China’s industrial structure took shape in the 1950s, based on a large-scale aid program from the Soviet Union. The Soviet model was characterized by a system of State Owned Enterprises (SOEs) in key sectors. Inefficient and still pervasive today, SOEs have been the founding components of the Chinese economy.
In a one-party system, the Communist Party must control the nation’s economic lifelines, and that includes the SOEs. The management of these enterprises freely administer the state’s assets, while taking no responsibilities for their losses. The senior executives only need please their superiors who appointed them.
In December 1978, when reformers led by Deng Xiaoping launched the “Reform and Opening Up” program (改革开放), the state made some efforts to reform the SOEs. For example, it expanded the autonomy of SOE business operations, such as making production plans. It abandoned the practice of requiring the SOEs to disperse all their profits and instead began to collect income taxes. The objective was to incentivize the SOEs by allowing the retention of a certain portion of the profits. It also started to implement an accountability system that made the executives responsible for SOE profitability.
However, these measures were not successfully implemented. Toward the end of the 1980s, China’s SOEs were facing a grim reality: one third of them were profitable, one third were losing money, and one third were in de facto loss, meaning the profits on the books were lower than expenditures. By the start of 1994, 48.6 percent of the nation’s SOEs were in the red, and in some provinces, the proportion was as high as 60 percent. Two years later, 1996 was the first year that the SOEs as a whole registered a total loss of 37.8 billion yuan (U.S. $4.6 billion).
A new campaign to “restructure” the SOEs was mounted.
In September 1995, an official paper from the fifth session of the Communist Party’s 14th National Congress claimed to “carry out strategic restructuring of SOEs by reshuffling the asset stocks, with an aim to improve the entire state economy.… Invigorate large enterprises while relaxing control over small ones. Optimize the structure of state-owned assets and SOEs’ corporate structure, while optimizing the investment structures. Support the good ones and weed out the mediocre ones. Make use of restructuring methods: mergers, bankruptcy, downsizing, and efficiency enhancement mechanisms; and prevent the loss of state assets.… Through restructuring, merger, joint-stock cooperative, leasing, contractual operation, selling, and other means, accelerate the pace of reform and restructuring of small-sized SOEs.”
Thus, officials were provided the perfect subterfuge to gobble up the state assets under the banner of “restructuring the SOEs.” Amid the process, the communist cadres used various types of chicanery to “optimize” the structure of state-owned assets or conduct “strategic restructuring” of the SOEs. Using the modern terms of “redefine,” “transfer,” “reorganize,” and “redeem,” they had found the pathway to making themselves very rich.
Let’s use the case of the city of Changsha in Hunan Province to show how the subterfuge played out.
In November 1999 and January 2000, the city government issued two documents (no. 29 and no. 3 documents) to accelerate the SOE reform. Between April and May of 2000, the city’s three leading companies, which we will call company X (Hunan Xiangjiang Paint Group Co., Ltd.), company T (Changsha Tongda Co., Ltd.), and company H (Hunan Friendship & Apollo Co., Ltd.), sped through the process. Note that it was not necessary for these three companies to be “reformed,” as they were quite profitable industry leaders and did not belong in the group of underperforming SOEs.
A critical aspect is the “redefinition” of property rights, or the ownership of the assets. The financial statements at the end of 1999 showed that each of three companies’ total assets went well above 100 million yuan (U.S. $12 million). However, the no. 3 document provided that the company’s net assets by the end of 1983, plus the newly formed assets from funds earmarked by the state since Jan. 1, 1984, were defined as state assets, while all the properties accumulated by the company’s profits (after taxes) and other assets after Jan. 1, 1984 were redefined as the company’s private property. After this “redefinition,” state capital of company X as a share of the total assets, for example, immediately fell from 100 percent to 20.5 percent. Company X’s new total capital was about 70 million yuan (U.S. $8.5 million), among which the state capital took up only 15 million yuan (U.S. $1.8 million). Moreover, the policy allowed a 50 percent discount for a one-time buyout of the state assets. After Company X spent 5 million yuan (U.S. $0.6 million) to buy out the 10 million yuan (U.S. $1.2 million) state capital, only 5 million yuan (U.S. $0.6 million) of state capital was left, or 6 percent of the total shares. Among the rest of the shares, 14 percent went to other social organizations, also known as legal persons, and 80 percent went to individual employees. This “redefinition” ended up shrinking the size of state assets from above 100 million yuan to only 5 million, that is, more than a 95 percent reduction.
The next step was to assign the individual employees’ shares to individuals. The official policy again kicked in. Both no. 29 and no. 3 documents made provisions so that the composition of the shares should tilt toward the management and executives, enabling them to hold large numbers of the shares; policy also opposed equality of shares held by the employees. The policy encouraged the representatives of the legal person of the enterprise (usually top executives) to buy out the shares. They can pay back within three to five years (i.e., with future dividends). Or use bank short-term loans to pay for the shares. As a result, the leadership personnel of the three companies all got relatively big chunks of the shares. For example, general manager Wu of company X received one million shares (1 share is priced at 1 yuan a share). And then by a 1 to 1.88 stock split ratio, Wu got 2.88 million shares in total, much more than the average employee.
