Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else

by Chrystia Freeland

  We don’t often equate the rise of China with the rise of the red oligarchs. That’s partly because, unlike most economies that are friendly to rent-seeking, China has been so phenomenally successful: rent-seeking and the sustained high growth that China has experienced don’t often go together. It is also because, in contrast with the countries of the former Warsaw Pact, which transferred the property of the communist state into private hands with a big-bang sell-off, China’s market reforms have been slower and its avenues for rent-seeking have been more varied and more opaque than a quick privatization drive led from the top.

  Finally, China’s billionaires are among the world’s most discreet. China’s rising bourgeoisie loves conspicuous consumption: gold is so popular you can buy it at ATMs, all the West’s great luxury brands are enjoying robust growth in China, and the market for the highest-end possessions—old wine and fine art in particular—is driven significantly by Chinese demand. In 2011, according to a study by the European Fine Art Foundation, China as a whole accounted for almost a third of the global art market revenue, outshopping the United States for the first time. But at the very, very top, China’s billionaires understand that notoriety is dangerous. The Russians invite British politicians to party on their yachts in the Mediterranean and buy sports teams in New York and London; the Indians vie to build the biggest mansion and to do the sexiest deal with a famous Western partner; the Latin Americans buy penthouses in Manhattan and stakes in U.S. media companies. While the Chinese state has been flexing its muscles in the Western political economy, Chinese billionaires, of whom there are ninety-five—the third-largest cohort in the world—are less visible. That is because they know that the Chinese regime—still, after all, a one-party communist state—is highly ambivalent about its plutocrats. Hence the party’s official policy of pursuing “harmonious growth” and Premier Wen Jiabao’s insistence, on the eve of the lianghui, that “we should not only make the cake of social wealth as big as possible, but also distribute the cake in a fair way and let everyone enjoy the fruits of reform and opening up.” “Four legs good, two legs better” is the politically dangerous contradiction at the heart of China today. One way to appease the restive four legs is to imprison the occasional Chinese plutocrat, which is why you probably can’t name a single one.

  But if you have the self-discipline to fly below the radar, China is a rent-seekers’ paradise. That is because over the past few decades the Middle Kingdom has offered three lucrative routes to rent-seeking, and many of its billionaires have taken advantage of all of them. The Chinese hate comparisons with Russia’s capitalist transition—when my book on Russia’s sale of the century was translated into Chinese, the first question Chinese journalists always asked me was “How were the Russian market reforms a failure compared to the Chinese approach?”—but many of their plutocrats have been the beneficiaries of a slower and more opaque version of the same transition from total state ownership to some private property. Tellingly, both the Chinese and the Russians refer to the murky first fortunes of their liberalization-era plutocrats as their “original sins.”

  Second, China has what you might call robber baron plutocrats: the rent-seeking billionaires who develop a network of government connections and use them to reap windfall fortunes at a moment of rapid economic growth—in China’s case, the shift from a poor, rural economy to an urban and industrial one. America doesn’t think too highly of its robber barons, but these, like the privatization plutocrats, are not the worst kind to have. Both use personal connections to unfairly benefit from a massive transition, and both capture value that a fair and effective state would have diverted to the common good. But both are also the beneficiaries, and very often the drivers, of an economic transition that transforms the economic prospects of the country as a whole. That’s why, over the past three decades, China’s average per capita income has risen from $200 to $5,400, and 50 percent of its people now live in cities, where the average income is over three times higher than in the countryside. The rent-seeking beneficiaries of these big shifts in the United States in the nineteenth century and in China over the past three decades were part of a change that had broadly shared benefits.

  Third, and most important, rent-seeking in China isn’t just the result of a fast and turbulent economic transformation—though that is, of course, taking place. Making money through government connections isn’t a temporary, one-off thing in the People’s Republic, or a “corrupt” instance of rule breaking. In a state-capitalist system like China’s, making money by being close to the state isn’t an exception to the rules or a violation of them—it is how the system really works.

