Gong] would hold small meetings. The government had been very effective in destroying their jobs and income, so that direct sales was a very obvious place for them to start work again.’ The Chinese government ministries handling foreign trade and labour issues backed the well-established direct sales companies, because they generated income and jobs. But these ministries were not powerful enough to stand up to state security and the police.

  The macabre intensity of the denunciations of the industry issued by the government and the Chinese media underlined the Party’s sensitivity. One relatively liberal newspaper in southern China labelled direct sales companies ‘independent kingdoms beyond national law and very much like a cult’. The national police body asserted that the companies wanted to control the ‘minds and bodies’ of participants. The word ‘cult’ had become a highly loaded political term by then, because of its association with the outlawed Falun Gong. In words that could easily have been applied to the Party itself, the State Council criticized direct sales because ‘its organization was closed to outsiders, its mode of transaction was secretive and its distributors had spread throughout the country’.