The Suspicious Princelings
My biggest learning from this WSJ article on the Ant IPO is the hidden role played by the most powerful families like the grandson of former president Jiang, Zeming and the son-in-law of the retired Chairman of the National Committee of the People’s Political Consultative Conference, Jia, Qinglin. To make the cross country connections, these princelings are the Chinese counterparts of Obama’s grandson and Newt Gingrich’s son-in-law in the US. They decided to invest in Jack Ma’s Ant Group not for charity but for financial gains. The big question is whether we smell anything rotten here.
Past records involving the Chinese princelings had not been good, involving Fortune 500 firms with a large stake of interests in China. The story line has been always the same: These firms hired the princelings so they can see more regulatory greenlights in their China endeavors. But what about a domestic IPO (in Shanghai and Hong Kong) by a domestic firm this time?
First of all, the princelings in the Ant Group story no longer only have social capital (I.e., connections at the top) but financial capital as well. Secondly, instead of being passively hired by a multinational enterprise to enter China, they now actively seek to maximize returns from their capital.
These princelings are suspicious because their money has been hiding behind “layers of opaque investment vehicles that own stakes” in the Ant Group, quoting the words from the above WSJ report. “Those individuals, along with Mr. Ma and the company’s top managers, stood to pocket billions of dollars from a listing that would have valued the company at more than $300 billion.” “Ant’s IPO plan represented the kind of payday and accumulation of wealth that Mr. Xi has long frowned on.”
Another sign of internal and guanxi (关系) dealing is the Moutai Club created by Li, Botan, someone with a similar identity as Newt Gingrich’s (i.e., a former House Speaker) son-in-law in China. It was Mr. Li, together with several others, who “established the Moutai Club in Beijing, and Ma Yun (Jack Ma) was also a deputy director of the first council. The Jiangnan Club, which Ma Yun (i.e., Jack Ma) later established in Hangzhou, was once regarded as the Jiangnan (South of Yangtze River) branch of the Moutai Club and became a gathering place for the CCP’s senior officials and powerful people.” (Notes added by me) according to this report.
Xi’s Shocking Words
It is here when the WSJ report cited the words from Mr. Xi, soon after he took over the top party position, in a secretive meeting attended only by senior officers: “You people, you either eat and drink yourselves into the grave, or die between the sheets.” Dying between the bed sheets is an metaphoric expression for dying from having too many extra-marriage affairs — just like Trump and Stormy Daniels — except in China the affairs are most likely not involving a hooker but a wife (of someone else), a mistress, a subordinate, or sometimes even friends or relatives of the subordinate or mistress. Similarly, eating and drinking into the grave is another metaphoric expression for an extravaganza of excessive drinking and feasting — and doing or caring about little else — that is detrimental to one’s health.
These words of Xi are shockingly sober and surprisingly candid that the party would only allow senior officers to hear them. Otherwise it would be a disaster to the public image of the party, no matter how much money and efforts have been spent on maintaining it.
Right Diagnosis, Wrong Prescription
Of course, describing the problem is one thing, finding a way to fix it is another. Xi’s problem is with the latter. There has been no lack of trying. One of Xi’s priorities since day one has been uprooting the corruption. The economic cost of corruption justifies it. “Between 1978 and 2003, an estimated $50 billion was smuggled out of the country by corrupt officials” according to this Wikipedia page.
Xi has been busy doing what is the obvious and what had been done by Mao, Zedong and even earlier emperors. The most dramatic of all was the Emperor Zhu Yuanzhang, the founding emperor of the Ming dynasty, reigning from 1368 to 1398. Emperor Zhu launched a large scale anti-corruption campaign with penalties far more severe than anyone else: Officials who embezzled more than the equivalent of 60 liang (one liang was around 30 grams) of silver were to be beheaded and then flayed, the skin publicly exhibited, filled with straws to make it look like the real person.
Xi does the same — in spirit, not in matching degree of cruelty of course. A top-down anti-corruption campaign to purge those who violated the party rules has been going on today even as we are speaking. At the beginning of the campaign, Xi and his lieutenant, Wang, Qishan, were so confident that they believed their campaign would make officers from not daring to not able to finally not wanting to corrupt.
Little did they know that the best of a top-down anti-corruption campaign can do is to scare people off and to refrain from corruptions for a while. Stopping the thinking of corruption is an entirely different matter and proves much harder. Turns out that officers are not the only ones to blame, because the entire country and the average Chinese all have fortune and fame as the top priorities and biggest life goals in mind.