  “What moves this structure is not a market economy and its laws of supply and demand, but a carefully balanced social mechanism built around the particular interests of the revolutionary families who constitute the political elite,” explain Carl Walter and Fraser Howie in their award-winning book on the Chinese economy, Red Capitalism. “China is a family-run business.

  “Failure to grasp the impact of unbridled Western-style capitalism on its elite families in a society and culture lacking in legal or ethical counterbalances is to miss the reality of today’s China. Greed is the driving force behind the protectionist walls of the state-owned economy inside the system and money is the language.”

  Unlike their Russian comrades, China’s red oligarchs didn’t get rich in a one-off privatization of the country’s natural resources. China hasn’t had a mass privatization moment, and it lacks Russia’s vast oil and metal wealth. Instead, China’s rent-seekers prospered through privileged access to the two essential economic goods the state does control: land and capital. A preponderance of China’s plutocrats, including Wu Yajun, the country’s wealthiest woman—and, of course, one of the delegates to the 2012 National People’s Congress—have made their fortunes in real estate. Because land use is still closely controlled by the state, that is a business which inevitably involves close ties with the government. And almost all businesses need credit. For all China’s success in nurturing private business, more than 90 percent of loans in the country are still made by state-controlled banks. To borrow, you need a favorable relationship with the state and its mandarins, something the bosses of state-owned enterprises, who are simultaneously business executives and senior government officials, have automatically. As Walter and Howie, who have worked in Chinese finance for decades, explain: “What would the chairman of China’s largest bank do if the chairman of PetroChina asked for a loan? He would say: ‘Thank you very much, how much, and for how long?’”

  The subtle hand of the Chinese government in appointing its rising class of plutocrats—according to Hurun, there were 271 billionaires in China in 2011, and the cutoff to make the list of the one thousand wealthiest Chinese was $310 million—is perhaps most apparent in the emergence of red dynasties, whose scions are known as the “princelings.” These are the sons and daughters of today’s Chinese leadership, and often the grandchildren of the leaders of the Maoist revolution. They form an important political faction in the Chinese Communist Party, and many of them are plutocrats. Li Peng was China’s premier from 1987 to 1998. Today, his family are utility tycoons. His daughter Li Xiaolin, who has been called “China’s Power Queen,” serves as chair and CEO of China Power International Development, and his son Li Xiaopeng managed Huaneng Power International, the country’s largest independent power generator, before entering politics in 2008. Zhu Yunlai, son of Zhu Rongji, another former premier, who was in office from 1998 until 2003, is a senior executive at CICC, the Chinese investment bank, which counts the illustrious private equity firms KKR and TPG among its shareholders. In rent-seeking societies, the plutocrats are appointed by the state. Who better to appoint than your own children?

  Another sign of the political nature of wealth in China is Beijing’s ability to defrock its oligarchs. That reversal of fortune is often dramatic—a strong predictor of China’s future jailbirds is its current rich list. In 2002, Zhou Zhengy
i, who made his fortune in Shanghai real estate, was identified as the eleventh richest man in China, with a fortune of $320 million; in 2003, he was imprisoned on corruption charges. In 2008, Huang Guangyu, the Beijing-based founder of the GOME retail chain, was named the second-richest, by Forbes. In 2010, he, too, was jailed for corruption. The list goes on. The point isn’t that China’s plutocrats are squeaky clean and are being unjustly imprisoned—like all businesspeople in a rent-seeking society they have their original sins. But where all property involves, if not theft, then at least some rule bending and palm greasing, everyone is vulnerable. As The Economist noted in 2003, Zhou’s dealings were far from exceptional: “If they wanted to, China’s authorities could probably find grounds for accusing most of the country’s richest people of bending (if not breaking) the rules. But China’s legal culture thrives on the principle of ‘killing the chicken to scare the monkeys.’ Mr. Zhou . . . was a conspicuous potential chicken.”