There were several problems with this “reform” process.
First, the massive undervaluation of state or public assets was even more extreme than in Russia and Eastern Europe during their period of privatization. During the very controversial Russian privatization in the 1990s, one option required that management and workers be allowed to buy no more than 51 percent of their enterprise at discounted prices. In Czechoslovakia, a more equitable method of voucher privatization was adopted, whereby citizens were given or could inexpensively buy a book of vouchers that represented potential shares in any state-owned company. In the case of company X in Changsha, 80 percent of the state assets were conveniently “redefined,” as collectively owned by the management and employees, and even lacked any provision to pay something for the assets.
Second, the management acquired the lion’s share of the company. Before the “reform,” senior management was appointed by the superior bureaucracy, and the appointments were usually unrelated to their performance. On the contrary, it was usually because they did a poor job in running the company that reform was needed. When a manager received one hundred times more shares than an ordinary employee, usually without having to purchase anything or at an artificially low price, the huge issue of fairness emerged. In addition, the policies established the wrong incentive mechanism: rewarding windfalls for bad performances. Today’s China is known for many people awash with money shopping around the world. Actually, perhaps this was how they got their first fortune.
Third, and most important of all, through the “redefinition” and giving away large numbers of shares to the management, what amounted to fraud was made legitimate and promoted by government policy. In the case of Changsha, we see clearly that it was the city government’s official documents that laid out the detailed instructions for legal appropriation of assets. Since 1995, such practices swept across the nation, as management and local officials seized on opportunities to make huge personal gains. As it was Jiang’s policy that legitimized the theft of state assets on a massive scale, the damage was much more serious and widespread than other means of corruption, which normally would lack the official sponsorship of the state.
Fourth, bringing about the right conditions for a market economy could not occur afterwards. Privatization is usually part of economic reform process that transitions into a market economy, so that the resources that fall into private hands can be put to the best use under market mechanisms. However, after the “reform” of SOEs in China, even till today, the Chinese economy is still largely a command economy by the government. Although the state enterprises are as small as one-third of the national economy, they dominate all the key industries: banking, transportation, manufacturing, and telecommunication. Private enterprises cannot borrow in the same way, if at all, what is available to the state giants. Entrepreneurship and individual creativity are severally disadvantaged in many areas, compared to the SOEs.
Cheng Sanchang, former mayor and party chief of the city of Luohe in Henan Province, got himself a nickname of Cheng “Soldout” (程卖光) for selling 27 SOEs between 1996 and 1999. However, the selling processes were all black box operations, meaning that they weren’t disclosed to the public. In one example, he sold a three-star hotel that was worth 47 million yuan (U.S. $5.7 million) to another private company for 20 million yuan (U.S. $2.4 million). In another case, when one SOE was bankrupt, the city government wanted to sell the land that it controlled by putting it up for an open bid. While a company offering a 30-million-yuan (U.S. $3.6 million) bid did not win, another bid at 20.5 million (U.S. $2.5 million) was successful. Cheng profited immensely from these SOE sales. In 2001, he absconded abroad carrying large sums of money.
At the same time, the SOEs Cheng sold did not end well. Three SOEs—a pharmaceutical company, a knitting mill, and a shoe factory—were sold to Hong Kong investor Xiao Wande under the stipulation that Xiao retires the debts of the companies within a few years. After Xiao took over, he not only did not pay off the debts, but also sold the machinery and equipment and transferred the revenues to his personal accounts. Xiao was later arrested for letter of credit fraud. Many of the former employees were laid off and living on public assistance.
Another company example of abuse of the reforms set in motion during Jiang’s rule is the San Jiu Auto Group. In 2006, when it came under reform, it was sold to Beijing Hengyuan Investment Co. for 8.28 million yuan (U.S. $1.0 million). Wang Guanchao, the CEO of Beijing Sanjiu Automotive Industrial Co., had already purchased Beijing Hengyuan for only 30,000 yuan (U.S. $3,764). It was all an artifice as Wang did not conduct business with this company. With this kind of legerdemain, Wang successfully sold a SOE to himself.
Earlier on, between 2003 and 2006, Wang deposited 7.03 million yuan (U.S. $0.9 million) of sales revenue into the company’s off-book account. Over the years, Wang took home 4.82 million yuan (U.S. $0.6 million). When Beijing Sanjiu Automotive Industrial Co was to be sold in 2006, these funds that Wang had siphoned off were concealed and not reported for audit. He wrote in a notebook: “Set up a few companies, and play with them using public funds. If I make money, the profit goes to me; if I lose money, let the state bear it. Everyone is doing this.”
