Fallen billionaire offers lens on Xi’s China

Billionaires who break the law are not easy objects of sympathy. Xiao Jianhua’s trial, however, deserves attention, even if its subject matter may not. The circumstances and conduct of the case have ramifications that go beyond the fate of this Chinese-Canadian tycoon who was once worth nearly $6 billion.

Xiao disappeared from the Four Seasons hotel in Hong Kong in early 2017, with several media outlets reporting that he had been abducted by Chinese security guards, who at the time were not authorized to operate in the city. There was no official word on his status until 2020, when Chinese regulators took over nine of his companies and Xiao’s Tomorrow Group confirmed he had returned to the mainland to cooperate with investigations. The Canadian embassy in Beijing said Monday it was aware that Xiao’s trial would take place and that its representatives had been denied access. Authorities said nothing and state media remained silent.

According to the New York Times and the Wall Street Journal, the 50-year-old has elite and military connections and handled transactions for the families of President Xi Jinping and former Premier Wen Jiabao, among others. Although authorities have not disclosed the charges against Xiao, the defendants are rarely acquitted by Chinese courts. There are even more reasons than usual to expect a staged result this time. The lawsuit comes at a sensitive time, with Xi set to seek a third term as head of a precedent at a five-year party congress later this year. Any fireworks of controversy would be unwelcome.

For supporters of the Chinese system, such extralegal and opaque procedures are understandable. Xiao wouldn’t have been targeted if he hadn’t done something wrong, from that point of view. China’s unitary governance structure makes it possible to effectively deal with offenders. In contrast, the systems of liberal democratic countries, which emphasize the separation of powers and the rights of the accused, can sometimes let wrongdoers with smart lawyers escape justice.

The problem is that in the absence of transparency and due process, there is no way to verify whether this reliance on the fairness and probity of the authorities is justified. Few of the fortunes amassed in the early years of China’s economic rise can be entirely clean, given the nature of an evolving system: explosive growth; underdeveloped rules and legal infrastructure, with many gray areas; and public officials earning meager official salaries while controlling lucrative assets and business rights.

So when any mogul goes down (and there have been many), there will be a measure of suspicion whether it is purely a matter of law enforcement or the result of machinations. policies. “Red Roulette,” by Shanghai-born businessman Desmond Shum, offers an insider’s view of this nexus between political power and business opportunity. Shum’s ex-wife, Whitney Duan, is among those who disappeared into China’s extralegal detention system.

Xiao was a Tiananmen-era student leader who remained loyal to the government and later built a business empire spanning banking, insurance, real estate, and commodities. The trigger for its demise appears to have been concern over the systemic financial risks posed by the debt-driven expansion. Tomorrow Group was among four private conglomerates honored by China’s central bank in 2018, along with HNA Group Co., Fosun International Ltd. and China Evergrande Group.

For foreign investors and executives reviewing the case, it’s worth considering what has changed since Xiao’s disappearance and what hasn’t. At the time, his apparent kidnapping from the Four Seasons sparked fear and controversy in Hong Kong, being seen as one of the most egregious examples of China’s encroachment on the city’s autonomy. Five years later, Beijing imposed a national security law on the former British colony, allowing for the creation of a vast security complex that goes far beyond the isolated incidents that caused such consternation in 2017. Xiao’s case was a “harbinger of what was to come”. come” in terms of Communist Party jurisdiction over Hong Kong, Kevin Yam, an Australian lawyer who has practiced in the city for two decades, said in an interview.

Conventional wisdom once suggested that China would become more transparent and rules-based over time, moving closer to Western standards. Instead, Beijing has become more assertive in proclaiming the superiority of its own system. In January, Xi announced a “limitless” partnership with Russia ahead of his invasion of Ukraine, in an undisguised challenge to the liberal world order. Foreign capital has flowed out of Chinese markets at an unprecedented rate this year. Hong Kong’s Hang Seng index, which is open to international investors and has become increasingly dominated by Chinese companies in recent years, is trading at its lowest valuation to earnings since the 1998 Asian financial crisis.

It is difficult to see why this high risk premium should fall. Xiao’s interpretation fits a pattern under Xi in which the Communist Party’s arbitrary exercise of state power has become more pronounced, often to the dismay of foreign investors. This includes a crackdown on tech companies and a ban on the for-profit tutoring industry, which has wiped out hundreds of billions of dollars in market value.

The case of this fallen billionaire is reminiscent of a system determined to go its own way.

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