The heady rise of China's red oligarchs

When Sichuan Hanlong wanted to acquire Sundance Resources in Australia, the Foreign Investment Review Board was concerned about the character of its chairman Liu Han, a prominent Chinese businessman.

Alarm bells went off when a routine background check on Liu revealed that he was the target of an assassination attempt in 1997 by a rival businessman Yuan Baojing, according to John Garnaut of Fairfax. There were also Chinese media reports about his alleged insider trading and tax dodging activities.

The Australian Securities and Investment Commission also started taking an interest in the company when it detected irregular trading activities just before the announcement of market-moving takeover deals for Australian-listed companies.

Two Hanlong executives were later found guilty of insider trading and had their assets frozen in Australia. One of them had since fled to Hong Kong and applied for asylum there.

However Liu’s illegal activities in Australia seem like kindergarten plays compared to what he has been formally charged with in China -- organised crime.  Two senior detectives and one prosecutor from Sichuan have been charged for providing protection to Liu’s alleged criminal syndicate.

More tantalisingly, Chinese media reports also hint at Liu’s connection to the apex of the Chinese political pyramid, the standing committee of the politburo of the ruling Chinese Communist Party, which effectively rules the country.

Liu is allegedly a business partner of Zhou Bin, who is the son of the reportedly detained former Chinese security chief Zhou Yongkang, one of the most powerful men in China, according to Caijing Magazine, one of China’s leading business outlets.

Chinese police have seized an estimated fortune of US$ 14.5 billion from Zhou’s family, which included 37 billion yuan worth of deposits, shares valued at 51 billion yuan and more than 300 apartments and villas.

The businessman reportedly used this amassed fortune to build a vast web of corruption and influence from small counties to Beijing. He even outmanoeuvred local officials and state-owned enterprises in securing lucrative business contracts and natural resources.

Liu and his brand of crony capitalism is the underbelly of China’s economic miracle. The unholy alliance between the thriving business sector and corrupt officials from the ruling party is causing deep strife within Chinese society. Ordinary citizens are increasingly fed up with endemic corruption and widening social inequality.

The country’s Gini coefficient, a widely used measure of inequality, was at 0.473 in 2013, amongst some of the highest in the world, according to the National Bureau of Statistics. Many people believe the official figure significantly underestimates the growing problem of inequality in China.

At the same time, there is the rise of the red oligarchs in China. A growing rank of super-rich in China is joining their plutocratic cousins worldwide.  

Many of these new oligarchs are rent-seekers, who have prospered through privileged access to the two essential economic goods that the state controls: land and capital, according to Chrystia Freeland’s Plutocrats: the rise of the new global super rich.

Many of China’s richest tycoons are in the real estate industry. As the state controls the land, their businesses are closely intertwined with the government. State-controlled banks also make up about 90 per cent of all loans in China, so the party can always offer favourable financing deals to well-connected businessmen like Liu.

Despite all of this, China has fared well on The Economist’s crony capitalist index, ranking 19th out of 23 countries. The United States has more crony capitalists than China! The reason why China ranks so well is that much of the wealth is hidden.

Many powerful Chinese politicians have disguised their fortunes through offshore accounts and non-transparent property records that also help them to evade detection. Crony capitalism and economic rent-seeking can seriously inhibit economic growth; you need not look further than many Southeast Asian countries and Latin America where rent seeking and economic growth have soared in tandem.

However, as the economy slows down, Chinese citizens are more likely to be less tolerant and patient with the country’s endemic corruption problem. Even top Chinese leaders believe it is one issue that could destroy the party.