How to Convince Entrepreneurs to Trust the Government? / Sheng Hong

Note: From the end of 2018 to the present, we have been listening to the declaration of “protecting private entrepreneurs”, but the incidents of private entrepreneurs being infringed repeatedly, until the Dawu incident finally reached a peak. If a government claims to protect people’s security and property rights without catching robbers, “protection” is an empty talk. If we do not take strong measures against the local administrative agencies that violate the Constitution and violate laws, the document of “protecting private entrepreneurs” will be a blank paper. Reissue the article written in 2018.

The developments between the publication of an essay about “private enterprises leaving the party” by a Mr. Wu Xiaoping on September 12th and the address made by Mr. Xi Jinping emphasizing the importance of private enterprises are dubbed by some people as “exhilarating 50 days for the private sector.” To be fair, this is no exaggerating, nor is it normal. How come a common commentator, Mr. Wu Xiaoping, with no official background, could start such a fuss that only the General Secretary of CCP could later pacify? Right after Mr. Xi’s address, the People’s Daily published an article, claiming that the address “gave private entrepreneurs an assurance”, which was heavily ridiculed online. Some say the assurance did not seem to last long, some say it bordered with “I have a bridge to sell you,” some even dug up decades of People’s Daily propaganda and showed that similar assurances had been given out to people for so long. There are some scholars who commented that the expression of “one of our own”, referring to the intimate relationship between the government and the private entrepreneurs, sent a startling signal to cause private entrepreneurs uneasy, because an equal contractual relationship can only be created between those who are “our very own,” and those who are not. Comments like this ensued. Why the fuss?

Confucius said, “At first, my way with men was to hear their words, and give them credit for their conduct. Now my way is to hear their words, and look at their conduct. It is from Yu that I have learned to make this change.” This might just be the real mentality development of private entrepreneurs’ dealing with government policies. In fact, it is written in the Chinese Constitution that “private property is protected”, and “non-state economy is protected”. Party congresses in recent years also wrote in their rout esolutions to “encourage, support, and guide non-state economy in its development with unremitting efforts.” Judging from the last few decades, we have gotten accustomed to various policies, documents, and minutes of addresses from the government to pacify and support private enterprises. Such instances include the old and new editions of the policy documents entitled “36 Suggestions Regarding Non-State Economy” in the times of former President Hu Jintao and former Premier Wen Jiabao, that is the “Some Suggestions on Encouraging and Supporting Non-State Economy by the State Council”. This policy was issued in 2005, and it included several articles on “improve private property protection institution”, “solidify the principle of equal entry and fair treatment”, and “enhancing fiscal and credit and loans to support non-state economy”, etc.. In principle, they were in line with President Xi’s address.

However, before this policy, there were two well-known cases in 2004 where private enterprises’ property rights were violated and suppressed. One was the case of Tieben Company. In this case, the company was sued for investing in and acquiring land in an unlawful way, and its president Dai Guofang was taken into custory, later tried on criminal charges for “purchasing forged special invoices for value-added tax” and sentenced for 5 years. Inn fact, the investment of a private enterprise would be its own economic freedom that needs no one else to approve; besides, the acquired land was firstly approved by the local government, and if there should be any fallout, it should be the government to take accountability. Another case is the oil field case in Northern Shaanxi. In 2003, some local government in this region abruptly nationalized hundreds of oil wells that were formerly operated by private entities, and compensated them by 20% of their investment value. Faced by the mass protests of the investors, the local government abused its public power and sued them on the charge of “crime of picking quarrels and provoking troubles”. After some investors were thrown behind bars, some of the lawyers on their behalf were also detained for “unlawfully disturbing social order” charges. This act by the local government was no different than that of marauders.

