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Xiao Jianhua

The Chinese billionaire who rides the tiger can never get off

Beware of entering into partnerships with the state, as the rule of law may not be the only one that matters. It’s the kind of business where occasionally people disappear

PUBLISHED : Tuesday, 07 February, 2017, 4:02pm
UPDATED : Tuesday, 07 February, 2017, 10:42pm

News of the disappearance of Chinese billionaire Xiao Jianhua from Hong Kong was widely reported in the media locally and internationally.

Unconfirmed reports said he was abducted and whisked across the border over his business dealings with powerful figures in China who might have been targeted in the graft crackdown.

Xiao’s disappearance has raised fresh fears about Beijing’s growing lack of respect for Hong Kong’s autonomy and independence in law enforcement.

For wealthy businessmen from the mainland or Hong Kong, this is not their most immediate concern. The central message of the alleged abduction is to send a strong signal to them about the dangers of questionable dealings with those in power.

Throughout human history and across all cultures, wealthy businessmen have feared government, and have worried about how to conduct their business activities as a consequence. They have three main concerns.

The first is about increased regulations and higher taxes, through which the state can curtail the flexibility of business.

In general, small businesses suffer more from regulations, which impose fixed costs that are more burdensome to them, and big businesses are more hurt by taxes. This is why businessmen have a common interest in preferring a small limited government. When Donald Trump announced he was going to cut regulations and lower taxes, the stock market gave him an immediate, positive response.

The second worry is about the arbitrariness of government decisions. Wealthy businessmen of the past feared lords, sultans, and emperors would confiscate their property, sometimes on drummed up charges.

All pre-industrial societies developed solutions to help the wealthy protect their property, typically land, from the grabbing hands of an arbitrary state. For instance, in Islamic territories, the wealthy endowed their immovable private estates to Islamic trusts called waqfs to support a designated social service in perpetuity: a mosque, a school, a lighthouse, among innumerable other possibilities.

The trust came to be viewed as sacred on the ground that it served charitable purposes. This protected property because rulers were constrained by the fear of developing a reputation for impiety.

The third worry is of entering into a business relationship with the ruler as partner. Partnering with the state is a two-edged sword. It is the fastest path to acquiring monopoly privilege and huge profits.

But it is also vulnerable to the moods of the ruler. Even more worrying, it is an avenue for corruption and promotes rent-seeking for privilege that transforms businessmen into political lobbyists and cronies.

During the time of Adam Smith, the dominant economic philosophy was mercantilism. The purpose of trade and commerce was to make the state rich, and businessmen shared in the profits through state-granted monopolies.

In The Wealth of Nations, Adam Smith criticized monopolies and advocated market competition as the preferred way of doing business.

Today we are taught in economics courses that market competition promotes innovation, productivity, and better use of resources to the benefit of the consumer. Smith’s revolutionary idea was to associate the wealth of nations with the prosperity of the consumer and not that of the ruler. This turned being bourgeois from a vice into a virtue and opened up opportunities to build a better material and spiritual world.

The big economic story of our times is how China and India began to embrace the economic ideas of Smith and of Hong Kong’s experience, and attributed a sense of dignity and liberty to the bourgeoisie they had denied for so long. The result has been an explosion in economic growth.

To be sure, the challenges of such a momentous transformation are plenty. The task of reconstructing proper relations between the state and the market in China cannot avoid a long and tortuous path despite everyone’s best hope.

Hong Kong will continue to thrive if it remains a place where businessmen do not have to worry about embracing bourgeois virtues. And if they are free to do so, then they need not be worried about the disappearance of Xiao, whose rise to fortune appears largely to be a by-product of the on-going restructuring of state-market relations on the mainland.

As long as the government maintains a light-handed regulatory environment and low taxes, businessmen will have no fear of the first type of worry.

If the government does not arbitrarily expropriate the wealth of business, then the second worry will not be there either.

But the third worry is always present – the one that most worried Adam Smith, that of doing business in partnership with the state where the rule of law will not be the only factor that matters.

It’s the kind of business that could from time to time cause people to disappear.

Richard Wong is the Philip Wong Kennedy Wong Profession in Political Economy at the University of Hong Kong.