Crime Type In China Tells Us Something
The Internet has only made this clearer than ever. Whenever a celebrity (mostly movie stars, plus a few athletes) showed up in public, the media always highlight what jewelry she wears (with price information), what brand is her dress (also with price) and what house she bought (where and by how much). If someone chose not to follow the popular trend (e.g., not to wear expensive jewelry or not so showy in public), the media and the people would suspect that maybe she was bankrupted.
Even the dark side of the society tells us something about what Chinese care and crave. China has a relatively low rate of violent crimes. To put things into perspective, in 2011, the reported murder rate in China was 1.0 per 100,000 people according to the same Wikipedia page, while the US reported that “In 2020, in sample cities the homicide rate was 11.4 deaths per 100,000 residents.
On the other hand, China has a high rate of economic (i.e., money related or money motivated like human trafficking, sex trafficking, drug trade, corruption) crime and “(t)he majority of economic crimes were committed by business people who engaged in tax evasion, theft of public property, and bribery.” Even if we assume that all murders had nothing to do with money — a highly unlikely assumption — this high economic crime paints a clear picture: whether you look at the “haves” or “have-nots”, the pursuing of money never dies among Chinese.
Parents Are Actively Killing Diverse Preferences
One thing is clear: to stop people from thinking of corruption, they must have something else to think about. In other words, the corruption problem can be alleviated through diversified preferences. Lacking such a diversity is what worries me the most, so much that I believe China is hopeless to get rid of the corruption as we know it.
China will defeat China, Chinese will beat Chinese, mostly because everyone is pursuing the same goal with the same preference. The road becomes too narrow and too crowded. The way to solve the problem is to encourage people to develop different preferences and tastes so they would no longer all compete for political power and money like they do now.
The biggest obstacle is from the parents. Chinese parents, especially those living in the big cities and with more resources than those living in the countryside, are trying everything in their capacities to kill diverse preferences of future generations. This report (in Chinese) is based on the first hand experiences of private tutors hired by anxious parents to help their children. It is hard not to be shocked by these most devoted parents in the world who (1) know the latest admission scores and how to get the bonus points of the top middle schools, high schools and colleges in the city they live; (2) know where the best teaching resources are (for which subjects and in which extra-curriculum learning facilities); (3) know the grades of their juniors from every test as well as their ranks in the class; (4) worry about and think of the grades of their juniors and their prospect of being accepted by the top schools more than the kids themselves; (5) discipline kids on time management so much that they would tie shoe strings for their sons or daughters so they could use the time to memorize one more English word or to solve one more math problem.
These parents put so much pressure on the juniors to make their daily lives like living in a military basic training camp. One private tutor witnessed a sixth grade boy — ten minutes before the next computer programming class — was handed by his mom one soy drink, two steamed meat buns and one egg, and was urged to swallow them all down. Apparently on the mom’s agenda, that ten minutes were the only time allocated to eating.
In another family, a mom of a high school junior daughter demands and designs all her time after school. First her daughter must go to those tutoring classes until 9:30 at night, followed by finishing school assigned homework until after midnight. Her mom would accompany her daughter every step of the way. The same mom also strongly believes advanced learning ahead of anyone else: An elementary schooler must start learning middle school courses, a middle schooler should learn high school courses, while a high schooler should start college courses.
Under such an extremely strict scheme of military-like trainings for academics, what can you expect of the kids? More often than not, they silently and passively move by parents’ orders and wills. If some of them had their own interests in some subjects, that would be killed by the parents who only care about whether the kids can pass all the tests. of course, none of the juniors is happy in life.
The Non-Independent Media Add To The Problem
Without the internal drives for different pursuits, the next best thing is to let the public, including the media, monitor the officers. Unfortunately Xi has made a fundamentally wrong move by demanding that all media listen to the party, effectively ruled out independent media and press.
On the surface, Chinese media do not look much different from their US counterparts: They report corruption cases and name the officers involved. The crucial difference is whether the media can launch their own independent investigations without party permissions, like the ones we see with the NYT and other newspapers. In China, only the party, more specifically only its internal disciplinary committees, can be the “heroes” in digging up dirt of the corrupted officers, not some low rank, attention-hungry reporters. They are not smart enough to recognize that it is far better letting everyone be the potential hero than just a few party officers.
Even worse, Xi would not even share the glory with lower party agencies and officers, as he has been emphasizing the central leadership of the party, equating party leadership to Beijing leadership, or more accurately from the Zhongnanhai compound of the head quarters, prohibiting local party agencies and local officers from even “randomly” commenting the central leadership.
This is how Xi, Jinping, although made a very smart diagnosis of the problem, is not in the position to fix it. In fact, he has led the party to an opposite direction, effectively turning the problem into a permanent dilemma.