Both these cases were different violation of the private property rights of private enterprises, and they both took place around the time when the policy “36 Suggestions Regarding Non-State Economy” were issued. If the promise of “improving private property rights protection” was kept, even if such cases took place, mistakes would have been corrected. The public litigation against Dai Guofang, though not directly related to the project, caused the project to be canceled. The company lost a fortune on the equipment purchased for this project, and the private property rights were harmed instead of protected by the government. Investors in Northern Shaanxi also found them losing big fortune at last. Similarly, their loss was not only due to the inactiveness of the government to protect their property rights, but also due to the violation of property rights by the government. Forget about “enhancing equal entry and fair treatment”, these two cases were straightforward institutional ownership discrimination. By the time the Tieben Company canceled the project, their state owned competitors, such as Baoji Steel and Wuhan Steel, declared their new big scale investment. And the cause for the oil well disruption was easy, the local government wanted to nationalize local energy business. In hindsight, it was not from the policy document but from these two very peculiar cases that private entrepreneurs learned their lessons in the most realistic and terrifying way.

Years later, in 2010, the State Council came up with the new edition of this policy, the key change was the specification in market entry, such as encouraging private enterprises to enter basic infrastructure industries including telecommunication services, power generation, gas, and transportation; public utility including water supply, gas supply, heating supply and waste management; and social enterprises such as healthcare and education. However, in the same time, another case involving Kechiley Investment, an energy investment firm, in Shaanxi Province. This was exactly the area where the State Council meant to encourage private enterprises to enter with the new policy. The case started when the state-owned enterprises tore the contract with Kechiley on the ground that the “the contract was not in line with the relevant policy in the minute of the Shaanxi Provincial Government meetings.” However, the real reason was that the state-owned enterprise found a millions worth volume coal mine reserve in the exploration period and wanted to pocket the profit alone. In 2011, when the Higher People’s Court of the province reopened the case and nullified the contract, Kechiley’s registration license was revoked by the administrative authorities and its legal representative Mr. Zhao Faqi was arrested.

Another major legal case was the case of Zeng Chengjie. Zeng Chengjie along with a real estate developer in Hunan signed a contract with a local government to invest and construct three public stadium and buildings. They also raised public funds when encouraged by the local government. However, when financial policy changed and financial crisis hit, the local government and its officials were the first to leave the party, leaving the private entrepreneur to take the blame. Zeng Chengjie was sentenced to death and his company was sold at a low price to a state-owned enterprise when Zeng’s company was able to pay off the debt and had the will to do so. In this case, Zeng Chengjie lost not only his property rights, but also his life, needless to say there’s anything to do with market entry. Which sent a clearer signal, then, the new policy or Zeng Chengjie’s death sentence? Actually, around 2010, there is another much bigger and more influential event, that was the “Chongqing Crashing Crashing Black Crime”. The black crimes mainly were related to private enterprises, and 13 people were sentenced to death and executed eventually. After Bo Xilai, then Chongqing governor, was taken down on multiple charges, no review or distinction were made on these cases. Li Zhuang, famous lawyer, pointed out that about RMB 100 billion worth of assets was confiscated by the Chongqing Police, yet only around RMB930 million were turned over to the state coffer.

In 2016, the Party Central Committee and the State Council issued yet another policy, Suggestions on Improving the Protection of Private Property Rights Institution and Protecting Private Property by Law, to give another boost when it comes to protecting property, and proposed five principles such as “equal protection”, “comprehensive protection”, “protection by law”, and “mutual participation”. The intention was good, and the words were convincing. A section of this policy entitled “improving the government accountability promise mechanism” emphasized that “for situations where the contract was broken by the government and enterprises’ and citizens’ property rights were violated, compensation, complaint and relief mechanism should be improved, and complaint and relief channels should be established.” However, after this policy was issued, incidents involving violating the property rights of private enterprises went pandemic. For example, party chapters were required to be set up in private enterprises. By the end of 2016, over 68% non-state enterprises set up party chapters. This did not only increase of cost for the enterprises, but also allowed political organizational principles to interfere with the corporate governance structure, which would cause insecurity for private enterprises. By the end of 2017, the act of evicting migrant workers and non-permanent residents and removing rooftop billboards by the Beijing municipal government without noticing people beforehand have caused great damage to private property rights. The victims of these acts were not compensated. And they could not even find the so-called “relief channels”, rendering the policy from the Party Central Committee of piece of scrap.

