Mafia-Like Business Systems In China: Xi’s Crackdown In Context

Estimated read time: 1:20

Summary

The Hoover Institution's speaker series features a discussion on China's unique political economy and the patterns of business moguls facing crackdowns under Xi Jinping's administration. Meg Rithmeyer of Harvard Business School provides insights into these mafia-like business systems in China, which prioritize personal wealth through complex, opaque structures and political connections rather than traditional profit-making models. The presentation explores how these systems have risen in response to China's institutional weaknesses, creating significant challenges for the state's control over the economy.

Highlights

Meg Rithmeyer from Harvard presented on Mafia-like business systems in China, which prioritize personal wealth over traditional profit. 💰
A discussion on how these systems exploit institutional weaknesses and challenge state control was highlighted. ⚡
China’s continuous efforts to control such business practices through crackdowns were discussed. 🚨

Key Takeaways

Mafia-like business systems in China are unique and prioritize personal wealth through complex structures and political connections rather than traditional profit-making. 🚀
These systems exploit China’s institutional weaknesses, challenging the state’s control over the economy. 🔍
China’s crackdown on these systems is part of a broader effort to regain control and enforce discipline within the financial sector. 🚓

Overview

In a recent talk at the Hoover Institution, Meg Rithmeyer of Harvard Business School delved into the intriguing world of mafia-like business systems in China. These systems stand out for their focus on personal wealth accumulation through complicated and non-transparent structures that often involve political ties, as opposed to standard business models aimed at generating profit.

Rithmeyer explained how these systems have evolved as a reaction to the inherent institutional weaknesses in China, where lack of regulation often leads to exploitation. This dynamic creates a chaotic landscape where these businesses can operate with relative impunity, posing a significant challenge to the Chinese Communist Party's control over the economy.

The crackdown on these business operations by Xi Jinping’s administration reveals an effort to reinforce state control and implement discipline within the economy. Despite the political and economic complexities, the long-term goal of such crackdowns seems to be about securing regime stability rather than following a particular ideological path.

Chapters

00:00 - 01:00: Introduction and overview of China's economic growth The chapter provides an introduction and overview of China's economic growth, emphasizing the country's spectacular economic performance over the last 40 years. China has seen significant development, with private firms benefiting from this growth. However, the chapter notes that Chinese firms often operate differently than their Western counterparts. It also touches upon Xi Jinping's aggressive anti-corruption measures, suggesting an intersection between politics and economic practices in China. This sets the stage for further discussion on how China's unique economic model functions and its implications for global economics.
01:00 - 02:30: Introduction of professor Meg Rithmeyer and Dr. Carl Walter The chapter introduces Professor Meg Rithmeyer from Harvard Business School, a political scientist focusing on comparative politics and the political economy of China. It discusses anti-monopoly and data governance in China, suggesting that leading firms in China may be governed by rules that are distinct from those in other economies. Professor Rithmeyer is noted for her work on the political economy, with a special emphasis on China, highlighting her expertise in land bargains.
02:30 - 04:30: Professor Rithmeyer begins her presentation on mafia-like business systems in China The chapter begins with Professor Rithmeyer's presentation about mafia-like business systems in China, highlighting how these systems impact Chinese capitalism. Her work has been widely recognized, with publications in Cambridge University Press and an upcoming article in the China Quarterly. The presentation emphasizes the politics of property rights during China's reform period. Following her presentation, Dr. Carl Walter, who has a background in both political science and investment banking in China, will provide his insights as a discussant. He is the author of 'Red Capitalism', offering an insider perspective on Chinese economy and business practices.
04:30 - 06:00: Desmond Shum's Quote and Context of Crackdown The chapter titled 'Desmond Shum's Quote and Context of Crackdown' seems to focus on an event or discussion involving key individuals from the financial sector. It mentions a former CEO of JP Morgan China, implying a high-level discussion about financial markets or strategies. The setting suggests an academic or formal presentation environment where there is an opportunity for audience interaction through a Q&A session. The chapter may also touch upon insights or works related to Desmond Shum, potentially discussing his viewpoint or experiences within China's corporate or political landscape.
06:00 - 08:30: A tale of four business moguls The chapter introduces a tale revolving around four business moguls, setting the stage for discussions on their roles and experiences. It features an academic perspective, with insights tied to ongoing research work that will be part of an upcoming book. The focus is on garnering feedback and engaging with an audience to refine the study. This reflects the broader aim of exploring the dynamics and outcomes linked with these influential figures in the world of business.
08:30 - 11:00: China's distinct political economy and the role of private entrepreneurs The chapter discusses China's unique political economy and the complex role of private entrepreneurs within it. Drawing from Desmond Shum's book 'Red Roulette,' the excerpt highlights a strategy many entrepreneurs in China adopt: building a business, selling it, and reinvesting profits rather than relying on long-term business models. This approach is suggested to be 'smart' in China's dynamic and often unpredictable market environment.
11:00 - 14:30: Definition and characteristics of mafia-like business systems The chapter delves into the concept of mafia-like business systems, opening with a metaphor on investment risk—suggesting that reinvesting part of profits is safer than keeping them all in one place, as the latter risks total loss. This metaphor sets the stage for discussing regulatory crackdowns on major businesses, starting with the suspension of Alipay's IPO in November, highlighting a systemic crackdown that began earlier in 2015-2016. The chapter features notable business moguls, such as Lee Fay, a hedge fund manager in China, as part of this narrative, illustrating the intertwining of business mogul activities with overarching regulatory frameworks and systemic risks.
14:30 - 17:00: Research data and structure of Chinese firms This chapter delves into the intricacies of Chinese firms' research data and structures, starting with a narrative involving a prominent domestic figure who became notable in 2015 during a stock market crisis. She was reportedly detained, which was later downplayed as a mountain retreat for meditation. The speculation was she was coerced by authorities to provide insights into stock market operations amidst the financial turmoil of that year. Additionally, the chapter touches on notable figures in Chinese business, including Guo Guangchang, often dubbed as China's Warren Buffet, who serves as the chairman of Fosun.
17:00 - 19:00: Concept of plunder in mafia-like business systems This chapter explores the concept of plunder within mafia-like business systems, focusing on key figures such as buffett, who faced detentions between 2015 and 2017, and sao jian hua, known as China's 'banker to the stars' and a long-time affiliate of the Chinese Communist Party (CCP). Their varying experiences with the CCP underscore the complex interactions and the impact of political affiliations on business operations in such systems.
19:00 - 22:00: Obfuscation and organizational structure in mafia-like systems The chapter delves into the use of obfuscation and organizational structure within mafia-like systems. It highlights the story of a student movement leader who was sought by authorities for years, eventually taking refuge in Hong Kong in 2014. However, he was apprehended at the Four Seasons hotel in Hong Kong in 2017, during Chinese New Year, and remains in state custody. Despite his influential empire, the Tomorrow Group, being dismantled and nationalized, he has not been formally charged or appeared in public. This serves as an example of how such systems may operate in secrecy and complexity, exuding power while remaining hidden from public view.
22:00 - 25:00: Mutual endangerment between business systems and political elites The chapter discusses the complex and often dangerous relationship between business systems and political elites. It highlights individuals like Mr. Guo, who despite being wanted in China and having legal issues in the U.S., has been vocal about his experiences and knowledge. Broadcasting from New York, Mr. Guo shares information about Chinese political figures, blending truths and untruths, thereby illustrating the risks and intertwining lives of those involved in business and politics. The chapter emphasizes the precarious positions of these individuals, who maintain connections with authorities despite the dangers.
25:00 - 27:00: Manipulation of the financial system by mafia-like business systems The chapter discusses the manipulation of the financial system by companies with mafia-like operations in China. It highlights that while half of these influential individuals have become fugitives or are in state custody, the other half manage to remain operational despite conflicts with the state. The discussion provides an analytical puzzle about the nature and reasons behind state crackdowns that began before 2020, and why some businesses manage to survive such interactions whereas others, such as Hainan Airlines and Anbang Insurance, face significant challenges.
27:00 - 29:00: Case study of Evergrande The chapter delves into the case study of Evergrande, examining its structure and business practices. It discusses how certain firms could end up bankrupt, nationalized, or have their founders imprisoned or deceased, highlighting the volatile nature of such enterprises. The focus is on understanding the unique business systems at play, particularly those that differ significantly from firms in other systems and even in different developing countries. The transcript emphasizes the existence of large business groups and conglomerates that are vertically integrated, which is a strategy to manage complexity amidst differing business environments.
29:00 - 31:00: Implications for scholars and conclusion The chapter discusses the intersection of politics and economics in China, comparing the relationship between the state and the private sector to 'mafia-like business systems.' It explores how this relationship has traditionally been seen as a form of cozy cronyism or 'crony capitalism,' involving special deals and profit-sharing arrangements.
31:00 - 37:00: Carl Walter's commentary and discussion of party influence Carl Walter discusses the interplay between the state and private sector in China, emphasizing their collaboration to achieve mutual benefits and substantial economic growth. He highlights how private entrepreneurs form special relationships with politicians and political elites to navigate a formal institutional system that is generally unfriendly to private businesses.
37:00 - 43:00: Questions and discussion on regulation and investment in China This chapter discusses the dynamics between regulation, investment, and business relations in China, focusing on the concept of 'unfaithful friendships' in state-business relationships. The author does not aim to generalize about the entire private sector but instead focuses on large conglomerate firms, drawing comparisons to organized crime.
43:00 - 45:00: Conclusion and final remarks The conclusion delves into the concept of a 'mafia-like business system.' This system is defined not as a traditional mafia or organized crime group driven by illegal activities, but rather as legal businesses that prioritize extortion over profit-making or revenue-building. These businesses engage in legitimate operations with a primary focus on extortion as their main business strategy.