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  The dramatic denouement of the March 2012 NPC is that now the biggest monkey is directly in the state’s sights, too. Bo Xilai, the charismatic former chief of the thirty-four-million-strong Yangtze River megalopolis of Chongqing, was one of the leading elite critics of China’s rising inequality: on the eve of the NPC he told reporters in Beijing that the country’s Gini coefficient had exceeded 0.46 (it is 0.45 in the United States) and warned: “If only a few people are rich, then we’ll slide into capitalism. We’ve failed. If a new capitalist class is created then we’ll really have turned into a wrong road.” But at the same time, Bo was a princeling—his father was Bo Yibo, one of the Eight Immortals of the Communist Party—and the patriarch of a clan with wealth as well as political power. His son Bo Guagua reportedly drove up in a red Ferrari to pick up a daughter of then U.S. ambassador Jon Huntsman for a date. (Guagua denies driving the Ferrari; the Huntsman daughter says she can’t remember the make of the car.) Guagua was educated at Harrow, the British public school with an annual tuition of $50,000; Oxford, where he helped organize the Silk Road Ball; and Harvard. Bo’s wife, Gu Kailai, is a lawyer who ran a lucrative international law firm, Kailai, and an advisory firm called Horus Consultancy and Investment. Since Bo Xilai’s fall from grace, the family’s documented fortune is now pegged at $136 million and the figure seems to rise every day.

  In early March 2012, Bo was one of China’s rising leaders—he was seen as a strong candidate for membership in the Standing Committee of the Politburo, the nine-person body that rules China. Over the next five weeks, in the most dramatic political fight in the country since Tiananmen Square, Bo went from princeling to pariah, first losing his job and then facing investigation for “suspected serious violations of discipline.” Gu, his wife, has been charged with murder. The fall of Bo Xilai is partly a tale of red capitalism intrigue and skulduggery—the attack on the Bo clan began with the mysterious hotel death of a British national who worked with Gu and alleged efforts to block investigation of it. But it is also being read as a fight between the red oligarchs, personified by Bo, and the reformers, who are fighting for a more transparent and competitive system. As Stephen Roach, the former chairman of Morgan Stanley Asia who now teaches at Yale, told me, “The emphasis once again is shifting much more back to the reformers. . . . [Bo Xilai’s sacking is] very powerful evidence in favor of returning to this pro-reform, pro-private-enterprise, pro-market-based direction that China has been on for the last thirty-two years, barring a few pretty obvious bumps in the road from time to time.”

  Professor Roach is right. Bo Xilai was China’s most visible advocate of state capitalism, a system rife with opportunities for rent-seeking. His downfall has been part of a wider drive to make the Chinese economy more fair and open, most notably Premier Wen Jiabao’s striking attack on state banks, an important source of wealth for the red oligarchs. As Wen told an audience of business leaders in remarks broadcast on China National Radio, “Let me be frank. Our banks earn profit too easily. Why? Because a small number of large banks have a monopoly. . . . To break the monopoly, we must allow private capital to flow into the finance sector.”

  But as in the other emerging markets, and indeed in the West, too, understanding China’s great political struggle as a fight between venal red rent-seekers and virtuous market reformers doesn’t tell the entire story. Some of the most successful princelings are the children of some of China’s most effective market reformers, and even the entrepreneurs whose fortunes are largely based on creating real value needed a helping hand from the state to survive and thrive. To paraphrase Proudhon, in a country like China, where money and government are so intimately intertwined, all fortunes required a little rent-seeking.

  RENT-SEEKING ON WALL STREET AND IN THE CITY

  On January 22, 2007, Mike Bloomberg, the mayor of New York, and Chuck Schumer, the senior senator for the state, released a study they had commissioned from McKinsey, the world’s leading management consultants. The report, titled “Sustaining New York’s and the US’ Global Financial Services Leadership,” warned of impending financial crisis and offered detailed guidance on how to avert it.

  Less than seven months later, the greatest financial crisis since the Great Depression did indeed begin, when BNP Paribas, the French bank, froze withdrawals from three of its funds, a step we would see in hindsight as the opening shot in the economic Armageddon of 2008.

