Kill Chicken Scare Monkey (杀鸡儆猴) – Beijing’s Philosophy Of Regulation Won’t Work

• “According to an old folktale, a street entertainer earned a lot of money with his dancing monkey. One day, when the monkey refused to dance, the entertainer killed a live chicken in front of the monkey and then the monkey resumed dancing….. 
• “Kill the chicken to scare the monkey (traditional Chinese: 殺雞儆猴, lit. kill chicken scare monkey) refers to making an example out of someone in order to threaten others.” – Wikipedia

Death in Tianjin

On January 29, a man named Lai Xiaomin was executed in China, probably by lethal injection, possibly by a firing squad of some sort. (The authorities did not specify precisely how the sentence was carried out, but both options were available.) 

Lai was no common criminal. He was a mogul, a financier. An “asset manager.” In fact, he was the former CEO of China Huarong Asset Management, one of the largest such firms in China, with hundreds of billions of renminbi on its balance sheet. Huarong was a creature of the state (although it eventually floated a public offering in Hong Kong, and invited select foreign investors – of the Goldman Sachs sort – to buy in). It was created to help bail out an even larger creature of the state, the $4 Tn Industrial and Commercial Bank of China, by taking over that bank’s nonperforming loan book to help clean up China’s first banking crisis in the early 2000’s. 

In short, Lai was a Big Fish. He had enjoyed a multi-decade career moving through the top echelons of the Chinese financial system and the Chinese Communist party (outlined in a previous column). After taking over Huarong, and apparently not content to merely clean up the trash, Lai raised new capital, expanded the firm’s portfolio through various foreign adventures, and entered into new lines of business (brokerage, insurance). He also strayed into a corrupt lifestyle, which eventually brought him down. Even in disgrace, he had celebrity status. His rise and fall inspired a fictionalized TV series that stretched over 50 episodes. Last month, his pathos-drenched confessions were woven into a five-part documentary entitled (like a classical Chinese Novel) “The Tales of Lai Xiaomin,” which aired on Chinese State television. 

Officially, Lai was put to death for bribery, bigamy, and for being “extremely greedy.” 

(There had been speculation at the time of the sentencing that Lai might be granted a reprieve by means of “a commonly added caveat that allows death sentences to be commuted to 25 years, or life in prison after two years.” But the authorities seemed determined to demonstrate severity, and wasted little time. “Never before had a senior Chinese financial official been put to death in such a swift manner.”) 

For Whom The Bell Tolls…

The brutal verdict was of course a message aimed at a broader audience. Kill chicken. Scare monkeys. 

In the last two decades, China has developed a new kind of economy, different from the old statist model of Mao and his generation. The rigid collectivism of the past has been softened, and partially displaced, by a new entrepreneurial culture. China is learning to tolerate private enterprise, risk-taking, and merit-driven inequality. But the “new men” who have emerged with this new economy are not always agreeable to the old guard. They are creative. They disrupt existing arrangements, and irritate traditional sensibilities. They sometimes break the rules, crossing the thin line between innovation and infraction. 

But the upside for China has been significant, as well. These innovators embody the “modern China” for many people. They have built the first world-class Chinese companies capable of projecting China’s rise on the global stage. 

One senses the ambivalence in Beijing. The government would love to showcase Chinese versions of Bill Gates and Steve Jobs to demonstrate to the world that China, too, can innovate (just like the Americans). But such personalities are not always easy to control. They represent an alternative path to wealth and power that lies largely outside the official precinct.  

This ambivalence challenges the Chinese government to learn how to regulate the private sector without neutering it. 

In the financial sphere, this means (for example) learning how to manage the growth of a bond market – which has lately come under pressure. It means learning how to control the growth of consumer credit, or how to manage an initial public offering. How to navigate the risk and promise of “FinTech.” In short, how to deal with the Pandora’s box of capitalism. 

One thing is certain — capitalism makes some people very rich. Which makes the old guard nervous. In the traditional party mindset, accumulations of unsanctioned, unsurveilled, and often unaccounted wealth can be seen as evidence of “corruption.” Beijing’s regulatory response can be rough. 

The corrective procedure often starts with a kidnapping.

“Disappearing Boss Syndrome” 

A previous column reviewed a number of the highest profile disappearances. A CNN report from 2015 highlighted the bizarre specifics of a number of other cases, all of which took place in a single year. The details are worth reciting from CNN’s account. 

Hanergy

Hanergy was a leader in solar technology, cited by the MIT Technology Review in 2014 as one of the 50 most innovative companies in the entire world. The company’s founder and chairman, Li Hejun, was for a time China’s richest man. But in May 2015, Mr. Li…

• “…failed to show up for the company’s annual shareholder meeting… Hanergy shares began plunging, losing 47% in just one hour. That wiped out $18.6 billion of market value. Trading was eventually suspended pending an announcement “containing inside information” but the company hasn’t clarified much…”

China Minsheng Bank

Also in 2015, the CEO of Minsheng, China’s first private-sector banking firm, a firm with over $800 Bn in assets was “disappeared.”  

• “A respected financial news magazine in China reported that Minsheng’s president, Mao Xiaofeng, couldn’t be reached after he was detained… The bank announced in an exchange filing that he had resigned for “personal reasons.” Months later, there’s still no clarity or confirmation on what exactly happened to Mao, and Minsheng’s shares have plummeted 20% this year…”

China Aircraft Leasing 

CALC is the 4th largest leasing company in China, and the 19th largest in the world (2018) with a fleet value of more than $4 Bn. It was founded by Mike Poon in 2006 when he was 34 years old.