In December 2011, Wang Guanchao received a death sentence with a two-year reprieve for the embezzlement of 30 million yuan (U.S. $461.5 million)—“more than 26 million yuan in State assets, and misappropriating 4 million yuan for his personal business.”
At the party’s 80th anniversary celebration on July 1, 2001, Jiang Zemin declared that the party should formally accept private business owners. Later that year, the party’s constitution was modified to allow businessmen to join the party. Jiang’s announcement at the height of privatization of SOEs encouraged party members to become private business owners, while showing approval for those who had gone into business. Actually, heads of SOEs and private business owners have been a major part of the richest people in China. According to a report published in 2001, one-third of China’s wealthiest people were heads of SOEs or private business owners.
A study conducted by the Chinese Academy of Social Sciences, the “Research Report of Contemporary China’s Social Classes,” concluded that the proportion of Communist Party members among private business owners was as high as 19.8 percent in 2000, much higher than that among workers and peasants, the traditional base of the party. In 2001, Huangshi City of Hubei Province did an investigation of 355 private business owners of businesses with fixed assets of 500,000 yuan and above, annual revenue of more than 5 million yuan (U.S. $627,353), and more than 25 employees. There were 193 CCP members, or 54.4 percent. Another statistic of three cities in Jiangsu Province showed that the proportion of Communist Party members among the private well-to-do business owners was as high as 42 percent. Quite often, the larger the size of the enterprise, the higher the proportion of business owners who were also Communist Party members. Except for the government and military, private business owners have become the social class with the highest proportion of Communist Party members. Allowing private business owners into the party was not a magnanimous gesture on the part of Jiang, but rather a legal means to facilitate the collusion between political and economic elites.
By a conservative estimate, in the 1990s, the annual loss of state assets averaged 50 billion yuan, or 130 million yuan (U.S. $16.2 million) per day. In the 1994 nationwide capital verification of 124,000 SOEs, the asset loss of 223.1 billion yuan plus an outstanding account of 220.7 billion yuan ended up a total loss of 443.8 billion yuan (U.S. $55.7 billion), or 10.7 percent of the total assets of the 124,000 SOEs. Although it Is hard to obtain an accurate amount of the total loss of state assets, several statistics are quite telling. In 1995, the State-owned Assets Administration (the predecessor of the later State-owned Assets Supervision and Administration Commission (SASAC)), the agency overseeing the state enterprises, received 160 reports of, and investigated 22 cases of, state asset loss. In March of 1996, eight cases were closed with a restoration of 1.5 billion yuan loss of assets. In 1996, over 300 other cases were probed, recovering 2.1 billion yuan (US $263 million). Since the mid-1990s, more and more SOE corruption and bribery suspects fled to foreign countries. In the year 2001 alone, China arrested 3,046 criminal suspects, and recovered 680 million yuan (U.S. $85.3 million).
China’s stock market is still dominated by state-owned enterprises. By the end of 2008, there were 1,540 non-financial corporations listed on Shanghai and Shenzhen stock exchanges, 604 or 39 percent of which were private companies, and 936 or 61 percent were state enterprises. At first glance, it appears that Chinese capital market gave the private entrepreneurs a fair share. Nearly two-fifths of the listed companies were privately owned. However, the number of companies does not tell the whole story. If we look at the eight years between 2000 and 2008, the revenue brought in by private companies listed on the China stock market was only 10 percent of the total earnings of the listed companies. The state still controlled the lion’s share of the capital market.
There is a good explanation for why the state is very involved with the stock exchanges.
In September 1997, the Chinese Communist Party made it a priority to rescue the state-owned enterprises, many of which were almost bankrupt. The avowed goal was to help large and middle-sized state enterprises, operating at a loss, turn themselves around within three years. It was hoped that via reform and restructuring, these state entities would transition into modern efficient enterprises by the end of 2000.
At that time, the foremost task for Chinese stock exchanges was to provide a source of cash for state enterprises. Many ill-performing companies were packaged and listed on Shanghai or Shenzhen stock exchanges. As the amount of bad loans of those companies was too high for the state banks to cover, using stock markets to dupe ordinary stock investors became an alternative source of cash to pay down the state enterprise debts.
Guided by government policy, the state enterprises made the Chinese stock market perform like an ATM machine. The state regulators often controlled the number of the initial public offerings (IPO) of the state companies and created a shortage of stocks, so that the newly listed companies could issue stocks at a high premium. During that period, the stock market had become a finance channel for the state enterprises. The interests of millions of small investors were ignored and unprotected.
In addition, the stock market was also a money-laundering machine for the senior executives of SOEs to turn their stock holdings into cash. Due to China’s SOE “reform” policies, large numbers of the companies’ shares ended up owned by the management. These people had been holding the stock shares going back to the 1990s.
