A landmark review of a Chinese billionaire’s conviction for financial crimes has turned into a cause célèbre in China at a time of deep anxiety about the private sector.

Gu Chujun, once one of the richest men in the nation, has been on a one-man crusade since 2012 to overturn what he told the South China Morning Post was a rigged investigation by corrupt officials “with the evil intention to snatch my assets.”

A one-day retrial in June, after Gu had already served years in jail, was followed by complete silence. It’s unclear when the Supreme People’s Court will rule, but its decision will come at a pivotal moment for the private sector: the communist country is just four decades into its experiment with capitalism, but private entrepreneurs are more nervous than they have ever been.

The decision of the court – which operates as an adjunct of the Chinese state – could be a critical sign of President Xi Jinping’s intentions for China’s private sector. It is a segment of the economy that he desperately needs to succeed, to transform China from the world’s factory into a hi-tech powerhouse with a financially well-off – and content – middle class.

Private entrepreneurs have borne the brunt of Beijing’s diktats, everything from a policy to cut excess industrial capacity in steel and coal, to crackdowns on corruption and pollution, with non-state companies forming nearly all of the 11,000 firms that vanished since 2016, China Merchants Bank International’s chief economist Ding Anhua said in September.

Profit growth is plunging at private enterprises. Bond defaults have surged to a new high. Scores of listed companies have sold controlling stakes to the government for a financial lifeline this year. And a string of China’s richest businessmen have been swept up in corruption probes.

The last straw that sent public sentiment tumbling came in September, when an obscure blogger named Wu Xiaoping wrote that the private sector “had completed its historic mission” of reinvigorating state-owned enterprises, and should now “fade away.”

The essay, which brought back memories of Mao Zedong’s purge of capitalists half a century before, went immediately viral on China’s internet, riding on widespread fears that such radical thinking might be re-emerging.

Confidence in the private sector was so fragile that Xi made a rare speech earlier this month, asking private business owners to take an “anxiety pill” – ding xin wan – and know that Beijing will protect and support them.

The leader of the world’s largest Communist Party declared that private entrepreneurs “are one of our own”, an unprecedented endorsement of the private sector’s significance. The importance of this message, amplified in a top-of-the-page report in the party’s mouthpiece People’s Daily newspaper, could not be overstated.

But many are sceptical that Xi’s prescription is enough to calm jitters in the business community. Nor enough to answer the high-stakes question hovering: is the powerful state suffocating the most dynamic, vigorous part of China’s economy, at the very time when growth is slowing down amid a trade war with the world’s largest economy?

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“Private enterprises are in a dire moment now,” said Sheng Hong, executive director of the independent Chinese think tank Unirule Institute of Economics. “The country could risk a great recession.”

The anxiety ironically comes at a time of supersonic growth in China’s private sector, from being non-existent and virtually outlawed before 1978, to making up the bulk of the economy and job creation 40 years later today.

Since the late paramount leader Deng Xiaoping made his historic push to reform and open China’s economy to the outside world in 1978, private enterprises have flourished and fundamentally changed the way Chinese people live – from online shopping, to how they travel, to how they socialise and pay without cash.

The private sector also turned China into the home of more billionaires than any other nation in the world, producing billionaires at the rate of two a week last year, with 373 billionaires compared to just 15 in 2016, according to UBS.

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Technology moguls like Tencent Holdings’ founder Pony Ma Huateng and Alibaba Group Holding’s Jack Ma – owner of the Post – are looking to export business models to Southeast Asia and the US, while the fortunes of real-estate tycoons such as Cheung Chung-kiu of CC Land Holdings are starting to shape the skylines of London.

“The consensus is that China’s economic reform was successful because of the rise of private enterprises,” said Wang Ning, a US-based economist and senior fellow at the Ronald Coase Institute, who co-authored How China Became Capitalist with the late economist and Nobel laureate Ronald Coase. “Batch after batch of private entrepreneurs pushed the Chinese economy forward.”

The private sector accounts for 60 per cent of China’s gross domestic product and 80 per cent of jobs, according to official statistics.

But figures could be even higher by independent estimates. A study led by Sheng of Unirule concluded that more than 90 per cent of the newly added national output since 2016 came from the private sector, which is also the source of all new jobs created since 2000.

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“It’s even more important than what Xi described,” Sheng said. “If the private sector is in trouble, we will have a big problem with employment.”

And yet, some private entrepreneurs say that they are having the worst time since China’s economic reforms started four decades ago.

The difficulties faced by private businesses are threefold, at least.

Firstly, tax and social security burdens have been a huge drag on profitability. Fiscal revenue accounted for 22 per cent of China’s gross domestic product in the first three quarters of the year, almost double from 11.6 per cent two decades ago.

“In the past decade, revenue has sharply increased with the governments and state firms,” said Niu Wenwen, chairman of Dark Horse Venture (Beijing) Technology, a Shenzhen-listed provider of start-up training services. “The incomes of private companies and individuals have lagged behind, which lead to weakening private investments and a slower consumption growth.”