Mafia-Like Business Systems In China: Xi’s Crackdown In Context Transcription

00:00 - 00:30 [Music] welcome to the speaker series of the hoover institutions project on china's mobile shark power i'm glenn tifford a research fellow at the hoover institution and i co-lead the project along with larry diamond today we have a timely program over the last 40 years china's economic growth has been spectacular and private firms have ridden that wave but often these firms do not look or behave like their counterparts in western economies and xi jinping's aggressive anti-corruption
00:30 - 01:00 anti-monopoly and data governance initiatives have put many of them in the hot seat today's guest offers a thought-provoking take on how leading firms in the world's second largest economy may play by a very different set of rules that reflect china's distinctive political economy professor meg rithmeyer is associate professor at harvard business school by training she is a political scientist and her teaching and research focus on comparative politics and political economy especially on china she is the author of land bargains and
01:00 - 01:30 chinese capitalism the politics of property rights under reform published by cambridge university press in 2015 and a suite of influential articles including the one that she will be presenting today which is forthcoming in the china quarterly following professor rithmeyer's presentation dr carl walter a political scientist with a distinguished career as an investment banker in china will join us as a discussant with a unique insider's perspective dr walter is the author of red capitalism in inside china
01:30 - 02:00 stock markets and is the former ceo of jp morgan china and ceo of its banking subsidiary we'll leave room for audience q a at the end of the program please submit your questions using the q a button at the bottom of your screens and with that over to you meg thank you glenn for inviting me and thank you especially carl for um for offering to offer your discussive feedback um on the presentation in the paper as i said earlier i've been reading his work um
02:00 - 02:30 since i was in graduate school and so it's a privilege to have feedback on this work so as glenn introduced this paper is forthcoming and the china quarterly it's already online now but hasn't been assigned an issue so i assume sometime next year but you can read the final version of it there um that said it is part of a book in progress um which i'm finishing up ideally in the next couple of months and so um the larger project is very much open for feedback and reaction so i'm going to enjoy um getting your questions and your feedback
02:30 - 03:00 so as long as everyone can see my screen okay and see the slides i will start um so let me start with a quote from desmond shum's recent book red roulette which received a lot of attention about a month ago he says i came to believe that in china a long-term business model wouldn't work i began to understand what some of my entrepreneur friends have been telling me all along the smart way to do business in china was to build something sell it take money off the table and go back in if you invest a dollar and you make 10 you take seven
03:00 - 03:30 out and reinvest three but if you keep 10 in chances are you'll lose it all and i want to take that quote and then we keep hearing about this crackdown that supposedly started last november with the suspension of alipay's ipo and talk about an earlier crackdown that began even earlier than that around 2015 2016. so a tale of four business moguls you'll see here some of you may be familiar with these individuals some of you may not be so on the top left is lee faye a hedge fund manager in china who's
03:30 - 04:00 quite famous domestically she was detained in 2015 during the stock market crisis um where her husband said he didn't know her whereabouts she later tweeted that um she was she was doing meditation in a mountain retreat but was probably actually detained by authorities and forced to give information about how exactly stock markets were working and the financial crisis was proceeding in 2015. um and on the bottom right here you see gua guantang who's the chairman of fosun he's popularly called china's warren
04:00 - 04:30 buffett and he was detained several times between 2015 and really 2017 released each time and continues to helm his company as does lee ife in the top left but on the top right and the bottom left you see two figures who have had very different experiences and their interactions with the ccp the chinese communist party in recent years so on the top right is sao jian hua the banker to the stars in china who is a long time affiliate of the ccp since his college days um after 1989 when he opposed the
04:30 - 05:00 student movement um that year he was wanted for years absponded to hong kong in 2014 and was finally i'll say kidnapped but in fact apprehended at the four seasons in hong kong in 2017 over chinese new year he's still in state custody his large and influential empire the tomorrow group which i'll say more about later has been essentially nationalized disbanded taken for parts and he's still not been formally charged with anything but has yet to appear in public
05:00 - 05:30 and the man on the bottom left is someone i think everyone knows mr guo who is in exile was in exile in new york city for a long period of time has now had run-ins with the american state um wanted in china um now hunted in the united states and has been as we say singing like a bird from a penthouse in new york city where he's been telling all kinds of tales on youtube about all kinds of people in china half are true half are untrue but in any case what you find here is four people all of whom have been kind of close to authorities
05:30 - 06:00 in china half of them however have become fugitives um or you know in custody of the state and the other half have had these run-ins with the state and yet allowed to live on and it presents a sort of puzzle which is why have we had these kinds of crackdowns happening they again predated 2020 um and why do we see some people faring all right interacting with the state and finding themselves okay like whereas other people and we could think about hainan airlines we could think about onboarding insurance these are companies that have essentially been
06:00 - 06:30 bankrupt nationalized or whose founders have been in prison or in the ground as it were and so my take on this um is to help us understand what exactly some of these business systems are and as glenn sort of suggested my view is that they're very different from firms that we might find in other systems and even within other developing countries where we are still likely to see these large business groups and conglomerates that are verbally vertically integrated as a way to manage
06:30 - 07:00 risk and i call these mafia-like business systems which i'll i'll justify in a few minutes and it's a quite a provocative way to think about them but i think an appropriate analogy for a number of reasons but if we look broadly at china's political economic trajectory we've gone from this assumption that the state and the private sector are very much um cozy crony crony kind of communism or crony capitalism whatever you want to call it but tongkai sia has called special deals um and um which and profit sharing
07:00 - 07:30 according to the language of union which is that basically state and private sector are working together to capture gains in a way that's mutually beneficial for each other but also has generated a profound level of economic growth in china and so these special deals so private entrepreneurs are relying on these special particularistic relationships with politicians and political elites in china to circumvent the formal institutional system which is pretty hostile to private business to this idea that now um that relationship is quite
07:30 - 08:00 acrimonious as i i've shown in some of the examples i just put up and so this question of why do we why do we see these quote unquote unfaithful friendships and what does it mean for state business relations in china and so as i said my area of focus is not to characterize the entire private sector economy in china in any way or another but to instead focus on one particular type of firm these large conglomerate firms that i will argue hold more in common with organized crime
08:00 - 08:30 than they do with other conceptions of a firm so let me first say what i don't mean so what is a mafia-like business system it's not an actual mafia in the sense of organized crime that's designed to basically operate via violence and only an illegal business like kind of vice businesses right but instead it's legal business that's focused primarily on actual extortion rather than ref revenue building or profit making um but it is engaged in legal businesses and so here
08:30 - 09:00 you can see i i i my and i should have mentioned at the outset that this this particular paper is co-authored with um hau chen who is a professor at schwartzman college at ching hwang university and can't be here today because of the profound time difference um but um was instrumental in many of these ideas and then the research itself and so we think of mafia-like systems as a subset of large business groups right and you can see the conceptual distinction and the different columns and the table here so we see large business groups and companies and