In recent years, especially after the new leadership took office in 2012 with Xi Jinping at the helm, many high level executives of state-owned enterprises were sacked amid the corruption campaigns. Fearing that their holdings of a massive amount of stock shares would be treated as corrupt looting, many of them sold their shares on the stock market. By October 2014, many Chinese executives of listed companies had shed a substantial number of stock holdings, cashing in 47.4 billion yuan (U.S. $7.1 billion). Just in the first half of 2015, the SOE executives cashed in 500 billion yuan (U.S. $74.7 billion) from stock selling—a historic record.
At a seminar in May 2012, Guo Shuqing, chair of China’s Securities Regulatory Commission (CSRC)—the state agency overseeing the Chinese stock market, expressed his wish for Chinese security firms. “The industry ought to toughen self-discipline, taking the most stringent measures to build up integrity, sense of accountability, and the rule of law.” Guo reminded the securities firms that “gone are the days when you fooled and swindled the investors.”
Guo’s words revealed a secret: the Chinese stock market had been “fooling and swindling the investors.”
According to the CSRC’s public release, between January and December of 2015, the Commission received a total of 723 leads on illegal practices, filed 345 new cases and 139 new foreign-related cases, and closed processing of 334 cases. Orders from CSRS restricted foreign travel of 288 suspected parties, and froze a record high amount of funds of 3.75 billion yuan (U.S. $0.56 billion). The agency also transferred 55 cases to the judicial system and delegated 273 cases for penalty proceedings. Year 2015 also saw decisions of administrative punishment of 767 institutions and individuals, an increase of over 100 percent from year 2014. The amount of fines tallied up to 5.4 billion yuan (U.S. $0.81 billion), more than the sum of total fines in the past decade.
By the end of 2015, there were about 2,800 companies listed on Chinese stock markets.
Chinese CEOs and insiders have used a variety of ways to dupe investors. These practices include:
- Underreporting bank loan balances
- Creating non-existent or fictitious shell companies with no verifiable revenue to appear as customers
- Creating fictitious shell companies with no verifiable revenue to appear as suppliers
- Underreporting insider transactions and money transfers
- Using insider trading that is never disclosed
- Indulging in pump and dump schemes
- Stealing company’s assets by transferring to insiders leaving the shareholders with an empty shell company owning no assets
- Forging employee numbers
- Making fictitious buyout offers
- Using the company’s cash to secure the debt of companies privately owned by insiders
- Posting fake cash and fake revenue in financial statements
- Collaborating with local bank officials in China to inflate profit margins
“Pump and dump is a scheme that attempts to boost the price of a stock through recommendations based on false, misleading, or greatly exaggerated statements,” states Investopedia. As a result, after inducing the share price to rise, it is sold for a profit.
One standout example that exemplifies many of the malpractices listed above is Nanjing Textile Imp/Exp Corp., Ltd. (Nantex), a state-owned trading company of textile products.
In April 2014, CSRC issued a notice of administrative punishment of Nantex, with recognition that Nantex faked profits for five consecutive years from 2006 to 2010, with inflated profits of over 300 million yuan (U.S. $44.9 million). What made the Nantex case stand out is the fact that the actual controller of Nantex is the State-owned Assets Supervision and Administration Commission (SASAC) of Nanjing, which as stated earlier, is the government agency overseeing and managing state-owned enterprises.
Nantex’s accounting fraud involved fictitious transactions, underreporting operation costs, and underreporting bad debt reserves. It was also deceptive on its export rebates and deferred tax assets.
According to CSRC’s investigation, in each of the five years between 2006 and 2010, Nantex forged fictitious profits of 31 million yuan (U.S. $4.6 million), 42.2 million yuan (U.S. $6.3 million), 152 million yuan (U.S. $22.8 million), 60.5 million yuan (U.S. $9.1 million), and 58.6 million yuan (U.S. $8.8 million) respectively. In 2010, the inflated profit was 5,590 percent of its actual profit. At the end of 2010, due to underreporting of operation costs, Nantex overstated its profit as 42.9 million yuan (U.S. $6.4 million). Nantex also underreported bad debt reserves and exaggerated profits of 24.4 million yuan (U.S. $3.7 million). In its 2011 annual report, Nantex claimed the amount of tax rebates of 11 million yuan (U.S. $1.7 million) that did not meet the conditions of export tax rebate.
China’s stock market fraud has a long history, dating all the way back to 1990, when the Shanghai Stock Exchange and Shenzhen Stock Exchange first opened. Right from the outset they served the purpose for listed companies that needed capital. In order for the stock issuers to successfully raise money, the approving authorities are commonly acquiescent toward the malpractices and shortcomings of the listed companies. Their negligence is even evident in the applicable laws. For example, article 189 of China’s Securities Law states:
“Where an issuer fails to meet the requirements of issuance and has its issuance approved by any fraudulent means, if the securities haven’t been issued, the issuer is subject to a fine between 300,000 yuan and 600,000 yuan; if the securities have been issued, the issuer is subject to a fine between 1 percent and 5 percent of the illegally raised proceeds. The person-in-charge and other personnel directly responsible are subject to a fine between 30,000 yuan and 300,000 yuan.”