This is bad news to the party and its officers. Without diversity of preferences and without independent media, being party and government officers is among the most dangerous positions in the world, because they are constantly surrounded by people who all want a piece of them, ranging from their attention to their appreciation, which are all scarce resources that can be translated into promotion, money, properties and career advancements. Corruption becomes inevitable as long as the only source of power is from above.
Empowering Citizens Vs. Empowering Top Leaders
There are two models of governance in the world today. Democracy turns the above system upside down by empowering ordinary citizens, who then can do a better job of monitoring and disciplining the officers. Various versions of authoritarian regimes follow another direction of empowering top leaders and depending on the goodwill of the top authoritarian leaders to crack down corrupted lower leaders and officers.
Both sides believe they are better than the other. The truth is somewhere in between. Neither is perfect as both have advantages and disadvantages, strengths and weaknesses. The US-China competition is essentially to compete between these two models.
My theory of preinstitutions says the best model is not determined so much by the model itself but rather by the contexts that the model finds itself in. In other words, whichever matches better with its context is the best model. This fundamentally calls for finding locally and contemporarily optimal — rather than globally and constantly optimal — model. In spirit finding a locally optimum governance model is not much different from finding local minimum wages, except we will also consider the time dimension to see what the currently prevailing preference is.
Let’s use democracy as an example. It has its own costs. Why can Trump still effectively control the GOP and get away from two impeachments? Because he still has the strong supports of some citizens, even though his presidential approval rate is much lower than Joe Biden has.
By involving more people in the decision making processes, democracy can move slow compared with decisions involving only a few elites. Therefore, democracy and non-democracy each has its up- and down side and from pure decision making perspective, democracy does not possess absolute and sweeping advantage over the authoritarian system.
Meanwhile, we have democracy to thank for when we removed Trump from the White House. We also have democracy to thank for when Ted Cruz offered his apology for the trip to Cancun during the recent snowstorm in Texas and started delivering water to Texans. Was he really sorry for himself? I doubt it, but he has to say it in public because he knows better than anyone else that his power was granted by voters, not by anyone above him.
Three Advantages of Democracy
Democracy has an absolute — and hands down — advantage in public perception over authoritarian, because democracy sells big time everywhere in today’s world, ever since the former Soviet Union crashed. This is why even North Korea would call itself Democratic People’s Republic of Korea.
Perception matters and can translate into substantial gains. Democracies tend to have closer ties with each other. Former defense secretary Robert Gates made an excellent point that “The US has allies, the Russians and Chinese have clients.” Granted, allies can have complicated relationships with each other, and sometimes having a client is better than having an ally — when one just wants to do business as usual without long term engagement. Furthermore, allies can be clients and clients can be allies. Other things equal, however, allies help reduce transaction cost compared with non-allies, mostly through higher trust among each other.
The second advantage of democracy is stability of power transition, although stability is not guaranteed and can have chaos, especially in low efficient democracies. Even with efficient democracy power transition stability can be fragile, as we have seen in the US.
The last advantage has not been discussed to the best of my knowledge but it is more important than the first two. I call it “Complexity Challenge Advantage” or CCA. This is the advantage that arises when the tasks or challenges a country faces are getting complicated, when we must make tough choices and tradeoffs, when there is no perfect solution to every problem or when we want to “have the cake and eat it too”, this will be the time when democracy is the best and nothing else comes quite close.
The way this advantage works is like how procedural justice works: As long as we go through the democratic procedures, everyone must accept the result — like it or hate it. Without going through the democratic process, people dissent and their dissention accumulates quickly until one that only armed forces can “solve” the difference.
The Time Is Not With China
China always laughs at the US for its messy politics but in truth, the seemingly chaotic mess in the short run serves a big function of keeping the country in a stable order — through allowing everyone to voice his or her concern.
When China grows into the largest economy in the world, its tasks and challenges will inevitably get more complicated by days. In fact, China has the low diversity of preferences among its citizens to thank for. Even at its current level of economic development, things would have got messier than they are now, the country would have faced more diverse goals and conflict interests inside.
Sooner or later however, especially after China passes US to be the largest economy in the world, Beijing will find its job harder to keep the country together as solidly as it is today. The best way to solve domestic differences is democracy. This is why I wish Xi, Jinping had prepared the country for a democratic transition from now.
Going back to Mao offers no hope. For one thing, Mao and his lieutenants only had to manage a tiny economy, and even then they did a terrible job. Mao also lived behind the iron curtain which protected him from international exposures of many secretive — and dirty — moves. That iron curtain is gone now and China’s economy has grown from the size of a puppy to an elephant.
One thing is for sure that the only way forward to maintain, manage and grow such a huge economy and society is to empower more people to get the job done, otherwise the problems are too many and too big for a single entity (i.e., the government) to handle.