When Mr. Xi sat down with some private entrepreneurs, he promised to “protect the security of their persons and properties”, and “create an equal competition environment that facilitates the development of private enterprises with enough market room in the areas of market approval and entry, licensing, operations, bidding, and military-civil conversion of industries”, while giving his word to “further cut taxes”. However, almost at the same time, what we saw were another two cases: one concerned the confiscation of eight residential buildings built by Dawu Group, a well-known local conglomerate in Hebei Province, by Xushui District Land and Resources Bureau on the ground of not having the permit before construction; and the other concerned the revocation of the registration license of Beijing Unirule Consulting Co., Ltd, a company of Unirule Institute of Economics, by Beijing Haidian Administration Bureau for Industry and Commerce on the ground of organizing educational training without permit. The first case was a direct violation of the property rights of private enterprises, and the second case was a straightforward refusal to President Xi’s promise in terms of market entry and approval.

It seems that the policy documents and addresses by the decision makers are in contradiction with what we saw in real life. Are these decision makers not sincere or genuine? I don’t think so. In fact, the decision makers know very well that the private enterprises are an indispensable pillar of the Chinese economy and a key source or wealth. As President Xi emphasized, the non-state economy “contributed over 50% of tax revenue, over 60% of GDP, over 70% of technological innovation achievements, over 80% of jobs in urban and rural areas, and over 90% of enterprise entities.” In addition, from the incremental perspective, private enterprises contributed over 90% of the GDP increased margin, and over 100% of new jobs(why over 100%? Because the private enterprises also supplement the jobs lost by state-owned enterprises when they lay workers off.) The decision makers are also aware that the efficiency and innovation capacity of private enterprises are way higher than their state-owned counterparts, and most of state-owned enterprises rely on the development of private enterprises. That is because most of the state-owned enterprises are concentrated in upstream basic industries, such as finance, telecommunication, power, railway, and oil, and only when the downstream industries develop well, will they be able to cut their share of the profit, and they have the monopoly to do so.

However, on the other hand, the decision makers are the direct beneficiary of the tax revenue increases, and the high level executives and administrative officials are, in essence, the same group of people who could trade their positions in times of need. Therefore, the government officials don’t find it reasonable to either constrain the fiscal expenses, or break the monopoly of state-owned enterprises. They would not constrain the abuse of public power, either. In a fairly long period of time, doing so has not produced any telling negative results. The reason lies in the comparison before and after the reform and opening-up. The government took it as a baseline that in the planned economy period, Chinese people were poor, and so was the government, and the tax rate was, therefore, lower. However, with the market economy flourishing and wealth pouring in, and without proper limit of the government power, macro tax rate was raised constantly and administrative monopolies were set up along the way. Those who violate the property rights of private enterprises were also allowed to get away with it. That is why the decision makers know the importance of private enterprise and can not resist the temptation to exploit them anyway.

In a rather long time, protection of property rights does not go against limiting the public power. That is because, the tax rate is raised gradually, and from a very low leve. In the process, private enterprises felt it was still bearable, though their profit margin was dwindling. It was not a serious problem. At first, the violations of private property rights were not so concentrated. People were mistaken to think that they were just separate peculiar cases. However, when the tax rate rose to a certain level, those private enterprises that are not doing so well would feel the pressure first and complain about the tax burden. And abusing the unlimited public power to exploit private business and take their private property goes pandemic and in larger volumes. This explains why private entrepreneurs feel that the tax burden is too heavy and their private property rights are not protected properly. For decision makers, there is the conflict between protecting property rights and letting loose public powers.

As a result, when entrepreneurs begin to worry about their property rights, they don’t invest anymore. Some of them even begin moving overseas for their own good. The accumulated result would, then, influence the macro economic state. As for the first half of 2016, growth of private capital investment witnessed a consecutive decrease to 2.1% in July, 2016, which sent very serious signal to the decision makers. It is fair to say that the Suggestions on Improving the Protection of Private Property Rights Institution and Protecting Private Property by Law was issued, to some extent, to address this issue. The address by President Xi this time also has a lot to do with the current bleak economic situation. What we see is that mastic financial losses are witnessed by private enterprises, and most of their net asset return rate is lower than the sum of risk-free interest rate and reasonable risk profit margin rate. The Chinese economy is apparently taking a downturn, and there is the external pressure from the ongoing trade war with the US. Therefore, what we can see is the utilitarian purpose of the central government in issuing policies that seemed to have the best interest of the private enterprises, while what they really care about is the short term effect, instead of sticking to the principles they set out in those policies. As a response, private entrepreneurs could only go so far and think that these Suggestions were just for the short term relief for the government, instead of for their interest.

At an expert meeting with the National Development and Reform Committee in 2016 on Suggestions on Improving the Protection of Private Property Rights Institution and Protecting Private Property by Law, I emphasized along with some other experts that policy documents would have far less impact than cases. Ever since then, the central government did try to review some cases. Some of the well known cases include the Kechiley case where the company won the lawsuit eventually; the Wu Ying case review resulted in reduction of the defendant’s sentence; the Zhao Shoushuai case review acquitted the defendant innocent; and it goes on and on with the Gu Chujun case and the Mu Qizhong case. Recently, Mr. Liu He, the Vice Premier, stressed that “one act is louder than a dozen programs.” On November 12th, the supreme court issued a Notice on Creating a Good Legal Environment for Entrepreneurship and Innovation for Entrepreneurs(Court[2018]No.1), reemphasizing the execution of the spirit of the above mentioned policies in the judicial practices. This, apparently, is a major act that aims to make people hear and see, though it still has a utilitarian hue for the short term goal, it signified an institutional change. On the one hand, such an act reminds people of policy movement, or campaign, that does not last long or mean what it says; on the other hand, once demonstrated in the judicial system, cases would be amplified to showcase principles as examples, which could have seminal influences.

However, this is not enough to reassure private entrepreneurs. More importantly, reviewing and redressing some cases are not enough. There has to be institutional assurance that such cases would never occur again. The Notice issued by the supreme court sounds like it was targeting certain people, instead of applying to everyone in the form of written articles in the Constitution or laws. It is definitely not a normal institutional that is to be followed and practiced in due process by judicial bodies. And the phrase “redressing wrong cases” is innately contradictory. If it is known to be a wrong case where justice is not done, then it is a deliberate act to make it a wrong case by the court. From the statistical perspective, it is to admit that the current judicial system is problematic, and the problem lies in the failure to comply with the due process of law. “Redressing” is an administrative goal, and in the process, we can be sure that further ignorance of due process of law will be witnessed. And doing so might inflict new wrong cases. What’s really reassuring is stable expectation for the institution. When one believes that by following the Constitution and the law in due process of law while resisting the interference of administrative entities, still one could get a roughly expected result, then he can be assured.

Then, what is such an institution that matches the stable expectation of private entrepreneurs? Such an institution is one that could limit and counter balance the abuse of public power. “Protecting property rights” is not done when it is said, but is done when a series of institutional structures are set up and a series of operations are undertaken. These operations include complaint, warning, application, litigation, judgement, execution and constrain. In summary, 1) people have the right to complain and express their opinions, a right that is protected by Article 35 of the Constitution; 2) the government administrative entities are limited by the institution, that is when the government interferes improperly, such error can be corrected, and the personnel should be held accountable; and 3) an independent judicial system that is not interfered by the party or the government, and personnel of this system are expected to be committed to handling cases in a just manner.

