Capitalisn’t: Crony Capitalism in China

David Barboza: I would say, many of the Americans I meet in China, they’re either incredibly naive, or they’re pretending to be incredibly naive. And my own view is, Americans doing business in China don’t know the half of it.

Bethany: I’m Bethany McLean.

Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?

Luigi: And I’m Luigi Zingales.

Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.

Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.

Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?

Luigi: And, most importantly, what isn’t.

Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.

Speaker 8: For most of the last century, getting rich in China was against the rules. The communist government’s planned economy saw to that. But things changed in the 1980s when then-leader Deng Xiaoping’s rallying cry was, “To get rich is glorious.”

Luigi: Most people these days don’t focus on corruption in China. Why? Because China is so successful. You don’t want to think about it as corrupt.

Speaker 9: Lawyers who have represented activists have been disbarred. Journalists who write critically have been thrown out of the country. And as many as two million party members have been investigated for corruption. Xi has replaced collective leadership with centralized authority.

Bethany: When Luigi and I decided to do an episode focusing on corruption in China, we thought, of course, of David Barboza. David is the former New York Times reporter whose 2012 piece revealed that the extended family of China’s then-prime minister controlled assets worth nearly $3 billion. Who better to talk about how deep the corruption really extends, and whether it matters in the end?

David and I first met back in the early 2000s, when we were both reporters covering Enron, speaking of corruption. So, I’m particularly delighted to have him on this episode.

It might actually be interesting to start on a bit of a personal note, David, because you and I did meet way back when, in the wake of your coverage of Enron, and you were just making the decision back then to learn Chinese and go to China to work for The New York Times there. What made you make that decision? What took you there?

David Barboza: After my work on Enron, the Times said to me, “OK, because you lived in a hotel in Houston for a whole year, we’re going to let you go on vacation, and you can pick anywhere in the world.” My friend Jim Yardley, my colleague, was just being moved to Beijing. And he said, “Why don’t you come to China?”

I was so fascinated immediately after I got to China. And so, I went back and I told them, and I think six months later or so, I moved to Shanghai.

Bethany: And what pieces of that played out as you expected, and what did not play out as you expected?

David Barboza: Strangely, one of the first meetings I had in China was with a young guy who had graduated from Brown. And he said, “I read your stuff on Enron. And I can tell you, every Chinese company is Enron.” And, of course, I thought he was crazy. But, in fact, there were so many Enrons. In China, they thought of it as a good thing. Enron was a good word in China. It was like, they are so clever. I just couldn’t have imagined the kinds of stories and adventures and threats and people following me and all the crazy ups and downs of living in an authoritarian country that is both market-oriented and also Wild West and dictatorship. And, as you can see, since I got back to the US at the end of 2015, I cannot let go of . . . I could let go of Enron—it’s a great story, but I could let that go—but I can’t let go of the China story.

Luigi: And, in the meantime, you won a Pulitzer Prize, and I’ll read, “for your striking exposure of corruption at high levels of the Chinese government, including billions in secret wealth owned by relatives of the prime minister, well-documented work publishing in the face of added pressure from Chinese officials.”

Living in America, after four years of the Trump presidency, we’re a little bit not so sensitive to the word corruption, because corruption is everywhere. So, can you explain to us, what is the level of corruption in China? Is it Trump level of corruption? Is it much worse? Is it much better? Tell us.

David Barboza: Sure, sure. I mean, a lot of people actually said when Trump was running for president, the joke was that he’s the first Chinese president of the United States. There are a lot of things that are not very Chinese about him, obviously, but the Chinese part was that he’s an authoritarian leader, and he believes in family first. This is like the China model, which is, you bring all of your relatives in, you do business with them. It’s a family-owned company, and you crush your enemies. You threaten them. This is like a combination of a top Chinese tycoon and the Communist Party leadership. You have to be politically connected to do business in China on a big scale, not on every level, but if you want to get really big, there’s no way. I’m told by my friends, and a lot of my friends, even who admit that they were involved in this, say, “You’ve got to know the right people. You’ve got to make payoffs.” You have to perform. It’s not just like, you pay someone and you get all the spoils, but you have to do both the business side and the government-relations side. And you’re expected to share your wealth, because your wealth in China is really the country’s wealth, and the country’s leaders are the Communist Party.

