China in Transition
China's Rich under Fire - Should their original sin be pardoned?
Chi Hung KWAN
Consulting Fellow, RIETI
In recent months, several very rich people who have graced millionaire lists in China have been arrested in connection with scandals related to tax evasion and illicit deals. The case of Yang Bin, who was tapped to be the first head of North Korea's Sinuiju special economic zone, is well known overseas. These arrests have triggered public criticism of the wealthy. This criticism does not simply stop at the fact that the rich are hiding their property, and failing to fulfill their obligations as citizens through the evasion of taxes, it goes back to the "original sin" of having amassed their fortunes, not through their own efforts and abilities, but through some abuse of authority, status, or conspiring with those in power. However, the illegal acts of the rich should not simply be interpreted as an issue of individual morals, but viewed as a problem brought about by imperfections in the system.
During the days when China was a planned economy, capitalists were the target of oppression, and did not exist either as a class or even as individuals. However, this situation completely changed with the economic reforms that began in the late 1970s. Following the tremendous rise in private businesses since then, privatization of state-owned enterprises and land has also gathered steam since the latter half of the 1990s. It has been through this process that many managers of state-owned enterprises, and senior government and Communist Party officials have become incredibly wealthy. The target of public criticism regarding the original sins of the wealthy is more the party and government officials who found the seeds of their business in state-owned assets, rather than the private entrepreneurs who founded their own businesses.
Essentially, senior officials at state-owned enterprises were just entrusted with management by the government on behalf of all citizens, but because the systems and laws to oversee them were insufficient, they were allowed to abuse their positions. The methods by which they turned state assets into their own were so clever that in most cases they took the form of legal transactions. For example, during the privatization process senior party officials and managers allowed themselves to purchase stock in the companies under their control at very low prices. Land that was state- or collectively-owned became the private property of some privileged few due to similarly opaque maneuvering. Even though such actions might not have infringed on the inadequate laws prevailing at that time, it is clear that they run counter to social justice. What is at issue here is fairness, rather than legality.
In comparison, the "original sin" of the entrepreneurs who started their own businesses is not as big, and there is room for leniency. When economic reforms were just taking off and political pressure toward private businesses was still strong, many companies put on the "red hats" of state-owned or collectively-owned firms. This was necessary if they were to be able to receive favorable treatment from authorities on such occasions as acquiring permits or loans. However, as these firms became bigger, there were many clashes between their de facto founders and the local government authorities that had became their nominal owners. In many cases, the authorities, backed by public power, unfairly encroached on the founders' property and confiscated it. As this shows, even now on the eve of the 25th year since the shift to market-opening policies began, private property is not sufficiently protected in China. In such an unfavorable environment, entrepreneurs have no choice but to resort to illegal means as a way of self-defense.
While public sentiment is increasingly calling for severe punishment for the illegal acts of the rich, including the original sins they committed when initially amassing their wealth, authorities are taking a cautious stance out of concerns that such moves may destabilize political and economic order in the country. Should many wealthy people take their assets and flee overseas out of fear of being penalized, it would have a major impact on the domestic economy. At the same time, if such investigations were to target top Communist Party officials, the move could affect the stability of the government.
If it is impossible to hold people responsible for the incidents of the past, then the authorities should at least make efforts to prevent a recurrence by furthering reforms toward a market-oriented economy. Specifically, this not only means strictly penalizing illegal actions through more stringent laws, but also creating fair tax and social security systems. Meanwhile, the government must also strengthen its protection of private property, so that entrepreneurs can focus on their business with a feeling of security.
May 16, 2003
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