China’s Princelings Build the Wrong Kind of Capitalism

(Dec) Over the last three decades, Communist China’s leaders have lifted more than 600 million of their citizens out of poverty -- and built one of the world’s most unequal societies.

Those two outcomes didn’t have to go hand in hand. They are the result of a conscious decision by the former paramount leader Deng Xiaoping and some of his closest associates -- the so-called Eight Immortals -- to safeguard the primacy of the Communist Party by putting their families in charge of opening up China’s economy.

As Bloomberg News documents, what resulted was an enormous concentration of wealth and power in the hands of a few. Examining thousands of pages of documents and conducting dozens of interviews, Bloomberg traced the holdings of the Immortals’ 103 direct descendants and their spouses.

Three children alone -- including Deng’s son-in-law He Ping and Chen Yuan, the son of Mao Zedong’s economic czar Chen Yun -- led or still run state-owned companies that had combined assets of about $1.6 trillion in 2011, or the equivalent of more than a fifth of China’s annual economic output.

During the 1980s, many were chosen to run the new state conglomerates. A decade later, many moved into real estate, coal, steel and even golf, which owes much of its spread in China to Wang Jun, the son of a famous general. Now, the Immortals’ third generation has moved into investment banks, private-equity firms or international law practices.

An earlier, separate investigation by Bloomberg revealed the vast fortune amassed by the family of Xi Jinping, the newly installed Communist Party leader and himself a princeling descended from a revolutionary fighter and vice premier.

Unhealthy Inequality

Robber barons and power elites are nothing new. Nor are they necessarily unhealthy -- unless, that is, your society professes to be egalitarian. And notwithstanding the Communist Party’s protestations, China increasingly isn’t.

The government hasn’t officially issued a Gini coefficient, an index measuring income inequality, since 2000. Yet one just- published study put it at 0.61, much higher than previous estimates ranging from 0.41 to 0.48. Social scientists consider a reading above 0.4 as a warning sign of potential unrest.

Equally disturbing, inequality of opportunity -- not just income -- is also on the rise in China: One study found that richer parents helped ensure higher income for their offspring; parents employed by the state bestowed even greater advantages.

This year, a scandal that felled Bo Xilai, the son of another revolutionary hero and a member of the Politburo, uncorked widespread public disgust over the corruption of China’s ruling class. Since taking office in November, Xi has come down hard on graft, ostentatious displays of wealth and abuses of power by officials. At least 10 local officials have been dismissed in response to corruption or sex scandals.

Yet as the Bloomberg investigation demonstrates, the crackdown has only touched the periphery. Not only has the current generation of princelings run amok, but there is no one with the revolutionary legitimacy of Deng (who was purged by Mao three times) to command public trust.

Even if Xi lacks the will or political power to curb the economic power of the Immortals, he can still pursue policies that will reduce inequality and improve the lot of China’s poorest. During its high-growth years, Japan reduced its Gini coefficient from 0.45 in the 1960s to 0.34 in 1982.

Welfare Policies

And as researchers such as Yasheng Huang of the Massachusetts Institute of Technology have shown, China’s rural- focused policies during the 1980s reduced poverty and inequality much more than the urban- and state-focused policies in the decades that followed. As Huang has argued, private ownership, property rights, financial liberalization and deregulation are critical to ensuring that the welfare of China’s population improves as its gross domestic product grows.

A good place to start would be to accelerate the dismantling of China’s infamous system of residency permits, which hold back the almost 160 million migrants who have left their homes to take jobs in cities by impeding their access to health care, education and pensions.

With low public debt and more than $3 trillion in foreign reserves, China is in a good position to spend more on social services for its poorest. Most Chinese, for example, cannot afford to go overseas for schooling, as did many of the Immortals’ descendants (including the 23 who studied in the U.S. at Stanford and Harvard universities, among other places).

Mere mortal Chinese savers don’t have the investment options of the Chen family, whose members run the $1 trillion- plus China Development Bank Corp. and have worked for Morgan Stanley and Citigroup Inc. Simple changes in financial regulations, however, could at least give ordinary Chinese access to investments other than low-paying bank deposits.

China has tried to keep a lid on popular discontent over corruption and privilege by controlling its media. has been blocked in China since it published its story on Xi in June. But the best way to curb corruption is public accountability, and as we have argued, outsiders can help by supporting efforts to punch more holes in China’s Great Firewall.

They can also shine more light on the country’s convoluted corporate ownership structures, as the U.S. Securities and Exchange Commission has tried to do. At least 18 of the Immortals’ descendants own or run entities linked to companies registered offshore, many in jurisdictions that offer secrecy.

Deng was no democrat, but he wasn’t corrupt, either. As he said in 1980, “As far as the leadership and cadre systems of our party and state are concerned, the major problems are bureaucracy, overconcentration of power, patriarchal methods, life tenure in leading posts and privileges of various kinds.” More than three decades later, China should rediscover that reformist spirit.

To contact the Bloomberg View editorial board: