At the end of October the New York Times published an article concerning the “hidden wealth” of China’s prime minister Wen Jiabao’s family. The story provides an excellent example of how business is done in China specifically and in emerging markets in general
At the end of October the New York Times caused a small sensation in an article it published concerning the “hidden wealth” of China’s prime minister Wen Jiabao’s family. The article alleged that Wen’s family had amassed a fortune of over $2.7 billion. Two Hong Kong lawyers purporting to represent the family denied the existence of any such wealth and threatened to sue the Times. The Wen story is interesting, but why should investors care? For the simple reason that the story provides an excellent example of how business is done in China specifically and in emerging markets in general.
The first point to understand about the Wen story is the fact that elite power in emerging markets has been institutionalized. Certainly developed countries have their own aristocracies which are often based around the best educational institutions, but they are nowhere near as extensive or pervasive. In China the elites are based on relationships within the Chinese Communist Party. The party favours its own, especially the descendants of the founders of the People’s Republic of China. These individuals are known as taizidang ("princelings"). They include not only children, but often members of the extended family including wives, siblings, uncles and even in-laws. In fact the disgraced Bo Xilai’s father, Bo Yibo—one of the “Eight Immortals”, supported a process where only one member of each powerful clan could enter politics, leaving the other relatives free to make money.
Family connections in China are especially important and not only for cultural reasons. In countries where law might be given lip service, the only way to enforce bargains is to do business with people you trust. The people you trust are those with whom you have the strongest relationships—often family members, but could include members of the party, members of the same religion, sect or caste. What makes the process particularly prevalent in China is the extent to which the government controls the country’s economy. More unrestricted government power provides more opportunities to amass riches. So club membership goes way beyond connections to get in an elite school or a good job. It allows members to control entire industries.
Wen’s wife, Zhang Beili, provides an excellent example. Zhang Beili’s specialty was jewellery and gemstones. So with her husband’s power and connections, she was able to create two powerful state entities create the National Gemstone Testing Center in Beijing, and the Shanghai Diamond Exchange. Both of these institutions were the official gate-keepers. They formulated rules that required any diamond seller to buy certificates of authenticity for any diamond sold in China, from their government-run testing centre.
Under these rules, if you wanted to get into the jewellery or diamond business in China, you had to deal with Ms Zhang. So Ms Zhang became quite popular with the likes of Cartier or De Beers, who would happily work with the family to have the privilege of entering a growing market.
Maintaining control over the rules also allowed princelings to take advantage of bits of state property as they were privatized. It was a tremendous advantage to know which companies would be privatized so that the relatives could get in early and often purchase dominant positions. Once the privatization had gone through, the new private owners could be sure that competition would be limited.
The most important competitive advantage for the well-placed in China was and is access to capital. State-owned banks do not lend to just any qualified borrower, but only to the largest and best connected. Listing on exchanges is also restricted.
But why is this a problem? Certainly connections help in every market. The reason is has to do with certainty and transparency. Any investment is a bet on the future. If the legal and regulatory process is dependent upon connections it can easily change. Rich businessmen and foreign companies try to outdo one another to curry the favour of the connected. But the connected as rent seekers are always looking for more. For example several princelings including George and Jeffrey Li, Wilson Feng, Jeffrey Zeng, and Li Tong have all left their foreign banking employers and set up their own investment houses. If you have the power, why share?
The other problem is that without legal protections, property rights and power can disappear. When Deng Xiaoping died in February 1997, his son and son-in-law became subject of an investigation. When Hu Jintao became president in 2003, took revenge on his predecessor, Jiang Zemin’s cronies in Shanghai.
But the real problem is transparency. If scare resources are allocated according to connections and the relationships are unclear, the allocations cannot be efficient. So the fact that a lot of wealth ended up with Wen’s family means that much of that same wealth was diverted from the Chinese people or more importantly, investors.
To read more articles by the writer, please click here.
(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at [email protected] or [email protected].)
With the US Presidential Elections frenzy escalating and too close to call, conspiracy theories abound with regard to the voting process
While walking through the campus of Ohio State University (OSU) there is a Buckeyes American football game going on in the afternoon. I scramble to get myself a ticket and reach the stadium. I find out that I’m early, so I talk to some of the people about the US election.
Pete, who is an usher, tells me that he retired from the Radio Corporation of America (RCA) 25 years ago and had opted for Republicans. I ask him if he wants ‘Obamacare’. He does but feels that whoever becomes the president will not be able to repeal it. I almost whoop in delight when I find out that he’s currently a day trader. Here’s a guy who understands the highs and lows of life.
Later, I run into Gail, a senior with four kids scattered across the continent. I ask who she voted for. Interestingly, she answered that she voted for a ‘write-in’ candidate (someone whose name is not listed in the ballot). In other words, it is form of a protest vote.
The election is so close that conspiracy theories are doing the rounds. The Democrats say “vote early” while the Republicans say “vote often”. Astonishingly, no voter ID required in order to vote. In this day and age, it’s quite unbelievable. Some Democrats claim that supply of the voting machines is controlled by the Republicans. I am sceptical. However, I am told the story made it to Forbes Magazine and was promised a link to the story which has not come till date.
The OSU marching band put up a fabulous show, amidst a lot of cheering, before the game began. American football continues to baffle me and I cannot understand what the fuss this game is about. Americans love sports though. Various metaphors are used to describe a ‘tie’ or a close race. For example, in baseball it is “bottom of the ninth and the ball game is tied”. In basketball, it is “first overtime”. In American football it is “fourth quarter and the teams are neck and neck”. The Buckeyes game turns out to be one-sided, with Ohio defeating Illinois 52 to 22. The crowd goes home happy.
Two billion dollars later it is now a 100 meters dash to the end. It is too close to call as candidates are virtually neck and neck. The 6th November can’t come too soon for many Americans.
(Harsh Desai has done his BA in Political Science from St Xavier's College & Elphinstone College, Bombay and has done his Master's in Law from Columbia University in the city of New York. He is a practicing advocate at the Bombay High Court.)
Pratibha Cauvery, 31 years old, already in bad shape, with unpaid crew, no provisions, no diesel, no stores, no drinking water, is outside Chennai harbour. What are the options with the captain? Very little, given the current way maritime laws are implemented
I started my maritime career with a private Indian shipping company, now defunct, called Seven Seas Transportation (SST), as a cadet on a ship called the Satya Kamal. In due course I moved from cadet to second officer to chief officer (on dispensation) all between 1973 through mid-eighties. It was a part of the JK Group then. Boom to bust in shipping, would be a better way to describe the timeline, and the ‘Satya’ ships of SST were no exception.
SST owners knew how to look after their people. They also knew how to run their ships. But commerce does not give exemptions on these heads, and the shipping recession of the early and mid-eighties saw many shipping companies go under, with ships stranded all over the world. Unpaid crew, no money for fuel or food, maintenance not possible without stores, and soon you have a problem under your command if you are the captain. This is the situation Pratibha Cauvery finds itself in.
This was the situation in which MV Satya Kamal found itself. Ordered to head for anchorage awaiting instruction off Gujarat, the Captain instead brought the ship to Bombay, and made a due representation to the offices of the Director General of Shipping (DGS) and Mercantile Marine Department (MMD). In such circumstances, what else is the captain supposed to do?
By law, the captain has the right to approach the shipping authorities, and demand that the ship be auctioned “as is where is” to pay off the creditors. First lien here is always is for unpaid wages. Get your money, pay the crew, hand the ship over to the receivers, move on with your lives.
That’s what the master of the MV Satya Kamal did in the mid-eighties while in Bombay Harbour with the full support of the maritime authorities of that day, same DG Shipping Office from Jahaz Bhavan in Ballard Estate, despite the owners being powerful people and also from Mumbai. The ship was sold within 60 days, handed over to the duly appointed receivers legally, the crew paid off, and other creditors were told to take it up with the company. All under the Merchant Shipping Act of India.
Today, what can the master of a ship in similar dire straits, like the Pratibha Cauvery, expect if he approaches the DG Shipping for help in auctioning off the ship to ensure crew payments? Briefly, at the very least, his maritime career will be over. But that’s not all. He will be summoned for enquiries by all and sundry, in the course of which he will be paid nothing. He will face threats and more. And the ship will not be auctioned freely and fairly.
So, he stays on the ship, and keeps his mouth shut.
But what happens next, onboard, since the master/captain is on the ship, is supposed to be in charge and responsible for everything? Here's what you can expect:
Whatever authority he had, has been totally eroded onboard because he has not been able to provide even the basics to his complement. DGS is not giving him any support, nor is MMD, if he had approached them. The company has stopped responding. Unlike in an aeroplane, the captain cannot simply walk off, handing over to ground or shore staff. He and his crew will be detained before he crosses the port gates for wilfully abandoning ship and crew therein, and if lucky, taken back to his ship, if not, thrown into jail, unbailable. As an Indian, he is an alien in his own country, with no rights. He is good enough to command an Indian ship, sail her all over the world and around India, but he is a security threat if he wishes to go ashore and lodge a simple written complaint.
The Pratibha Cauvery arrived at Chennai Port about three months ago. The ship is over-age. The port safeguards itself by taking 150% of possible port charges and sends a pilot to bring her in for cargo discharge. The first physical contact then is by the pilot, who goes onboard and gets a few minutes to check the real status onboard vis-a-vis a document called the “Pilot Card”. If there are discrepancies, he informs the Port Control, which then dispatches extra tugs to bring the ship in. The marine authorities are informed of the deficiency—in this case it is the MMD in Chennai, which is a subordinate office of the DGS.
Anything further to do with the ship has to be done under the orders of MMD. In the worst case scenario, if it is a dead ship with no power, then once cargo work is over, the port authorities will place a few more tugs on duty to take her “cold tow” without engines to the anchorage area, and leave her there. A ship cannot block valuable berth space meant for cargo work.
(To be continued in part II)
(Veeresh Malik had a long career in the Merchant Navy, which he left in 1983. He has qualifications in ship-broking and chartering, loves to travel, and has been in print and electronic media for over two decades. After starting and selling a couple of companies, is now back to his first love—writing.)