In 2015 Mike…  

• “…resigned with immediate effect in a letter received June 17 by the company board, according to a description of the letter in a June 19 exchange filing. He gave no reasons for his decision to quit. And China Aircraft seems to know very little. ‘Except for news reported in the media, the Board does not have any information on the status of the alleged investigations, nor has the Board received any notice that Mr. Poon is under any kind of investigation,’ China Aircraft said in the filing.The company also said it had been unable to contact Poon since receiving his resignation, and was ‘unable to verify the source of information of the news in the media.’ Its shares plunged 19% on June 19, and the stock has lost 26% so far this year.”

Guotai Junan International

Guotai, the 2nd largest brokerage firm in China… 

• “… reported [in Nov 2015] that its CEO, Yim Fung, was missing. Shares tumbled 12% after the company said that it had been unable to reach Yim since last week, and had no idea of his whereabouts.”

The list goes on. A Bloomberg News article in August 2018 identified seven other “missing bosses” of major Chinese companies. “The companies sometimes lose contact altogether with their bosses…” 

The messages all about Uncertainty. It rattles through the financial market, as the companies’ shares predictably plummet. As Bloomberg puts it, rather jauntily 

• “Disappearing boss syndrome certainly adds to risks in Chinese shares.” 

It becomes in effect a form of collective punishment, a financial penalty levied on associates and supporters of the malefactor, and on the company’s public shareholders.

Where Have You Gone, Jack Ma?

The man behind Alibaba and The Ant Group, China’s preeminent private-sector success story, is the biggest Big Fish in China’s private sector today. Jack Ma is also now a big question mark. 

In October, he went missing (under circumstances described in previous columns). In January – after 80 days of silence – the Chinese authorities released a 43 second video showing Ma speaking to a group of Chinese school teachers. It carried no information as to the date or location, no comment on any of the events related to Ma’s companies, his future plans, the The Ant Group’s canceled IPO.

Another three weeks passed. Disappearing Boss Syndrome? 

• “Speculation over Jack Ma’s whereabouts has run rampant. Maybe the embattled billionaire had fled to Singapore. Or he had been placed under house arrest. Or worse yet, he was locked up in a high-security jail.” 

Then, on Feb 11, Ma was “spotted” — playing golf at a secluded resort on Hainan Island. 

Who spotted him? “People familiar with the matter,” who “asked not to be identified discussing private information.” Meanwhile “representatives for Alibaba, Ant and the Sun Valley Golf Resort declined to comment.” There were no photos. 

Masayoshi Son (the founder of Softbank, and a friend of Mr Ma) then stepped forward to assure the world that he has “remained in touch” with Jack. 

He was vague. 

• “While he didn’t talk about the Chinese billionaire’s whereabouts, Son said Ma likes to draw and has been sharing his sketches via chat.”

Sharing his sketches… Via chat… 

Investors were so desperate to believe anything not-the-worst, that Alibaba’s stock burped up 1.5%. 

The “soft re-entry” may be part of the pattern of rehabilitation. In 2016, for example Mike Poon of China Aircraft Leasing was similarly “spotted” (six months after he had disappeared). Other disappeared execs have also resurfaced with bland assurances that nothing was ever really amiss. But others have yet to turn up, or have turned up in prison.

We may hope that Mr Ma will be eased back into the public eye, personally intact. His companies won’t escape unscathed, however. The Ant Group is currently being “restructured” by the regulatory mandarins in Beijing. Key components have been amputated and in some cases apparently turned over the the state and its puppets. 

• “The People’s Bank of China last month tightened its grip on Ant, issuing new rules that could force the break-up of the company…”
• “One plan being considered would require Ant to feed its data into a nationwide credit-reporting system run by the central bank, the People’s Bank of China, the people familiar with the matter say. Another option would be for Ant to share such information with a credit-rating company that is effectively controlled by the central bank.”

Ma was reduced to bargaining over which pieces of his company to cede. 

• “The beleaguered Chinese billionaire offered to hand over parts of his financial-technology giant, Ant Group, to the Chinese government. ‘You can take any of the platforms Ant has, as long as the country needs it,’ Mr. Ma, China’s richest man, proposed…”

Under the best case scenario, the value of Ma’s business empire (and presumably his personal wealth) will have been cut by half, it seems. As Jack Ma has said: “Among the richest men in China, few have good endings.”

China’s Dilemma

  The barbarity of this should not be overlooked. Corporate restructurings are one thing. But imagine, if in the course of, say, an antitrust investigation here in the U.S., Jeff Bezos or Mark Zuckerberg suddenly disappeared, for weeks, months, or indefinitely. That is how things work now in China. And with the execution of Lai Xiaomin, the chill must have deepened for China’s entrepreneurs. If a death penalty can be handed down for “financial crimes” – the definition of which is at the discretion of the Chinese state – the danger of being too successful in China is higher today.

Beijing is facing a strategic dilemma. China will never achieve competitive parity with the West by relying on state-run enterprises (SOE’s). The Soviets tried that. China’s SOE’s underperform the private sector by almost every important measure, and they always will. They have no power to project Chinese power to the global stage. China needs a healthy, risk-taking entrepreneurial sector if it wants to match the West. But it will have to tolerate the rise of a class of wealthy and powerful players outside the CCP system. It will have to tolerate some economic disruption, and permit financial innovation. 

This is not to say that the government needs to turn a blind eye to excesses or “corruption.” Capitalism requires regulation, but regulation with a deft touch. The procedures for regulating the financial system (in particular) will have to evolve beyond the brutal authoritarian model rooted in the Maoist (or Stalinist) procedures of the past. 

Kill Chicken Scare Monkey is strategically ineffective for achieving China’s larger ambitions. Fear will not inspire the sort of innovation and entrepreneurial behavior which China needs to cultivate. It will suppress innovation. It will drive the innovators out. Perhaps Jack Ma’s next spotting will be in California.