Thursday, April 21, 2011

The Interest Charge for Chinese Entrepreneurs: Capital Punishment

Private businesses are the engine of Chinese growth, despite their being excluded from official bank lending. Chinese banks make only four percent of their loans to private businesses. To raise capital, private businesses must borrow in unofficial credit markets at high rates of interest, or they must finance business expansion out of enterprise savings.

Wu Ying, a 29 year-old Chinese female entrepreneur, faces the death penalty for “illegal fund raising.” Her crime: raising and pooling funds outside of the official lending system. Wu Ying, a secondary-school drop out, made her fortune in beauty parlors and cosmetics. Starting with nothing, she built a business empire of spas, hotels, and other properties estimated to be worth a half billion dollars.

Chinese entrepreneurs, excluded from the official lending markets, have no choice but to borrow in unofficial markets. With such a prominent business woman as Wu Ying facing the death penalty, private businesses now do not know if and when their private lending and borrowing will land them in jail or worse.

Wu Ying’s case sheds light on the miracle of Chinese growth. It is generated by private entrepreneurs who operate in a shadowy world of protection, uncertain laws, rule and law breaking, and risks of extreme penalties if they get on the wrong side of politicians. Chinese growth does not come from state enterprises, despite their privileges and preferences.

The unfortunate Wu Ying is the true face of the Chinese economic miracle, not the “national champions” of Chinese industrial policy and planning. That capitalism and enterprise have bloomed in such an environment is indeed the Chinese miracle.

It is about time we get this story right. Let us hope that Wu Ying’s death sentence is commuted.

Source: “When Fund Raising is a Crime,” Economist, April 16, 2011, 69.

1 comment:

  1. Isn't the situation somehow similar to the New Economic Policy of the early Soviet erea?

    The party still tightly holds a grip on the power, but it let a little bit of private enterprise in to boost its economy and to let it settle internal problems of the deficit based economy with the help of "nepmen".

    BTW, it appears that in the modern day Russia, essentialy the same soviet-KGB-party is still at power