09:00 - 09:30 countries all over the world especially in developing countries like you know i think of counterparts of the philippines or indonesia and what their objective is to seek revenues or profits through rent seeking sure they're corrupt sure they occupy they they try to capture rents and they try to stymie and um the development of even legal foundations and rely on their particularistic relationships with elites and and erect high barriers to entry to other firms right but their goal is still kind of business goals and seeking market share seeking revenue that we
09:30 - 10:00 would identify whereas mafia like systems are in pursuit of the personal wealth of shareholders through plunder and i'll say more about funder later their organizational structure differs it's not just a conglomerate or a group some of them are pure middle these kinds of business groups but when you see mafia-like systems they're more web-like and obfuscated which is difficult to understand the extent of these systems and the structure of the businesses themselves are designed to actually obscure ownership and obscure related party transactions which i'll say more about in a moment
10:00 - 10:30 their internal relations are based on interpersonal threat so impressing employees above and below right um within the system in kind of relations of what i call mutual endangerment which is the same relationship that they share with political elites meaning not only mutual benefit to one another by generating personal wealth but also i'm impressing you into my system in order to threaten you and ensure that in fact you will not reveal information about me because to do so might produce your own demise
10:30 - 11:00 since you are also mutually implicated in this kind of relationship so i'm going to talk about two organizational principles which is obfuscation and plunder and then talk about the the practices that characterize these businesses within the chinese political system but first let me show you some data which here is a little bit poorly organized but let me explain it so over the last five or ten years we have made extraordinary um progress in social science and in the business community
11:00 - 11:30 and understanding the structure of the chinese economy and collecting more data on the chinese economy and so interestingly how and i started working on this four or five years ago when it was quite um onerous to get the corporate filings and trace ownership of chinese companies up the corporate hierarchy now it's much easier to do that with the advent of certain databases like wind and others but in any case what we did here was took a sample a convenience sample of chinese firms random numbers of chinese firms um we took about a thousand and we found um
11:30 - 12:00 about 159 of these companies um that were directed by legal person so so an alternative would be many of them were state-owned enterprises since they weren't directed by a legal person so these are kind of private sector companies that are not owned by the chinese state and we tried to collect data and trace their ownership up and down the corporate hierarchy to figure out how what the structure of their firms were and so you can see here in the red we found the mean right of the number of companies directed by the legal person was 42 with a very high standard deviation and a max of 858 and so what
12:00 - 12:30 that would mean basically is um is the amount of layers within the company is incredibly high and the standard deviation being high means that the tail is very long so you can find this mass amount of companies in china and many of them have one layer two layer three layers but some of them have dozens of layers and those are dragging out the numbers quite far on the other end the bottom table is showing you in our sample of the number of individuals we
12:30 - 13:00 have of the owners so those of you who understand the chinese um the the chinese that um the way that the corporate filings are structured in china this is a far end pal so if we take the individuals that own companies from our sample there's 162 individuals and the mean number the average number of companies owned subsidiaries that they owned is around 30 and then below that companies in which they're invested as a minority shareholder is around 40 right but again we have a very high standard deviation and very high maxes meaning that most companies look kind of
13:00 - 13:30 normal by any standards but then there's a subset of companies that are incredibly layered right quite complex and hierarchical and some individuals who have very wide and dispersed tentacles throughout the chinese economy and those are the firms and individuals that i am interested in here so what are mafia-like business systems and let me say two dissatisfying things particularly to the social scientists in the audience before i go in to characterize them so one is that maybe conveniently for me maybe not
13:30 - 14:00 but when i'm defining many of these organizations that they're designed to obfuscate and to plunder which means it's very hard to measure them ex-ante or design basically characteristics that would allow me to show you exactly what a bright line is between a mafia-like business system and one that's not right and so in the paper and in my research we rely more on ethnographic research and qualitative type research to determine how these companies actually function and thinking of their internal moral economy and internal logic rather
14:00 - 14:30 than looking at kind of um let's say uh observationally manifest business practices that would allow me to draw a bite line between what is a mafia-like business system and what's not and so the rest of what you'll see is much more about the kind of internal logic and the ethnographic sense of how this works rather than a kind of traditional uh data collection and hypothesis testing type exercise that many social scientists are are engaged in so what is plunder what makes
14:30 - 15:00 these mafia like this systems different from business conglomerates that are trying to maximize their own profits or revenues and my argument is that it's beyond seeking the theft really to the idea of a theft of public resources and especially public resources in the chinese case and they're involved in doing this for a number of reasons and part of what i would like to convince you in the talk is that it's not this is not just a sense of regulatory failure and an incomplete regulation system but really at its heart political motives that have
15:00 - 15:30 to do with how politics is conducted and has been conducted in china that has generated these kinds of incentives and the first that's important is what in china is called original sin which is that in the 1970s 80s when it was allowed to do private business that was never a formal legal allowance there were never formal contractual categories that allowed private business to operate in china and so it was always an idea of trying to kind of informally operate as a profit-seeking private business without the legal blessing of the state
15:30 - 16:00 so many of these companies had uncertainty at their founding and that profound uncertainty led to what we argue is short-time horizon so the idea that we can't be sure about policy stability within the chinese system or legal certainty and so we operate with a two a three maybe four year time horizon of what we can maximize in the short term you should be thinking back to the desmond shown quote at the beginning rather than thinking about building a business that might last a generation or longer and this kind of uncertainty that is
16:00 - 16:30 fundamental to the foundation of private business in china is replicated we argue within the organizational hierarchy just like the idea of plunder is what can i take from myself now and especially once you get some of these firms that start to have as their operational mode right so when i think about what kinds of firms we're talking about especially in the late 1980s and the late 1990s the privatization of lower levels of the state sector and kind of released the small and grasp the
16:30 - 17:00 large so the privatization of state-owned enterprises a lot of this was about kind of stealth privatization and getting assets that belong to those firms critically land assets real estate other kinds of things and really taking those assets and turning them into personal wealth and once an organization is founded to do that in the 1980s or in the 1990s then you start to get people participating as employees or managers within that organization that themselves have incentives of what can i personally get as a cut of this while i'm involved in
17:00 - 17:30 it rather than building something for the long term so when you think about the logic of participation in a firm you know why if everyone in my firm and the people at the top are kind of plundering resources for themselves it's in my interest to plunder resources along the way so you find a lot of examples of that kind of behavior a couple of which i list here so this long-standing practice which i'm sure carl has encountered of the jshauren the introductory contact and so and every private sector firm has typically has an introduction contact a