The penalty for stock fraud is only a fine up to 5 percent of the money raised, which is even less than the interest rates of some banks. The low cost of violation induces, instead of preventing, illegal practices. In the case of Nantex, which faked an inflated profit of over 300 million yuan (U.S. $44.9 million), the company was levied a fine of only 500,000 yuan (U.S. $74,900). Executives and involved personnel were each fined between 30,000 yuan (U.S. $4,500) and 300,000 yuan (U.S. $45,000). Nantex still went on as a listed company and continued to raise money from the public.
In comparison with the U.S. regarding the penalties for fraudulent financial activity in public companies, the Sarbanes-Oxley Act, passed in 2002, sets forth in Sarbanes-Oxley Section 906, that if management engages in fraudulent statements regarding the company’s finances, they can be fined up to $5 million and imprisoned up to 20 years. Congress passed this law in response to major corporate misleading financial disclosures, such as the Enron and WorldCom scandals. Soon after, many countries passed similar laws, including Canada, Germany, South Africa, Japan, France, Italy, Israel, Australia, India, and Turkey, according to the Wikipedia.
Hopefully, some day in the near future, China will have its own version of a Sarbanes-Oxley Act that will ensure truthful financial statements to potential investors. It will also have some entity comparable to the U.S. Securities and Exchange Commission (SEC), which proposes, regulates, and enforces securities rules that protect investors. Meanwhile, the reputation of Chinese companies in the overseas stock markets is that they are notorious as scammers.
In January 2013, ABC News’ “Nightline” program reported cases of scams of Chinese companies listed in U.S. stock exchanges. The ABC News investigation found that “more than 100 China-based companies have now been delisted, have left the NASDAQ and New York stock exchanges, have been denied listing, or have withdrawn applications, all following allegations of fraud or accounting irregularities.” “… But experts estimate that Americans—everyone from small investors to hedge-fund titans—have lost tens of billions of dollars in the suspect Chinese investments.”
“The Chinese government snubbed a U.S. request for help in cracking down on a string of alleged investment frauds that have cost Americans billions, outgoing Securities and Exchange Commission Chairman Mary Schapiro told ABC News.”
All the players in China’s stock markets, except the investors, take full advantage of their positions, as the rules and enforcement are quite feeble. The issuers offer the stock at a high price. The underwriters, who are rewarded by the price difference between the price they pay the issuer and what they collect from investors, also usually overprice the stocks. Quite often, underwriters directly act as the shareholder of the issuer. It is the public investors whose interests remain unprotected, especially in investments with low or no dividend payments.
Between 2008 and 2010, only about half of the listed companies paid a cash dividend, according to CSRC. More than 100 companies had not paid any dividend between 2008 and 2011. Among the 2,366 Shanghai and Shenzhen listed companies based on the 2011 annual report, 616 companies that were profitable and had undistributed profits chose not to pay dividends to shareholders. 170 listed companies did not pay dividends for 10 consecutive years.
Some companies did pay dividends, but the amount hardly compensates the investor in the Chinese stock markets. For example, in 2009, state giant PetroChina paid a pre-tax dividend of 15 Chinese cents (US 2.25 cents) per its stock share, whose price was 16.7 yuan (U.S. $2.51) at the time. The calculated rate of return of 0.898 percent was even lower than the bank interest rate.
According to statistics from Wind, a China-based financial data provider, from 1990 to 2010, Chinese A-shares—shares in mainland China-based companies that trade on Chinese stock exchanges, such as the Shanghai Stock Exchange and the Shenzhen Stock Exchange—raised over 4.3 trillion yuan (U.S. $625 billion). The amount of dividends paid during the period was 1.8 trillion yuan (U.S. $270 billion). As the ordinary investors held less than 30 percent of the total shares, the dividends paid to them was 540 billion yuan (U.S. $81 billion). In another words, the Chinese public investors put 4.3 trillion yuan of money into stock shares, but received a dividend of only 0.54 trillion (or 540 billion) yuan over the course of 21 years. The rate of return was only 13 percent over 21 years or an APR of 0.6 percent. This is far below the compound interest rate of depositing money in an ordinary bank.
Considering the fact that investors had to pay for stamp duty, transaction commissions, and other expenses, the cumulative returns from 21 years of investment look worse. As CSRC shows, the total transaction commissions for A-shares for that period of time was over 400 billion yuan (U.S. $60 billion), plus a stamp duty of over 600 billion yuan (U.S. $90 billion). The total transaction cost paid by Chinese investors was about 1 trillion yuan (U.S. $150 billion), which alone exceeds one quarter (28 percent) of the 540 billion yuan from dividends received.