  But this is not the story of two Cassandras and their unheeded cry that Wall Street’s bubble was about to burst. Instead, the Bloomberg/Schumer report focused on a very different danger: the risk that London, or perhaps Hong Kong or Dubai, might soon eclipse New York as the world’s financial capital. Were that to happen, Schumer and Bloomberg warned in an op-ed published in the Wall Street Journal on November 1, 2006, foreshadowing the full report, “this would be devastating for both our city and nation.”

  To avert such disaster, Schumer and Bloomberg counseled urgent action. The first problem to fix was the overly harsh regulation of Wall Street. As they wrote in their op-ed, “While our regulatory bodies are often competing to be the toughest cop on the street, the British regulatory body seems to be more collaborative and solutions-oriented.” The full McKinsey report, made public two months later, elaborated on this danger: “When asked to compare New York and London on regulatory attractiveness and responsiveness, both CEOs and other senior executives viewed New York as having a worse regulatory environment than London by a statistically significant margin.”

  A specific risk posed by America’s overly strict financial regulators, McKinsey warned, was that their approach was driving the highly desirable derivatives business abroad. “Europe—and London in particular—is already ahead of the U.S. and New York in OTC [over the counter—which is to say difficult for regulators to monitor] derivatives, which drive broader trading flows and help foster the kind of continuous innovation that contributes heavily to financial services leadership,” the McKinsey report cautioned. “‘The U.S. is running the risk of being marginalized’ in derivatives, to quote one business leader, because of its business climate, not its location. The more amenable and collaborative regulatory environment in London in particular makes businesses more comfortable about creating new derivative products and structures there than in the U.S.”

  Moreover, the report sounded an alarm about the future. America’s overly zealous regulators were on the verge of another colossal mistake: they were planning to raise capital requirements for U.S. banks, a measure McKinsey warned was unnecessary and would weaken the country’s financial champions in the fierce global competition for business. “U.S. banking regulators have proposed changes that would result in U.S. banks holding higher capital levels than their non-U.S. peers, which could put them at a competitive disadvantage,” the study said. These tougher new requirements were unnecessary, in McKinsey’s view. Instead, the report advocated a more sophisticated approach that took into account the economic environment. “This application also ignores some of the changes in capital require
ments that occur as a result of economic cycles,” the report argued. “In a strong economic environment, for instance, capital requirements in a risk-based system should actually decline.”

  Read with the benefit of hindsight, the Bloomberg/Schumer/McKinsey report is a parody of hubris. The overall concern with overly harsh U.S. regulators, a year before regulatory laxity permitted the worst financial crisis in three generations, is clearly absurd. The specific fears are even more specious. Alarm about a U.S. regulatory environment that was unduly restrictive of derivatives—those were the very financial instruments at the heart of the crisis. Worry that new capital requirements would be unnecessarily onerous—when it turns out that higher capital requirements were precisely what the banking system needed. Had Michael Moore set out to write a satire about the shortsighted greed of U.S. financial and political elites, he could not have invented better examples.

  The arguments in the report are so wrong that it is easy to mock McKinsey, the author, and Bloomberg and Schumer, the sponsors. But what is really striking is how bipartisan and transatlantic the consensus within the Anglo-American financial and political elite was on the ideas in the study. Bloomberg is an independent; Schumer is a Democrat. Eliot Spitzer, the erstwhile sheriff of Wall Street as New York’s attorney general and then governor of New York State, joined Bloomberg and Schumer at the press conference announcing their report and broadly supported its conclusions. Two days before Bloomberg and Schumer took to the op-ed pages of the Wall Street Journal to raise the curtain on their report, another bipartisan pair, Glenn Hubbard, the dean of Columbia Business School, former Bush adviser, and future Mitt Romney adviser, and John Thornton, the active Democratic donor and former president of Goldman Sachs, announced that they, too, had organized a study on costly regulation and whether it was causing the U.S. capital markets to lose ground to foreign rivals.