17:30 - 18:00 person who's powerful who introduces them to a bank in order to get credit and what they get from this is a cut of the loan and so everyone sort of has an incentive to blow up the value of the loan or blow up the value of the project in order to get a larger cut of this which is passed on through the organizational hierarchy and the other which i put here which is actually a quote from someone at china minshang investment group a more recent kind of predatory firm which is to eat meat together right to get rich together we're all going to be able to eat meat
18:00 - 18:30 here and so everyone's trying to get their their piece of the pie and so it's really about plunder of resources rather than building long-term business strategies the second characteristic is as i said obfuscation and so here we see that the connections to political elites and the actual controllers themselves so who owns the actual business are buried and so when i first started doing this research five or six years ago um really in 2013 2014 i kept saying to my colleagues in the
18:30 - 19:00 accounting unit you know i'm having a really hard time understanding a lot of chinese firms i can't really figure out who owns them i can't figure out who's on their board it's very opaque and now um you know at that point it was a kind of new thing to do this kind of research and now everyone is doing that so much so that there are there are businesses that are selling contracts to the u.s government into libraries universities saying i can tell you who the ultimate beneficiaries are of chinese firms but they're buried and they're hidden and so an example here is tomorrow group which purposefully said over and over
19:00 - 19:30 again and a lot of its um internal interactions that its goal was to hide and disperse the ownership of assets and its political connections and of course you know many companies do this right they have um you know um incorporations and tax havens and things like that right what's the difference between this and that right is that really it's about political secrecy as well who is tied to whom and so here let me intervene a little bit um in the scholarship on this which there's a huge industry in economics and political science of
19:30 - 20:00 trying to show the value of political connections right so this firm is connected to this political elite and when that political elite falls let me show how much the firm's value actually decreases right but here we have this is done secretly which means it's a lot different it's hard actually to figure out if you just look at the board members you can't necessarily figure out who owns the business or to whom they're connected but the secrecy imbues information with the value of a weapon right so when you think about this puzzle i presented with why do some some business tycoons fall and others remain
20:00 - 20:30 in place my hypothesis would be the ones who may remain in place know quite interesting things about people who remain in place politically and it's not quite easy to go after them and so when you have this obfuscation it creates secrecy and information that further distorts um how resources are allocated and makes the entire project of business and state connected together and it's difficult for the state to go after business people especially when they still have political elites that know things about other political leads who
20:30 - 21:00 are still in power so just for an example why is it that it took three years um so first of all why is it that saljin hua knew we had to go to hong kong someone tipped him off um and why is it that it took three years to capture him probably because the people in power who were still tied to him had to be neutralized before they could actually go after him would be my hypothesis and of course the obfuscation facilitates plunder so and this is again a quote from tomorrow groups internal kind of discussions which is they tried to distance related party transactions
21:00 - 21:30 so you list this kind of firm which seems like it's not connected to you you use that vehicle to you know then buy out other parts of your firm and through doing that you expropriate minority shareholders you list something in ipo and you funnel those resources to a privately controlled business which it doesn't seem like as a related party all of which facilitates this blunder so let me just show you a little bit of structure from some of the research this isn't in the paper but um is in the book that's ongoing so just four of these so-called gray rhino groups um that c
21:30 - 22:00 jimping started to go after in 2016 2017 these are corporate structures you just really wouldn't find um for large conglomeration firms even um in other developed economies and again this is only a kind of crack at the surface of what we've been trying to do tracing these corporate profiles up and down i exclude here things like regional subsidiaries because i wouldn't see that as part of an unusual corporate pyramid and so and i'll show you a little bit about evergrand later which is quite surprising i think and how large it is
22:00 - 22:30 so let me talk about two practices and then seize crackdown in context and then i will turn it over to carl um so what do these business systems do so i told you a little bit about how they're organized their organizational principles but how do they engage and what's new about these business systems and so the one concept we put forth is the concept of mutual endangerment right which is when we think about corruption there's many types of corruption and people love to call you know cozy state business relations and cronyism right
22:30 - 23:00 and that's kind of one thing but it doesn't describe why sometimes cronyism generates massive amount of economic development and seemingly um you know loving relationships or faithful relationships between tycoons and and political elites and other times uh cozy state business relations fall into this trap where then you get a kind of mutual movement against one another where some tycoons are defecting and singing all kinds of bad songs about the ccp and others are kind of on a catch and release basis
23:00 - 23:30 with the states and what mutual endangerment is is a hostage holding through investment and illicit dealings and so here i don't think i quoted in this presentation but john osberg has this wonderful book called anxious wealth um about um about private sector business elites in china and has this great quote where he says basically this one guy says you know you the number one you think you want to do with local level political leads is not really take them to dinner but take them to a brothel because then you know that they've done something bad and they know
23:30 - 24:00 that you've done something bad and you're both in it for life and that basically captures the lower level essence of what i mean by hostage holding and mutual endangerment like plunder within these organizations it's internally replicated right so the first thing that you do if you come on board in a mafia-like organization system is your manager basically enmeshes you in some illicit dealings so that it makes it very hard to leave again very similar to a mafia system so he has something on you you have something on him and so you're so kind of forged in your loyalty
24:00 - 24:30 that this organization all of which has happens on a kind of unfaithful and forced basis rather than any kind of you know actual loyalty but critically when we think of hostage holding we think of this as a stable equilibrium but my argument is that it's fundamentally unstable because each party is constantly fearing the defection of the other and is therefore incentivized to hedge and this is particularly true in relationships between um these business systems and political elites right so if i have bad
24:30 - 25:00 information on this member of this faction within the chinese government it serves me to collect even more bad information and since he couldn't go after me but i'm still worried that he might i still expatriate my assets or hide other wealth to try and basically um have more of an escape route from him because i fear the defection of the other and then these dynamics tend to be pretty quick to unravel so once you see something like the interrupt introduction of an anti-corruption campaign how long will it be until my
25:00 - 25:30 person starts to sing bad songs about me and then you get all of these incentives to accelerate the expatriation of assets or the the theft of resources and more so the idea of mutual endangerment i think more than cronyism or corruption or patron crime relations helps explain why some systems some of these firms have fallen and others have survived so i would argue that a firm like fourson still has prominent connections and important knowledge about people within
