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Tuesday, 21 October 2014

Inside story

China insider exposé is explosive and predictable

Fix one problem, and along comes another. On the day China expelled disgraced politician Bo Xilai from its parliament, a New York Times investigation alleged that Premier Wen Jiabao’s family controls financial assets worth $2.7 billion. The suggestion is explosive, particularly of a leader who has spoken out about inequality. But it is also mundane, and won’t much change the calculus for investors in the People’s Republic.

With only around three weeks until Wen steps down from his party post, the risk that this becomes a social hot potato is slight. China’s censorship machine works as efficiently as ever: visits to the New York Times website were swiftly blocked. Blog users discussed the story, but only in euphemism, referring to Wen by names like “Wo Jia Baobao” – “My baby”. Though the details are juicy, the idea that China’s elite are very rich is hardly surprising.

For investors, it might even be reassuring. Many have staked large sums of money on backing entrepreneurs with connections. Private equity firms, and Western investment banks, have made billions of dollars from pre-IPO investments struck by knowing the right people.

There is thus no contradiction in the fact that China is the world’s top destination for foreign direct investment, with $59 billion in the first half of 2012, according to United Nations data. Investors worry less about unorthodox systems and insiders than they do about unpredictability. India, by contrast, struggles to attract investment because its unpredictable and pervasive corruption is far less conducive to healthy returns.

True, the long-term effect on the economy is corrosive. China lost $3.8 trillion in the past decade through capital flight, suggests a report from Global Financial Integrity – far more than it attracted in foreign investment. And outsiders – including investors in the public markets – are short-changed. That might explain why stocks in Shanghai and Shenzhen look cheap on most measures.

For now though, China’s system is one that many large investors feel they can work with. Even regular folk have developed coping strategies. Consider this year’s civil service examinations, which are on course to attract a record number of applicants – in some cases with 9000 applications for a single post. That power breeds money is China’s worst kept secret.

Readers' comments (1)

  • the money matters might be the next worst kept secret as elite interests diverge and exposing people become more profitable...

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Context News

The family of Chinese Premier Wen Jiabao, a leader known for his humble roots and compassion for ordinary Chinese, has accumulated massive wealth during his time in power, the New York Times reported late on Oct. 25, U.S. time.

“A review of corporate and regulatory records indicates that the prime minister’s relatives, some of whom have a knack for aggressive deal-making, including his wife, have controlled assets worth at least $2.7 billion,” it said.

The Times’ websites in English and Chinese were blocked in China on the morning of Oct. 26, and searches for the New York Times as well as the names of Wen’s children and wife were blocked on China’s main Twitter-like microblog service.

China’s parliament, the National People’s Congress, expelled disgraced former senior politician Bo Xilai, state news agency Xinhua said on Oct. 26, paving the way for formal criminal charges to be laid against him.

(The latest version of this story removes an inaccurate reference to “With only around three weeks until Wen makes way for a new premier” in paragraph 2.)

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