Since 1992, China’s stock markets have experienced more than ten rounds of big swings. Among Chinese stock investors, losers were much more frequent than winners. The following is the performance of Chinese stock investors since 2008.
The 2008 A-share market was historic with a decline of over 70 percent. Shanghai Securities News conducted a 2008 survey of status of stock investors, with 25,110 investors nationwide participating. The survey showed that more than 90 percent of the investors incurred losses, and 60 percent suffered a loss of over 70 percent in the stock market. At the time of the survey, only 6 percent of the interviewees said their investments were profitable.
A Sina.com investigation, “Chinese stock investors incurred massive losses in 2013,” stated that about 65 percent of the investors were losing money in that year. Among them, 26.3 percent suffered a loss between 20 percent and 50 percent, 7.5 percent were hit hard with losses up to 80 percent. Bad stock market outcomes caused 32.2 percent of the investors to have a significantly lower living standard.
During the turbulence from June 2015 to June 2016, the Shanghai Stock Exchange Composite Index fell from 5,178 to 2,927. The total market value of listed companies on the Shanghai and Shenzhen stock exchanges plummeted from 76 trillion yuan (U.S. $11.4 trillion) to 45.5 trillion yuan (U.S. $6.8 trillion), a drop of more than 40 percent. Among the 2,800-some stocks, more than 2,500 tumbled. The average stock price plunged by 25 percent. Over the course of the year, the loss for Chinese investors averaged 500,000 yuan (U.S. $75,000).
In western countries, most of the land is privately owned. Additionally, the owner of a piece of land is also the owner of any construction built on the land. In communist China, the land belongs to the state. Someone owning a house cannot own the land underneath. You may be able to lease the land (typically, 70 years for residential properties), but after the period expires, the government may elect to not lease it again to you.
This land tenure arrangement, however, was not always the case throughout the history of the Chinese Communist Party.
During the civil war with the Nationalists in the 1940s, the CCP forcefully seized the land from landowners and gave it to millions of landless peasants. The process was often bloody as the Party mobilized the poor peasants to kill the landowners. It provided a huge incentive for the peasants to join the Party’s armed forces to fight against the Nationalists and helped the Party win the war.
After the Party took over China in 1949, it gradually took back the land from the peasant farmers and urban residents. In 1982, the Chinese constitution for the first time codified the state ownership: “Land in the cities is owned by the State,” and “The state may, in the public interest and in accordance with law, expropriate or requisition land for its use and make compensation for the land expropriated or requisitioned.”
After the 1989 Tiananmen massacre, the Party had to resort to economic development to woo the Chinese people. In 1992, Deng Xiaoping took trips to a few southern cities to push China into a new round of economic growth. The massive expelling of farmers from their land started there.
Initially, the seized land was used to build industrial parks in coastal cities so as to attract foreign investments. At the end of 1992, these parks numbered as many as 2,000, and jumped to over 6,000 in 1993. According to the Ministry of Agriculture, most of the land used for development was originally arable land.
In 1994, the party pushed forward a fiscal reform to re-divide the tax revenue between the central government and local governments so as to save the central government from fiscal crisis. Immediately the central government experienced a twofold revenue increase, while the local governments began to feel the pinch. As a result, the latter turned to leasing out the state-owned lands to use the proceeds as a revenue source.
The land lease fees as the means of local government finance brought in a multitude of benefits. First, the income went directly to the local government. Another benefit is that It entailed little cost. Normally, the cost of demolition of existing construction was low. The waves of development of real estate would boost local GDP as well as enhance officials’ resumes.
Leasing the land also provided ample opportunities for corruption.
The land grab mania immediately spiraled out of control, with its size and speed endangering the nation’s agriculture sector. The central government had to issue directives in 1997 and 1998 to freeze the use of arable lands for non-agricultural purposes. However, the restriction was shortly lifted to mitigate the economic slowdown, and the mania went on.
Along the way, the idea of industrial parks was replaced by the grander scheme of building new cities. This was the time during which China’s urbanization process experienced a transition from natural socioeconomic development to deliberately planned projects. The number of local governments’ proposals to build “international metropolitan” cities rose from 78 in 1998 to 182 in 2003. In 2008, when the 4 trillion yuan stimulus package was injected into the economy to fend off the global financial crisis, the urbanization process as a national strategy was pushed forward to a new high. 24 among the 32 provincial capital cities planned to build cities between 2014 and 2020, with a total planned area of 4,600 square kilometers. For example, Shenyang planned to build eight new districts, and Guangzhou to build nine. Not only large cities, but also hundreds of smaller cities did the same.
Hundreds of thousands of villages were demolished, and millions of farmers were expelled from their homes, and moved to high-density residential buildings so that land could be “saved” for the urbanization. For example, in 2005, Jiangsu Province planned, within 20 to 25 years, to “consolidate” 250,000 natural villages of 40 million rural population into 40,000 planned residential areas, so as to save 4 million mu (unit of area, one mu equals to 7,180 square feet, 4 million mu = 660,000 acres) of land. By September 2010, the massive destruction of villages across China had reached a peak. In a 2011 survey, 20 percent of the farmers had been forced into residential buildings, and even high-rises.