25:30 - 26:00 the chinese political system who are still there whereas something like an bang or h a does not it also exp helps explain the patterns of overseas investments from mafia firms which i don't show in this presentation but one amazing thing about those gray rhino firms that i showed a few minutes ago and even companies like evergrand is that over the last 10 years we see them purchasing all kinds of real estate amusement parks all abroad and you know we have this logic of chinese outward and direct investment being going to
26:00 - 26:30 um institutionally poor environments with natural extractive industries right but in fact these companies all go to western europe and the united states and australia because they want their assets beyond the reach of chinese elites who could take it back and the chinese elites are trying to chase what they call state assets that have been expatriated from china and lastly these mafia-like business systems exist on the manipulation of the financial system or specifically looting
26:30 - 27:00 and the term looting is as a term of art and economics as well as in crime um and i'm i'm thinking of the acrolog at all paper from the early 1990s on bankruptcy for profit um so instead of guns and sportsmen they use the technology of modern corporate governance and finance to basically invert what we think of as normal business relations so instead of building a long-term business it's you're much more incentivized rationally to develop a massive amount of debt to basically bankrupt your own
27:00 - 27:30 business um and exploit those gaps within the chinese system in order to make wealth make generate personal wealth for yourself so specifically within the chinese system we see the massive development of these systems after 2003 and 2005 the creation of a quote-unquote modern financial system which was governed by the ehong sun way system so the one bank and three regulatory commissions excuse me and the three commissions are on the
27:30 - 28:00 china securities commission the banking regulatory commission and china insurance regulatory commission and one thing that's fascinating if you look at companies like tomorrow or onboard you find that they have licenses and insurance licenses and securities licenses and banking those three different regulatory bodies weren't necessarily talking to one another and all quite surprised by the intricacy of these licenses and how they use them to kind of sift assets back and forth and expropriate minority shareholders internationally they've used transfer pricing overpayment for assets um and
28:00 - 28:30 resources in order to basically turn remnb into u.s dollars as i was told several times and this whole the the interaction with chinese stock markets and indeed global equity markets has been a game of trying to basically list on ipo as fast as possible to take as much money as possible and turn it into something else and so one example would be luck and coffee which is very famous listed on the new york stock exchange immediately was discovered to have been a fraud um
28:30 - 29:00 it's part of this shenzhou system and in fact this is not the first fraud perpetrated by the shenzhou system it's a whole pattern that they've been doing over and over again in sectors that range from car rentals to coffee and they always blame the coo for basically fraudulently reporting revenues but meanwhile the actual owners of the system have already pledged their shares for cash and expatriated those assets in the interest of time i'm going to skip a few things i promised i would show a little bit of data on evergran which has according to our system that
29:00 - 29:30 according to my research of a total of 11 layers of different companies with 2939 total subsidiaries that is companies majority majority owned by evergrand and i think many things that evergrand does has done um indeed follow this logic of what is a mafia system so xujayin continues to have a personal fortune that is expatriated and beyond the reach of the chinese authorities they've engaged in an apparently irrational expansion into electric
29:30 - 30:00 vehicles into sports teams in europe diversification and this assumption of excessive risk indeed bankrupting their own company with the expectation of bailout or the expectation of political demise both of which kind of give you incentives to to make good for now when you have access to the financial system and they also engaged in pressing employees into lending the company money and engaging in the company's fraudulent um and and highly risky financial dealings all of which made it very difficult for employees to have from evergrand to get out of the system once
30:00 - 30:30 they got into it um so let me give a few conclusions for scholars and then say some things that may be more interesting about the long-term trajectory of the chinese economy so first when we find the structure of companies right this unit homogeneity assumption that's embedded and work on chinese firms may not be reasonable so a typical economics or political science paper on chinese firms would say oh we surveyed firms but what is a firm when you think of a chinese economy that's constructed in this way and the flip
30:30 - 31:00 side of these mafia systems which are so large and intricate might be state-owned enterprises which you know papers that have looked at the corporate structures of those have found that they average in 17 000 subsidiaries in the chinese economy so when we survey a single firm what is a firm if it's connected in an embedded network that's that hierarchical and that opaque and so we may need to rethink some of the core assumptions methodologically and how we do research on the chinese economy secondly more conceptually is that disentangling closeness as trust and
31:00 - 31:30 cronyism from a more acrimonious nature of relation so um here we think of closeness to the state and you know cronyism right they're close to political elites but i think we have to fundamentally realize that a lot of that closeness is not based on trust and co-optation right it's based on distrust i get closer to my you know my enemies um in order to protect myself and so conceptually when we think about what the long-term consequences for political and economic stability are those are really two different modes of state business
31:30 - 32:00 relations that should be disentangled and lastly my view is that all of this is made possible by what we might think of as the edifice of a modern financial system red capitalism and carl's language smaller scale firms like this are kind of a feature of chinese political economy we find them all over china but they don't intend to be this big and they're systemically risky and only when china started to develop massive investments in equity markets access to the private took credit for the private sector and to bond markets did we see
32:00 - 32:30 the development of these kinds of behaviors and so it's intimately related to the adopting at least the edifice of a modern financial system without that regulatory framework moreover i would like to argue that these firms have been a key part in a shift of china's political economic model from kind of state capitalism or market socialism to what my co-authors kelly thai and margaret pearson and i have called in various publications party state capitalism in china which differs
32:30 - 33:00 from this kind of state ownership at the commanding heights to think about state ownership as diffuse and widespread and the benign neglect of the private sector has become a party's role in corporate governance even all the way through different sectors in china into firms of different size instead of special deals we find the a security approach right securitizing the state's role in the economy and instead of growth as the bottom line it's really regime stability as the bottom line so it's an entirely different kind of logic of a of a
33:00 - 33:30 political economic system which is brought on by many things so i say here what caused it many things caused it right one is a generalized threat perception we know this issue is paranoid it's always been paranoid um some social unrest the color revolutions arab spring all generated this threat perception but so too did as i say at the bottom here growing distrust of the domestic private sector's alignment with the national interest the feeling that they're not necessarily working towards what the ccp wants and economic insecurity which came kind of from different global sources as well as some
33:30 - 34:00 domestic ones so what is this we see basically the securitization of economic issues in china so a suite of new laws with which many of us are familiar intelligence cyber security national security and various forms which have brought things like financial stability to the level of national security in china as well as a massive expansion of state finance in the non-state sector and many of people have looked at this only as a feature of industrial policy and technological competition with the united states but
34:00 - 34:30 if you actually look empirically into what kinds of firms the state is holding a stake in a lot of it i would argue has to do with wanting to monitor what's going on in the financial sector especially after several years of some big surprises in terms of financial risk spots blind spots and systemic vulnerability this is from an entirely different paper also without 10 in studies and comparative and international development and i won't have time to explain this very much but um looking at basically the rise of central shareholding and local shareholding organizations and their