Corporate taxes account for 67 per cent of all commercial profits, the 12th highest tax in 190 economies, much higher than the 44 per cent in the US or the 31 per cent in the UK, according to the World Bank.

The real tax rate, which is each industry’s tax revenue divided by output, could be as high as 45 per cent in real estate and 31 per cent in finance and services in 2014, a study by Haitong Securities shows.

Secondly, banks have long shunned private enterprises, as most Chinese banks are owned by the state and prefer to lend to state-owned companies, which are considered to be less risky.

Private-sector lending only made up a quarter of China’s corporate loans, according to Guo Shuqing, head of the banking and insurance regulator.

“How can private companies compete with state-owned companies, when the latter are backed by the entire financial system?” asked economist Wang.

Many private enterprises consequently turned to so-called “shadow banking” – riskier non-bank financial products and lending – which has ballooned to US$15 trillion since the end of the global financial crisis.

But since Beijing clamped down on risky lending under a deleveraging strategy adopted two years ago, credit liquidity for private entrepreneurs has been further squeezed.

This culminated in a spate of defaults in peer-to-peer lending platforms since June, and the forced sales of listed companies that pledged their shares for bank loans.

Lastly, one of the biggest worries among private entrepreneurs is their security.

The chairmen of at least 11 listed companies have gone missing, temporarily or not, over the past three years, according to state newspaper Economic Information Daily.

A dozen self-made tycoons has been swept up in Xi’s crackdown on corruption and financial risks, and some have simply vanished from public view.

Ye Jianming, founder of CEFC China Energy, the country’s biggest private-owned energy conglomerate, has been missing since February, constituting one of the greatest corporate mysteries in China. Anbang Group, once the operator of China’s largest wealth management insurance, is under state ward while its chairman serves a jail term on embezzlement charges.

Xiao Jianhua, another Chinese billionaire who controls financial conglomerate Tomorrow Group, disappeared from Hong Kong’s luxury Four Seasons Hotel in January 2017, and is still waiting for his trial while heeding Beijing’s call to divest his highly leveraged business.

And the government has waded into the business affairs of some of the biggest private groups in China, from HNA Group to Dalian Wanda Group.

As the Chinese saying goes, three feet of ice does not form in a single day, so were the problems not formed in the past year or two, Sheng said.

The central government’s policy misjudgment since the start of Xi’s tenure in 2012, rooted in the belief that the state sector is the pillar of the economy, has allowed these problems to build up and worsen, according to Wang.

“Attention to the private sector has been de-prioritised” since Xi took office, said Kerry Brown, professor of Chinese Studies and director of the Lau China Institute at King’s College London. “For Xi and the leaders around him, the state sector has a high political status and priority.”

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The government has clearly realised the problems and made attempts to address them since 2016, Sheng said.

The efforts include retrials of sentenced businessmen like Gu.

Xi turned heads in China earlier this month with his colourful “anxiety” comment to business leaders, which in full was this: “Every private business and every private business-person can eat an anxiety pill and go about their own development with peace of mind.”

But without a fresh mindset, no substantial improvement will be possible even if entrepreneurs take more “anxiety pills”, Wang said, likening the government’s attempts to asking “patients suffering from the smog to eat more vitamins”.

Gu, 59, was once held up by the Chinese media as a role model for entrepreneurs. He made his fortune in the early 1990s in appliances, establishing Greencool, which manufactured environmentally friendly air-conditioning systems, and went on to control four other public companies.

He was China’s 20th wealthiest man in 2001, according to Forbes. But it all came to a halt when he was sentenced to 10 years in jail in 2005 for falsifying financial reports, violating disclosure rules and engaging in illegal diversion of funds.

Since his early release, Gu has been fighting to correct the record, seeking a judicial review of his case and asking for 48.9 billion yuan (US$7.6 billion) in financial compensation for the loss of control of the five companies.

Gu’s case was one of three high-profile appeal cases involving private businessmen that China’s highest court vowed to retry last December.

So far, only one case has been concluded. In May, Zhang Wenzhong, the former chairman of one of China’s biggest retail chains, Wumart Stores, was exonerated of bribery and fraud charges that had landed him in jail.

While Gu awaits his verdict, the Chinese president was sending out signals to calm frayed nerves in the business community.

At the start of this month, he convened an unprecedented symposium with dozens of representatives from the private sector, including Tencent’s Ma and Baidu’s Robin Li Yanhong. Xi stressed that Beijing would protect the personal and property rights of entrepreneurs.

What the court says about Gu will also be telling. He declined a recent interview request from the Post, saying it would be “inconvenient” for him to make any comment “before an exoneration is made”.

“It will become crystal-clear that the investigation into my company was based entirely on illegal procedures initiated by officials with the evil intention to snatch my assets,” he said during a January interview. “I’m confident that justice will finally be done.”


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