Allow me to elaborate. Firstly, without the right to complain and express their opinions, people would not even know whether the rights of entrepreneurs are being violated. Therefore, this is the first and foremost right. In hindsight, the right to complain by entrepreneurs has been severely suppressed in recent years. Many cases where property, even life, was jeopardized did not get expressed and discussed publicly. For example, in the Zeng Chengjie case, he was sentenced to death in 2013 and executed in 2015. During this two-year period, no discussion was in the public discourse. According to the assistant of Mr. Zeng’s lawyer, she almost visited all the websites, newspapers, magazines and other public media Chanels in over a year only to be told that there was paramount pressure to cover negative stories or that the superiors would not allow the coverage of this case. In comparison, the Wu Ying case was taken to the media since the beginning. Unirule Institute of Economics also held seminars to discuss the case. And Wu Ying’s sentence was great reduced, from death to life imprisonment. After Zeng Chengjie was executed, Unirule also held meetings which were twice interrupted and changed the venue for that matter. Some experts were even coerced not to attend the meeting. Therefore, the first institutional signal would not be received by entrepreneurs if Article 35 of the Chinese Constitution is not fully implemented.

In addition to the meetings on the two cases, Unirule Institute of Economics also held other seminars on cases related to entrepreneurs, such as cases of Sun Dawu and Kechiley. It is fair to say that Unirule Institute of Economics is one of the few private organizations in China that spoke out for private enterprises. We have also set up a China Entrepreneur Research Centre that publishes Index of the Survival and Development Environment for Private Enterprises every year and organizes seminars on the same topic. In the end of 2016, Unirule Institute of Economics published a Report on the Tax Burden of Chinese Private Enterprises and the Tax Reform that undertook surveys and meetings with over 100 entrepreneurs and 113 valid questionnaires in 4 provinces and key cities. This report found that the tax burden for Chinese private enterprises was too heavy, nearing the “Death Tax Rate”. However, such a finding was immediately suppressed. What’s more serious, Beijing Unirule Consulting Co., Ltd., a company of Unirule Institute of Economics, was revoked of its registration license the same time when Mr. Xi made his address. The existence of this company sent a significant institutional signal. If this company cannot survive, what other reassurance for “one of our own” would ever work?

A second institutional signal is the effective constraint on government administrative departments. One simple and key constraint is that all of these departments should be abided by the Constitution and laws. Article 11 of the Chinese Constitution stipulates that “The state protects the lawful rights and interests of the non-public sectors of the economy, including individual and private sectors of the economy. ” All the administrative departments are but public organs established under the Constitution and should only have the mandate to serve the citizens’ constitutional rights(including non-state property rights). Therefore, one of the most important principles for them to follow is that property rights precedes administrative power. When I see that the Xushui District Land and Resources Bureau believed it had the power to confiscate the private property of a private enterprise, I know this bureau has no understanding of the Constitution and no respect for private property rights. This is not a peculiar case, it is pandemic in mainland China. Otherwise, there would not have been the mass eviction of the nonpermanent residents from Beijing, or the coercive removal or rooftop billboards. Up till today, we are still seeing many administrative departments violating property rights relentlessly without due respect for such rights. Even when such violations are called off, no one was held accountable. Therefore, there is a need for an example incident where the violation by administrative departments is punished.

A third institutional signal is judicial independence. That is the constitutional principle. Article 131 of the Chinese Constitution stipulates that “The people’s procuratorates exercise procuratorial power independently, in accordance with the provisions of law, and not subject to interference by any administrative organ, public organization or individual.” One key indicator is whether private enterprises (and of course all citizens) could get judicial services. Nowadays, one the most widely used tool to interfere judicial independence is to demand the court “not to hear” the litigation raised by private enterprises against the administrative departments. For example, when Dawu Group, a company in Hebei Province, tried to sue the local government administrative departments for removing its billboards, the local court “refused to hear the case”. Apparently, “protecting of property rights” is a widely needed public service which cannot be done by some promise of the political leaders but by the nationwide judicial system. If a court refuse to take a well-founded litigation, there is no measure of relief for the security of property rights of private enterprises. Under such a judicial system, “protecting of property rights” is no more than empty words. Besides, there is a question of whether there will be a just trial even if the court accepts the case. Is it possible to have a just trial with direct and powerful interference from the administration? Apparently not. The due process of law is the first to take the impact.