34:30 - 35:00 investment in firms that are beyond state majority owned so really in quote unquote private sector generating these blurred lines between state and society which has generated quite a bit of international backlash so let me conclude um with what just two more slides so one is thinking a little bit about china about the ccp caught up in two levels of security dilemmas the first is domestic and so over the course of the last 10 years this distrust of the private sector
35:00 - 35:30 especially private finance a distrust of political of business elites and their effect on the ccp that's evident both in this kind of dramatic moves against business elites but also the anti-corruption campaign and the sphere of foreign dependence which i would argue is partially legitimate based on some experiences the ccp has had generating this idea that china can't that the ccp cannot trust domestic business to achieve the goals that would lead the regime to be secure which led to this kind of party state capitalism and securitization of the economy which has now generated an
35:30 - 36:00 international security dilemma so these legal financial and political changes in china make china less trustworthy make chinese firms more in bed with the chinese state according to international observers and therefore less safe to be entangled with and then the u.s response and others responses reinforces china's sense of threat and so on and so on so in conclusion um let me say a few things and then turn it over to carl um so first is that my view
36:00 - 36:30 is what this crackdown is that i say it's a long crackdown because it didn't just start and it's not yet over it's a pursuit of discipline really rather than ideology and so you know this great debate about well is xi jinping really a communist or a socialist or what is he looking for and my view is that he's really looking for discipline rather than necessarily ideology within the chinese system and so he wants business elites um he wants business actors and political elites following his line and following the party's discipline more
36:30 - 37:00 than he has any particular ideology about how state and society should look and it's a reaction at least in part to a loss of control especially in the financial sector rather than any part of a premeditated strategic plan that was hatched in either 2012 or in 1921 depending on your review of it and the remedy right to all of these problems in china's political economy we see the party offering itself as a shareholder and a monitor not necessarily an increased regulatory system but really the party itself and
37:00 - 37:30 its various actors will control these business elites from the level of the firm from within um i don't need to work too hard to get you to think about the implications of that whether or not it will work and lastly what this is and what i think we'll see over a long time we all have been familiar with this hammer and the dance that we heard about covid a couple of years ago so you know google you do a lockdown and then you kind of dance around to try to see how you can have a new normal um with with the numbers
37:30 - 38:00 being what they are and i think the same analogy applies to the ccp in the private sector which is they're going to be hammers and then there's the private sector which is quite savvy at getting around some of these things and the state which still wants the private sector to invest so dancing around one another and then having a hammer again right um but we should think of this the critical thing is that it's not like a new system that just gets born but a dynamic that we can see going back and forth over time so we shouldn't think of something as static or new system that doesn't take maintenance but rather a
38:00 - 38:30 dance between the private sector and the ccp which will continue at least for the medium term um so with that i'll thank you for your attention um and let carl explain how things really work well i i'm very impressed that you're able to talk without drinking a little bit of water that was quite a presentation and i don't know how i can respond to so much interesting information and viewpoints so i i just have four comments or four areas of comment that
38:30 - 39:00 please do carl yes um so this is a tremendously interesting paper and it'll be a fantastic book i'm sure uh i'd be curious to know why you got interested in mafia systems but uh let me let me make four points or talk about four different things one is how do they when you talk about how they arise i think the history on this is pretty clear either they came out of the meaning hua the late 90s when when
39:00 - 39:30 jurong ji got rid of all so many soes or it's a consequence of the corporatization that came after the 1997 securities law that enabled enabled people to turn soes into corporations and shareholding corporations they became commodities so this kind of technology became became local government financial platforms or
39:30 - 40:00 they could also become used by private companies or these mafia guys so i think i think that's what the history of this thing should be the second comment in this regard is you need with regard to the physical system the fiscal system as you know quite well uh penalizes in effect penalizes local governments by not by giving them too many uh expenditure responsibilities and not enough revenue to do it so it makes local governments
40:00 - 40:30 in most of the non-rich parts of the country extremely vulnerable to guys like evergrand or the people you're talking about but not just them to anyone who wants to do business it was always my experience that you could have a lot more fun working in the provinces than trying to go to shenzhen or shanghai uh and the second second aspect of how do they arise talk about how
40:30 - 41:00 these mafia groups or systems seek out political elites for uh for uh to get the kind of uh power to uh pursue their plunder and so on but in my experience it's really the case that it's the political elites to create these guys uh if you know david barboza very well when we look back on his uh expose of
41:00 - 41:30 ping on and and the premiere that's what that's all about as you as you know and this tomorrow thing this is a thanks to i think michael foresight we know who was behind tomorrow group uh these are all top down types of types of organizations what's interesting about somebody like wang shi-shan is that supposedly has no family no children so he's clean maybe guo and gray has something to say about that
41:30 - 42:00 so i think they're their elite support at the top that's what onboard is all about those are a bunch of sort of low rent princelings who put that together and with cmig if you've got state council approving your company then what else do you need to say this is a simple government type thing uh and finally in this vein when you look at your the data set that you present in the paper anyway with 400 people and you break it up it's extremely
42:00 - 42:30 interesting to see the seisak central say sac and uh local say sac ultimate ownerships of these sprawling companies uh and and and i think that's a case of parasitical you know strip asset stripping where you've got somebody uh related to somebody powerful in the company creating creating a way to get out of the company and uh and strip assets out of it so why do they arise i mean my comment
42:30 - 43:00 here is really uh i've always remember audrey dunathorne talking about the cellular economy and when i when i think back about china you go from one county to another one city to another one province to another you're really going from one guy's turf to another guy's turf it reminds me very much of 2005 right after sars in beijing the everybody the private car
43:00 - 43:30 market just boom because nobody wanted to ride public transport so everybody went out and bought cars they went out and bought cars and drove them to tianjin and the cars were gone forever there was no there was no linkage between tenjin and beijing except going through through i guess um the uh the politburo so so when you think about why these guys have such sprawling organizations i think when
43:30 - 44:00 you're creating a company you've got to go do business with the people who are in each of these sort of boxes and uh and it's a way also of getting to have access to to banks and trust companies and and so on you might look at dalong if you remember de long it's a while ago it was china's biggest private group saijing had a wonderful diagram of its of its organization
44:00 - 44:30 structure i think when you think start thinking about these huge organizations like evergrand by god then you really start thinking well do they really are they really able to manage this kind of thing but then i think oh jp morgan has 350 000 employees how did we manage that i think that's a good question too that's that's my my third uh sort of area so so these sprawling groups in your analysis
