HONG KONG, Sept. 17 (Reuters Breakingviews) – In 2017, “Whitney” Duan Weihong, one of China’s richest women at the time, disappeared from her Beijing office without a trace. For years, no one knew if she was alive or dead until her ex-husband, Desmond Shum, told reporters that she called him in early September, begging him not to publish her book. He still pressed the button. “Red Roulette: An Insider’s Story of Wealth, Power, Corruption, and Vengeance in Today’s China” is a story of the dysfunctional but profitable relationship between China’s red aristocracy and the country’s nimble and rapacious private enterprises. Shum’s story is full of warnings, devoid of heroes, and full of political dynamite.

Like so many entrepreneurs who became very wealthy after President Deng Xiaoping began liberalizing the Chinese economy in the 1980s, Shum and Duan came from ordinary backgrounds. They met in Beijing during business negotiations and, according to Shum, their marriage was the pragmatic conclusion of a business school analysis of their compatibility. Duan’s unique ability to charm senior officials helped propel them into the financial stratosphere. “We were like the fish that clean the teeth of crocodiles,” as Shum puts it.

Their favorite crocodile was Zhang Beili, wife of Wen Jiabao, then Chinese Premier. “Aunt Zhang” helped the couple buy a stake in Ping An Insurance (601318.SS), (2318.HK) for $ 12 million, which they sold for a profit of $ 300 million. They also got part of the Bank of China (601988.SS), (3988.HK) in Hong Kong in 2006. They financed their investments with as much debt as possible: “If you weren’t fully in debt, you fell behind. If you weren’t fully in debt, you were stupid.

While it’s impossible to verify much of the juicy gossip about the Chinese political elite that Shum repeats, he is a plausible witness. He and Duan were ostentatious symbols of the excesses of China’s Golden Age, though Shum describes Ferraris, the $ 100,000 wine bills in Parisian restaurants, and the constant flow of relationship gifts like expenses necessary to convince potential partners that the couple had the power to deliver. on projects.

But as ordinary people realized how much government officials collaborated with Party “princes” and private companies to plunder public resources, trust in the Chinese Communist Party collapsed. Worried elders lifted up Xi Jinping, who after becoming president launched an anti-corruption campaign that purged bureaucracy and made examples of a few famous disbelievers.

It started Duan’s disgrace. A 2012 New York Times investigation alleging that the Wen family had accumulated billions of hidden wealth ended Aunt Zhang’s usefulness. At the same time, Duan miscalculated his cultivation of Sun Zhengcai, a rising Party star once seen as a potential successor to Xi, who was eliminated around the time Duan passed away.

Shum concludes that what once seemed like the start of a reform tidal wave was the peak of a high tide that is now receding. Capitalizing on economic success, the CCP feels free to crush entrepreneurs who know too much, like Duan, or talk too much, like Jack Ma, founder of Alibaba (9988.HK). It is telling that officials are now grappling with industries that have plagued so many “common” billionaires: real estate, online services, entertainment and private education. While Xi’s campaign to narrow China’s wealth gap may be necessary to restore the CCP’s credibility as a social equalizer, the book suggests that it will bypass the princely class because the crackdown on corruption l has largely done. This could end up concentrating more wealth and power in the hands of a few families.

The private sector will not necessarily shrink. But as the Party takes preferred stock in private companies and parachutes bureaucrats into their boards, the voices of entrepreneurs will be muffled. It comes at a cost. For example, Shum claimed he wanted to focus on creating value at the Beijing airport logistics hub he had established. But as officials who had supported the project were drawn into Xi’s anti-corruption campaign, it sold out. “I came to believe that in China a long-term business model wouldn’t work… If you invest $ 1 and you earn $ 10, you take out $ 7 and invest $ 3. But if you keep $ 10, there’s a good chance you’ll lose everything.

This attitude has frustrated Chinese economic policymakers for years, but the government’s current stance is sure to make matters worse. The hazy pace of change, the public humiliation of private sector champions like Ma, and the overnight destruction of entire industries like extracurricular tutoring, can only make private capital more risk averse, deterring investment. and research.

Xi wants to discipline the private sector, not destroy it. But constant flogging seems more likely to lead to stagnation than competitiveness. China might end up missing out on the dirty little fish that kept crocodiles clean.

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NEWS CONTEXT

– “Red Roulette: An Insider’s Story of Wealth, Power, Corruption, and Vengeance in Today’s China” was published by Scribner on September 7th.

Editing by Peter Thal Larsen and Katrina Hamlin