One official explained his enthusiasm in this way: “Here I have a total of one million households of farmers. I plan to demolish all these villages within three to five years, because one million households of farmers occupy one million mu (165,000 acres) of land for construction use. Let the one million farmers live in the buildings, so that we can have at least 700,000 mu (115,500 acres) of land. 500,000 mu (82,500 acres) should make us 350 billion yuan (U.S. $53.3 billion), one million mu (165,000 acres) makes 700 billion (U.S. $106.7 billion). What can’t we do [with so much money]?”
Within less than a quarter of the century, the Chinese authorities had enclosed 83 million mu (13.7 million acres) of arable land, expelled 127 million farmers, and eliminated at least 1.4 million villages.
Between 1999 and 2015, the land transfer revenue totaled 27.29 trillion yuan (U.S. $4.16 trillion), or 1.6 trillion yuan (U.S. $0.24 trillion) on an annual basis. The trend continues and was even more alarming in recent years: the amount was 3.15 trillion yuan (U.S. $0.48 trillion) in 2011, 2.89 trillion yuan (U.S. $0.44 trillion) in 2012, 4.13 trillion yuan (U.S. $0.63 trillion) in 2013, 4.29 trillion yuan (U.S. $0.65 trillion), and expected another 4 trillion yuan (U.S. $0.61 trillion) in 2015.
As the constitution ended private land ownership, Chinese farmers were in a weak position to refuse the land grabs from the local government. They may have tilled the land, but had no rights to own, buy, or sell the land. If someone dared to defend his dwelling on top of the land, what awaited him was usually organized violence.
Land requisition was usually announced unilaterally and on short notice, without a basic consultation process. It was mandatory, and didn’t need to be agreed upon by the villagers. The only available option for the farmers was asking for as much compensation as possible; expressing opinions against the land requisition or demolition had no legal standing. The time limit was usually short: the demolition must be completed or enforced before a given date.
A 2011 survey of 662 townships in 17 provinces shows that, since 1995, 43.3 percent of the respondents experienced at least one land requisition, of which 17.6 percent of people said the government used force. In another State Council investigations of 39 villages in Jiangsu, Shandong, Sichuan, and Beijing, violence incidents were reported in 36 percent of the villages where land requisition occurred.
Coercion and violence came in a wide range of formats. The whole gamut of local judicial authorities—police, courts, and procuratorates—were mobilized and involved. Interrupting farmers by cutting off water and electricity, and blocking roads were typical tactics. Charges such as “impeding the performance of official duties,” “disturbing social order,” and “blocking construction projects” were reasons used for arrests or detentions. Sometimes, previous misdeeds such as business operations without a license, tax evasion, or even “violation of family planning,” would be dredged up as a means of forcing acquiescence.
Actions against an entire village may involve hundreds to thousands of people. For example, there is the case in 2004 of the Shijiahe village, located outside of Zhengzhou (the capital of Henan Province and a city of nine million). The Washington Post reported, “Shortly after 2 a.m. on July 31, 500 to 1,000 police officers wearing anti-riot gear and riding in a convoy of more than 50 armored vehicles entered the village to search for protest leaders.” The villagers had been protesting farmland seizures. They became furious when they saw police taking away their representatives. As they tried to stop the police, the latter fired rubber bullets at the villagers and used tear gas to disperse them. Several farmers were injured seriously.
The same year, in the village of Sanchawan near Yulin in Northern Shaanxi Province, farmers had protested land seizures with little compensation for nearly two years and were getting nowhere, despite petitioning Beijing a few times. A detailed account was written in the New York Times by Jim Yardley. The land had been farmed since imperial times, but became of interest to city officials when natural gas, coal, and oil were discovered. It was designated an economic developmental zone. Jiang Zemin visited in 2002 and called for faster development. Once the corrupt officials in Yulin realized that the land had great development value, they offered little compensation while leasing it to developers at 50 times the amount they were paying the farmers and pocketing the difference. Some 800 protesters blocked construction on their land, although by law, it was never owned by them. Later, the farmers did a sit-in at the local Communist Party village office and occupied it for five months. Finally, the paramilitary police came by the truckload and fired tear gas and rubber bullets, injuring many and breaking the protest. As many as 2,000 police participated in the assault, according to the farmers’ count.
In 2010, Huangpi district in Wuhan sent 2,000 urban administrative and law enforcement personnel to the Houhu village to enforce the requisition.