44:30 - 45:00 of the 400 or the 1000 is something that that's where i was interested to begin with because the question i always had was uh well we ran across a company once that we wanted to list in hong kong but the trouble with it was it was a fake it was a gia yong guadezo it was a fake foreigner it was a joint venture but it didn't have any capital because the capital was put in was taken away by the local government so it looked like a joint venture but it wasn't and so that made it extremely hard to
45:00 - 45:30 to uh figure out how to audit basically anyway the deal never got done but but uh there are so many different ways i think that your paper suggests that these small or these large sprawling private companies have of protecting themselves so to me there's really a question of how do you it's a strategy paper how do you protect yourself one way is to have connections to uh you know the guys up
45:30 - 46:00 there another way is to is to strip acid strip uh soes uh and there's there must be other ways that's what i was thinking about when i read your paper and i understand your your intention is different but that was my reaction and and and fourth i you know i read the paper and i say well where's the party in all this are you just being polite you don't want to talk about the con well i won't say communist party uh i
46:00 - 46:30 won't say the government either because it's a group of guys where are the bros in all this uh uh because they're definitely at the heart of of these kind of mafia groups and also are the reason why the country after all this time has not generated any institutions other than the communist party i i would argue that the laws courts what have you been you know stock exchanges banks
46:30 - 47:00 whatever these are all in play all the time and it's because because the party uh likes it that way i totally i totally understand you're one of your last comments when you're talking about what is the party what does party capitalism really want to do it doesn't want to generate profits it just wants to be able to control the situation so it's all about keeping things moving
47:00 - 47:30 and not making waves i want to explain why i'm so insistent on the party in 1997 and then i'm going to stop after this so we can do q a in 1997 we had listed the largest soa in chongqing and was a totally clean deal i mean and it was nothing to it and so they come back after it's all over it was successful even though it was bankrupt
47:30 - 48:00 my boss says this is the time of uh this is the time of red chips and beijing enterprise and all those kind of things go back and get the chongqing red ship they must have lots of really good enterprises there you can package and list well they didn't and even if i even if i had well i did go back because i had to and then we had dinner that night with somebody in the government who was uh helpful in our in our listing and and he got drunk and he said you know you guys it you can't do anything everybody's already bought
48:00 - 48:30 it was just at the time that chongqing was turning into a directly administered city and it was all the people in the government the senior levels were replaced by guys coming down from beijing and those guys told people like our friend that unless you're in and you take the money then you're out this is go right into your right into your paper only as the party so as i was reading your paper all i could think about was the party
48:30 - 49:00 so i think i think i'm going to end with that and we can stop here i really appreciate uh being asked to uh participate in this and to and to talk about your paper make and thank you so much to hoover and glenn thank you meg i want to give you an opportunity to respond to uh to carl's remarks and then i have a couple questions for you before going to the uh audience q a there's a lot in there and i am um i just want to say a couple of things uh so thank you
49:00 - 49:30 for for those for those comments and i share many of these um many of your your reactions and the book has you know a longer kind of explanation but let me just say first on the on the point of the fiscal relationship so here i emphasize the financial system the fiscal system is a huge part of it right and especially um as the book explains when there's this shift from tax-based revenue um for local governments in 1994 and then you still get local governments who have these expenditure burdens right and they
49:30 - 50:00 have to generate something and they want to get investment right from local businesses but that investment doesn't have to come from retained earnings like it used to when the private sector was excluded from the financial system and so then you get this interesting set of relationships which i think are more parasitic um than they are productive where local governments want investment they don't care where that investment comes from you know if the investment comes from bank loans into put into enterprises that are you know investing in something really to get the the value
50:00 - 50:30 of the land or something rather than anything productive then you get a pretty um inefficient economy right that allocates resources in a pretty disgusting way and so that is i think the fiscal part of it the book is really equal parts about the financial and the fiscal system so i absolutely agree with that and then just on this issue of the what's the role of the party i'm not really known to be polite and so politeness was not the reason why but um but really to to bite off a paper that can take off what it's you know that can chew what it's fighting off or whatever the right um phrase is but um but the
50:30 - 51:00 the role of the party here and this idea that you're expressing which is look many of these firms are doing exactly what soes were doing which is to say i'm going to use the tools of corporate governance and the you and the tools of an equity market and of a parent you know financial system and bond markets etc to act like a company that has a bottom line that's a profit or revenue bottom line but i don't right and once you have large soes and small soes that
51:00 - 51:30 are doing that right i list uh you know oh sure yeah we're going to protect the rights of minority shareholders i mean everyone knows what's happening there which is that the party's in control of the enterprises and it's going to do political things if they need to do it then why wouldn't you have a bunch of other firms doing that right listing with no intent of protecting minority shareholders no intent of actually ceding any kind of you know appropriate perfect governance role to shareholders and in fact you know using this financial system
51:30 - 52:00 to generate exactly you know the capital that it wants and then do with it what they want without accountability to those shareholders and so um as a parent i learned that my own behavior right is mimicked and so if i you know if i want someone to listen to me i must listen to my children and i think the same thing happens with economies right we're used to thinking in terms of regulation et cetera but the norms of how a political economy operates right if some set of firms are doing something with impunity then what's to stop other firms from using those same tools in a way that i
52:00 - 52:30 mean carl suggests that like you know laws and institutions in china mean nothing and you know i'm not i'm not willing to go absolutely that far but i think that you know if there's some subset of firms who are above the law or beyond the reach of the law or or shareholder you know rights or corporate governance institutions then how can you apply that law effectively to others and it turns out you can't and so i do think that that other half of the economy is a huge part of the story of this half of the economy i just can't take it on in one single paper um but i appreciate
52:30 - 53:00 that and i could go on forever but i'd like to get some questions from the audience and from glen so thanks mike i think we definitely have to have you back on these subjects but let me ask you put yourself in gary gensler's shoes what is your guidance here for american regulators and for american investors who are trying to wrap their heads around this beast that you describe which is so unfamiliar to our ordinary frames of reference and in particular you know what are the answers to getting you know our markets under control here
53:00 - 53:30 if these creatures these bizarre firms mafia-like firms are listing on our exchanges where you know our our investors and uh likely have no idea what they're getting into so what's your guidance on that um so i mean i haven't i haven't spoken directly to you know the sec about this or you don't think i guess but i think but i have spoken you know in the us china congressional commission about it and i think my most famous and contentious refrain was
53:30 - 54:00 actually our investors are pretty sophisticated so if you look at especially the institutional investors who are engaged that you know the qfii institutions in china who have you know substantial access to a shares in chinese markets they're pretty savvy they know pro they know a lot of what's going on and in fact they were big winners in the 2015 financial crisis in china they all had algorithms to price their exit when the bubble got too hot they know they can tell you i mean the the people who really know these companies inside and out are people who
54:00 - 54:30 have a financial skin in the game not just tenure skin in the game right so people who you know want to figure out who exactly owns this company i mean look at half of the um the frauds and you know it by whether in u.s equity markets or chinese equity markets have been exposed by um you know short like basically your short sellers who are really financially engaged in doing this and so i wouldn't underestimate so you know there's a big i've heard a couple of things from american policymakers like oh we should be exposed to these markets at all because you know they're so volatile and
54:30 - 55:00 you know come on you know a lot of american capitalists have been involved in volatile markets for much longer than a century at this time and they know what they're doing and so i would say you know part of that is you know let's not pretend like the capitalists are super naive from our side either um that said i think in a way you know having chinese companies list in the us you know does expose them to more a corporate accountability and you know shareholder rights um you know upholding than it
55:00 - 55:30 would in china and so inviting you know companies who do want to uh in yashanpang's terms borrow american institutions to make sure right that they are engaged in um you know corporate governance practices that are right i don't see i don't think that chinese firms should be banned from doing y and z i don't really see it that way um and instead i think you know what do we do we enforce our own institutions and so um so you know recent moves by the sec to say look you know unless you can prove auditing by firms that we
55:30 - 56:00 recognize as as as you know legitimate auditors in the united states you can't list on american exchanges so that's that's the right answer to not you know make broad judgments and although it seems like i'm doing that um make broad judgments about what chinese firms do but rather to say look we are very invested in our institutions which we deeply believe in that guarantee you know corporate accountability corporate governance practices of the highest standards and we believe that as long as someone wants to follow those rules they can follow those rules um but this
56:00 - 56:30 question of you know what do we do with financial flows to china is tied up in a bunch of questions of national security that are different from this and to that i would only say we have to be very clear what we are talking about so i have been in a bunch of conversations where people are saying well we need a we need reviews of outbound investment to china and sometimes the logic is to protect american investors sometimes the logic is to protect you know not investing in chinese invested military companies sometimes it's a preventing genocide logic
56:30 - 57:00 all of those may be worthy logics but we need to be laser focused on what the policy goal is when we think about those kinds of instruments and not lump all of the problems into one so national security versus it's a messy market to very different things fair point i wanted to be sure to get to curtis millhop's question um so i'm going to just quickly uh summarize it here much of what you've discussed is common in other jurisdictions extremely complex opaque corporate structures close connections between business founders
57:00 - 57:30 and politicians and expropriation of minority shareholders his question theory theory on organized crime suggests that the state may tolerate it at some level because it mitigates institutional weaknesses that the state hasn't been able to address formally is your story really about plunder or about incentives or opportunities created by china's institutional weaknesses so i do not think that these are tolerated by the state as a solution to basically um
57:30 - 58:00 you know this thing that so i've learned a ton from um from curtis milhaupt over the years about a number of different things um and yeah and so i would say no so the answer is not that they have been tolerated it's not a kind of charles tilly type situation nor is it a you know i'm extending the mafia because i can't govern this region and so i'm allowing you to do it that is not what i think in fact i think they're more in competition with the state um in terms of you know having a a an economic system that's subject to the state's regulation so i would say they are brown
58:00 - 58:30 areas from the state and political science terms where the state can't govern them i do think of course it has to do with uh problems of china's institutional weakness that are able to exploit that not solve it so this very winegast and kind of um ligia leo argument about you know these large platforms solve problems of institutional weaknesses i don't think they do that i think they exploit institutional weaknesses in an unproductive way rather than a way that's generating kind of institutional um bill institution building in china
58:30 - 59:00 and i do think yes it's institutional weakness but again i really think the political incentives come from something beyond just institutions right so it has to be about the way the mindset of entrepreneurs in china and the mindset of capitalists and how they think about the long term rather than just what they can do right i don't really believe that the world you know just offers you know institutions and everyone wants to exploit them as much as they can right it's more that over you know what now is
59:00 - 59:30 your 70 years right of operating within the chinese economy and whatever stage it is people have learned that policy instability is a real thing that campaigns have high tides and low tides that they have to wear red hats and do all kinds of things list themselves as foreign owned enterprises when they're actually domestic enterprises and so that um learned system of of what i call you know following an early generation adept assimilation within the chinese economy is what we're seeing so it's deeply political and a kind of affective and
59:30 - 60:00 normative sense rather than just an exploitation of institutional weaknesses but i wouldn't say these are a solution or have offered themselves as a solution to institutional weaknesses instead their exploitations of that um but i appreciate the question fabulous um i have one other question that i want to get to before we close and that comes from matthew lowenstein as a new hoover fellow here and he wanted you to expand on the relationship between mafia-like businesses and politically motivated detention of business moguls he asks is
60:00 - 60:30 it that mafia-like businesses are more likely to be targeted because they're monetizing political power or is it just that the party state wants to discipline these organizations or something else so i would say um the kind of targeting um though the politically motivated detention of business moguls i'm not exactly sure thank you for the question matthew um whose work i know well and it's not um so when someone like renji chung is detained for saying nasty things about xi jinping's handling of kovid that's a
60:30 - 61:00 very different phenomenon than i think the mafia systems right which is um which i think is look the mafia systems over time were allowed to grow with impunity and build systems that generated systemic risk for the party state and now the party state is going after them but the going after is not very easy because there's all kinds of embedded interests everywhere and there's all kinds of hostage taking and so it's not straightforward that xi jinping can just crack down on everybody all at once instead there's a kind of
61:00 - 61:30 dance to it i think it's a different thing than saying you said something i don't like and so i'm going to imprison you so all of these things are politically motivated but i'm not sure if that's what what matthew sort of had in mind and so i would say what what what we know when we're seeing a kind of mutual endangerment thing dynamic play out is when you see all of this cat and mouse game about delays and about you know refusal to bring people to charge them those kinds of things what this is like the on bank story and
61:30 - 62:00 the h a story these are you know which will we won't get answers to for a long time about why the delays work the way they are who really fell off what wall those kinds of things um we won't get those answers for a long period of time i would say that's very different than the kind of you said something i don't like and i'm gonna i'm gonna take you into prison thank you meg thank you carl very much for participating in this discussion meg we'll have to get you out here in person soon to talk more about these issues a fabulous tour de force presentation
62:00 - 62:30 uh i want to let you all know that our final event for the season is going to be on on the 15th of this month eyes wide open ethical risks and research collaboration with china in which i'll be joined by my co-author jeffrey staff presenting a new hoover report on ethical risks in collaboration with china on ai and sophie richardson will be the discussant from human rights watch along with larry diamond hosting and moderating thank you meg thank you carl and we'll see you next time bye-bye
62:30 - 63:00 thank you thank you [Music]