After Hong Kong billionaire Li Ka-shing, Asia’s richest man, recently moved his investments out of China, state media accused him of being unethical and ungrateful, fleeing China when the economy was slowing despite having profited handsomely in better times. He Qinglian, a noted economist, explores the tensions between power and capital in today’s China.
Li Ka-shing’s “escape” has sparked heated discussions in China. This debate should be understood as a war between power and capital; it reveals the tripartite dilemma of investing in today’s China.
The first dilemma: Hong Kong investment has always been regarded as “internal” capital with a foreign name.
From the time when Deng Xiaoping started the reform and opening policy, up until the 1990s, Hong Kong investment was the most important component of all foreign investment, followed by Taiwan. Hong Kong’s location and its special economic role were part of the political considerations that prompted the Chinese Communist Party (CCP) to treat Hong Kong as “foreign” investment.
Before that, when the CCP was facing a comprehensive blockade from the West, Hong Kong was China’s “international channel,” the channel of foreign capital and technology, as well as its import and export trade base.
China started reform and opening up in 1979. Hong Kong businessmen were not only the main body of investment, but also pathfinders and bridges to help China open up. At that time, Hong Kong accounted for 70 percent of foreign investment, followed by Taiwan and Japan.
After China joined the World Trade Organization in 2001, Hong Kong gradually lost its status as China’s trade entrepôt. Its offshore financial business slowly weakened. Hong Kong became a base for Party officials to move their capital for further deployment abroad, their “money laundering garden.”
Between 1978 and 2001, out of political considerations, the CCP categorized Hong Kong investment as “foreign” capital as Hong Kong was yet to return to China, or had just been returned. After 2001, it was still in the CCP’s interest to treat Hong Kong investment as foreign capital in the economy. To interest groups, Hong Kong is an important channel for money laundering. Even now, top Hong Kong businessmen and Chinese investment in Hong Kong are closely tied to the Communist Party.
Money Is Allowed in, but Not Out
Second dilemma: There are limits to capital flows. Investment capital has been allowed to come in, but not allowed to leave.
The CCP forcibly interfered in China’s stock market decline this year. In the end it arrested people on accusations of “draining China.” This was generally regarded as inappropriate government intervention in the financial market and malicious restrictions on the free flow of capital.
International capital flows refers to capital transfers between countries or regions, including investments, loans, aid, buyer credit, seller credit, foreign exchange trading, securities issuance and circulation, and so on. International cross-border capital flows can be divided into inflows and outflows. When China entered the WTO, key members of the WTO, such as the United States and European countries, requested that China open up its financial market and allow foreign capital in.
Among the WTO member countries, there is none that welcomes foreign investment while at the same time limiting capital outflows. The CCP’s regulation on capital flows has established a precedent. The WTO does not have countermeasures on this policy. This has caused one more layer of concern for international capital. What can they do if one day China restricts capital outflow? They therefore want China to implement full capital mobility rules: to not only welcome free capital to come in, but also to allow capital to leave.
The ‘Original Sin’ of Being Rich
The third dilemma: the personal safety of private investment capital owners in China is at risk.
Private capital in China has always been considered an “original sin.” There is an understanding in China that the majority of private enterprises rely on political power for backing. They grow bigger and stronger by conducting business in the “gray area” created through connections with officials. Their wealth is not clean.
The government assumes that private sector “kings” make use of gaps granted them by the government, such as tax evasion and fraudulent bookkeeping. There are lots of gaps. Usually the government is not short of money.
When private companies have good relationships with officials, these gaps do not pose an issue. But when the government is short of money, or the officials whom private companies rely on are jailed for corruption or retire, capitalists are no longer safe.
In 2014, “Guidelines to Deepen Reform of State-Owned Enterprises” was published, to mobilize private equity. Many private entrepreneurs worry that the hand of the CCP is reaching for them. They have started to leave.
They have engaged in a large number of overseas investments. This caused a sharp reduction in foreign exchange reserves in recent months. Beijing painfully felt the shrinking of its foreign exchange reserves—about $600 billion in outflows, according to a Sept. 28 article by The Economist—and has hence increased control of foreign exchange. Dozens of security brokers were arrested for “draining China.” The relationship between money and power has reached a state of hypertension.
The Dilemma Trifecta
Li Ka-shing finds himself in all three dilemmas.
Why is Li Ka-shing being ostracized as an investment escapee? It is because of the nature of his investment capital.
Of all Hong Kong businessmen, Li Ka-shing is the most successful and has the closest ties to Beijing. He has met Party leaders on numerous occasions—Deng Xiaoping twice, in 1978 and 1990. This meant that his access in China was unimpeded, and his privileges surpassed any “princeling” (son or daughter of a top Party leader).
The article that attacked Li for leaving China said: “Given the nature of Li’s profiteering in China over the past 20 years, it is not as simple as just doing business. … Real estate wealth does not come entirely from the market economy. He might not be able to leave as he wishes.”
Li Ka-shing’s capital was actually “internal” capital with a “foreign name.” It was provided by the Communist Party, with particular policies and special privileges. Therefore, Li’s money should “go down with the regime.” However, with China’s economic difficulties bursting open, Li took the money and left. This has greatly disappointed the regime.
What the Chinese media dare not say is that Li Ka-shing’s divestment signals the beginning of the collapse. Li Ka-shing is not the only Hong Kong investor leaving China. Sixty-five percent of all “foreign” investment is Chinese capital in Hong Kong. This investment capital has increased in a fashion similar to Li Ka-shing’s, with help from those in power.
Li Ka-shing’s “escape” triggered a flood of responses that demonstrate the increasingly tense relationship between investment capital and political power and signals the end of China’s economic golden age.
This is an abridged translation of He Qinglian’s article published on Voice of America Chinese. He Qinglian is a prominent Chinese author and economist. Currently based in the United States, she authored “China’s Pitfalls,” which concerns corruption in China’s economic reform of the 1990s, and “The Fog of Censorship: Media Control in China,” which addresses the manipulation and restriction of the press. She regularly writes on contemporary Chinese social and economic issues.