In the case of Shanwei, Guangdong province, in Dec. 2005, 2,000 armed police and riot police showed up at the Dongzhoukeng village that led to violent confrontations over the construction of a controversial coal-powered power plant that led to three deaths per local government report, but international reports put the number killed as high as 20. The police allegedly shot civilians. The controversy was fueled by the displacement of 40,000 residents in Dongzhoukeng village, and the government’s unwillingness to provide adequate compensation and resettlement.
In March 2005, in Foshan’s Nanhai district, 4,000 personnel and 200 vehicles, including fire engines and ambulances, were dispatched to handle the demolition in eight villages. The large scale and high frequency of violent conflicts was not typical or normal for the area. They directly related to the violent tendencies of the local governments.
To protest the land seizures, some people chose an extreme form: self-immolation.
The first known self-immolation case in protest of the forced demolition was in 2003. Wen Biao, a disabled gentleman, set himself on fire at a local office building in Nanjing on August 22. Three weeks later on Sept. 15, 2003, Zhu Zhengliang, a farmer, from Anhui province, lit a fire and burned himself at the Golden Water Bridge in front of Tiananmen Square in Beijing. Protesting the forced demolition of his house and low compensation, the 45-year-old farmer had petitioned his case five times, but failed to achieve any result. The police on Tiananmen put out the fire. Zhu was hospitalized with minor burns to his back and arms.
In another case in Nanjing in August 2003, a man died from his ordeal. He had come home during lunch break to find his home demolished, according to Human Rights Watch. In protest, he set himself on fire at the city’s demolition and eviction office. In September, Beijing resident Wang Baoguang burned himself to death because he had been forcibly evicted, according to the HRW report.
At the time, the cases of Wen and Zhu shocked the whole nation, but failed to halt the desperation and violence resulting from China’s grand land grab. The self-immolators served as a model to copy. In 21st century China, the frequency count of farmer self-immolations to express the ultimate despair have exceeded any period in its history.
Undaunted, government officials continued their land seizures, demolitions, evictions, and unjust profit-taking.
On Nov. 13, 2009, Tang Fuzhen, a resident of Jinniu District of Chengdu City, Sichuan Province, stood on the roof to fight against the violent demolition of her house by the armed government law enforcement. After repeated pleas, she finally poured gasoline on herself and her body was burned. Tang, 47, died in the hospital after 16 days from serious injuries.
In another incident in September 2010, less than a year after Tang’s death, in Fuzhou in Jiangxi Province, Zhong Ruqin, her mother and her uncle set themselves on fire in an attempt to stop the demolition of their house. However the bulldozers continued roaring, amid loud shouting of officials, “If you don’t allow us to tear down the house today, you won’t know how you’ll die tomorrow!”
According to a scholar’s study, between 2010 and 2013, at least 20 farmers died under the machines that flattened their houses, while none of the perpetrators was ever subjected to legal investigations.
The standard of compensation to the landless farmers, not surprisingly, was low.
The current Chinese law allows the compensation to range from 16 to 30 times the value of agricultural proceeds from the land. For example, if we assume 1,000 yuan (U.S. $151.9) worth of agricultural products per mu (one mu equals to 7,180 square feet) of land, the compensation can only run as high as 30,000 yuan (U.S. $4,557) per mu.
According to statistics, since 1998, various types of compensation to farmers added up to 12,164 yuan (U.S. $1,848) per mu, or U.S. $0.25 per square foot, in addition to resettlement subsidies of 2,344 yuan (U.S. $356) per person. The typical land compensation to a farmer is about one or two years’ total income of an ordinary civil servant in China. In another estimate, the compensation and resettlement measures at the highest standards was only 18,000 yuan (U.S. $2,733) per person, only 1.5 times of an average urban residents’ disposable income in 2012.
In contrast to the meager compensation to the farmer or resident, the revenue gained from being replaced was worth much more. Due to the different purpose of the usage, revenue from the development of the land can differ widely. Gains from land used for industrial development can be worth hundreds of times more than agriculture production; gains from using the land for the tertiary sector development can be even worth thousands of times more.
Chinese Ministry of Land and Resources once conducted an investigation of 12 key national public projects, such as the Beijing-Zhuhai High Speed Rail and the Beijing-Fuzhou High Speed Rail. The compensation and resettlement costs typically accounted for only 3–5 percent of the total investment, with the lowest at 0.8 percent, and the highest only 12.2 percent.
Even with such a low standard of compensation and resettlement, the farmers were usually not able to get the full amount, often due to layers of complex rules of different level administrative authorities. The main reason for the massive number of petitions in modern day China is land-related, often attributable to local governments that withheld, deducted, and misappropriated land acquisition and resettlement compensation.
Continue reading Chapter 3 here
To read the Introduction, click here.
To read Chapter 1, Jiang Zemin’s Rise, Part 1, click here.
To read Chapter 1, Jiang Zemin’s Rise, Part 2, click here.
To read Chapter 2, Corruption Soars Under Jiang, Part 1, click here.
To read Chapter 2, Corruption Soars Under Jiang, Part 2, click here.
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