For instance, in Chongqing’s “Crashing Crashing Black Crime” there was even ridiculous scenes where the consignor report on their lawyers. In Li Zhuang’s trial, a famous lawyer, eight witnesses were prevented from attending the trial. In the second instance of the Wang Chengzhong case in Liaoyuan Intermediate People’s Court, the judge were colleagues of the defendants’ and yet still involved in the trial. In addition to being directly involved in the trial and pressuring the witnesses, what we also see that is commonly practiced is pressuring the non-governmental subjects, such as pressuring the lawyers hired by private enterprises. This indicates that the government departments consider the judicial system their own tool instead of a mechanism that generates justice. In general, Chinese judicial system cannot fully implement the judicial independence principle of the Constitution, and understandably is not trusted by people, especially private entrepreneurs. Hence, in order to change people’s perception of this system, a series of example events should be undertaken, such as 1) punishing the courts that refuse to take well-founded cases; 2) punishing the administrative personnel that pressure lawyers or witnesses; and 3) punishing courts that are not following the due process of law, etc.. It is not hard to find such cases. What’s needed is resolve.

As long as such institutional signals are sent and institutional reforms are undertaken full heartedly, with or without reassurance, people will find themselves reassured. Even though the conventional short term utilitarian goals are being met, the effect of reassurances decreases the more it is used, till such measures become invalid. therefore, even for the purpose of the present situation, the ruling authorities should adopt institutional changes that has a long term perspective. In the meantime, the authorities should also adopt a long term strategy, instead of being trapped with the short term tactics. A shift from focusing on the interest of the authorities’ own to a focus on the interest of everyone is needed. Even though it feels like a change under pressing situations, it is about time that a transcending mentality was adopted. What we see now, be it suppression of expression, indulgence of administrative departments, or distortion of the judicial system, are a mentality of games, that is dealing with problems from the win-or-lose point of view. However, in fact, those who win in this one game will eventually lose in repetitive games. To explain, one would make more misjudgment and mistakes if he suppresses others’ complaints and criticism; one would not gain assets but evidence of crimes when he abuses administrative power to take over other people’s property; the direct interference on judicial independence is likely to lead to injustice to himself in the end. Therefore, a fair institution is the best institution for the ruling authorities as well as for everyone else.

What we see in China today is a perfect demonstration of how the market(private property) is supplemented by rule of law(limit on public power) in principle and in practice. This relation was discovered by Mancur Olson. In an article “Dictatorship, Democracy, and Development”, he wrote “the conditions that are needed to have the individual rights needed for maximum economic development are exactly the same conditions that are needed to have a lasting democracy. Obviously, a democracy is not viable if individuals, including the leading rivals of the administration in power, lack the rights to free speech and to security for their property and contracts or if the rule of law is not followed even when it calls for the current administration to leave office. Thus the same court system, independent judiciary, and respect for law and individual rights that are needed for a lasting democracy are also required for security of property and contract rights.” That is to say the market economy implies the principle of rule of law that constrains the public power. Besides, there is no room for maneuver between protection of private property rights and not limiting public powers. To address the problems we are faced with today, we need a long term strategy.

Confucius once said “I would rather walk my life than talk my life.” Institutions are not abstract. Institutions emerge from the interaction among people. That explains why institutional changes would be accompanied by specific actions and the institutional signals that come with them. We also should believe that people are not significantly smarter than others. If we are to play another game of pacifying and pretending to be pacified, we are merely wasting precious time. In the various specific actions, judicial reform seems to be the most important. Because the judicial institution is one that showcases to the public the just rules of conduct by judicial cases, instead of one that supervises everyone and interferes with their affairs every minute. The latter cannot be implemented, because it cannot decide who is suppose to supervise whom. The just judgement of a case benefits the authorities more than a judgement that favors the authorities(such as local governments), because it wins the authorities credibility and integrity. In this light, in the dire situation where private enterprises are not doing well and Manny private entrepreneurs are losing confidence in the economy, it is only right to turn the table by implementing constitutional rights, judicial independence, and limiting administrative powers as a start for further reforms.

Translated by Mr. MA Junjie, This essay was first published by FT Chinese on December 5th, 2018: http://www.ftchinese.com/story/001080522?full=y

Author: flourishflood

Economist, Confucianist

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