And so, when you rise up as a businessman, you need to make sure that the local officials who helped you are taken care of, the provincial officials are taking care of, the central-government officials are taken care of. Often, I would track the career of a tycoon. And so, you knew that in the city that he started or she started, they paved the way through corruption locally. Then they moved their headquarters maybe to the provincial capital. And then they got those levels. And then, when they wanted to go national, they moved to Beijing or Shanghai, and they needed to get people at the very top to be a part of them.

And so, my story about the prime minister’s family was really following lots of tycoons that felt the best way to make sure you have support at the top is to bring in their families and to make sure the family or the, what they call the white glove, is tied into the political elites that will secure your business against the government, against competitors, against regulation. You need to have someone, maybe many people, on your side.

It’s almost like a more diversified or democratic form of corruption, which is, it’s not going to be five people, or five families. It’s going to be, every region can do corruption in their own area. Every member of the Politburo standing committee can have their own little fiefdom. It’s lots of corrupt individuals rather than a country . . . People would say, a lot of emerging markets, African countries, Russia, other places are, a few people just steal everything. China was, lots of people steal, because it’s a big country, and it’s not concentrated like it is in Russia and other countries.

Bethany: If you were to come up with a shorthand word for it, would it be some sort of mix of nepotism, communism, and capitalism, all combining in a form of corruption? Because it involves family members. You’re taking care of everybody along the way, so there’s a communist element to this. And yet there’s a capitalistic element to this, in that he at the top collects the most spoils, and you have to perform.

David Barboza: That’s right.

Bethany: Does that sound about right?

David Barboza: A lot of people think the Communist Party is really, it’s really not a communist party. They tried communism, that failed. And then they went back to sort of, like, the imperial times, like the dynasties. And they said, “Now, the Tang dynasty or the Ching dynasty is really the Communist Party. And you need to make sure all of those leaders and their families are on the same page with your business, that your business is supporting the empire and the imperial extended family of Communist Party leaders. When they say that, I think the eight leading cadres of the Communist Party, the founding families of communism, all of them have become, have gained wealth in the billions now.

Bethany: There must have been, to do the story you did, and I remember reading it, and just feeling proud that I knew you, and saying, “Oh, wow!” But there must have been, in the run-up to this, key moments of realization that things were wrong here. And one maybe was that first moment in Hong Kong where a friend said to you, “Every company is Enron.” But what were the other moments where you said, “Wow! This is how deep the corruption runs here”?

David Barboza: I think when we started getting the records. I heard the rumors for years, there are secret shares held by the leading families. At one point, we tried to make a map of each family of the leaders and see, where are their children, where is their money? But I was really hoping in this investigation that we would find $3 million or $4 million. But when we got the records, we calculated that this is a billion dollars in wealth we found, I think maybe the second or third month into it. I couldn’t believe that it was real. We have to go through the records. Could this be possible? Could the prime minister’s family really be sitting on a billion dollars’ worth of assets, and it’s documented in government records?

That was not only the realization that, my goodness, this is a big story, but also it was a scary point, because I knew how dangerous it would be if this were true. And I knew how dangerous it was going to be for me to continue to report on this story, knowing that confirming these details, tracking down the people, that was going to be very—I think a few months before I started the investigation, the FT had just mentioned that some of the families of the leaders were involved in private equity. Not illegal, but just mentioning their names, even in the Western media, could get you followed in China, threatened in China, tracked in China, and, a lot of people felt, killed in China.

By the way, for the FT story, they took the byline off. There was no FT byline for that story in China, even though it didn’t say anything outrageous. It said what everyone knew, which is the son of this leader is at a private-equity firm, the son of this leader is at another one, and there’s no byline for the FT.

So, I knew it would be dangerous. I also felt a little what I felt when we worked on Enron together, which is the excitement of the mystery that I had these Chinese records with all sorts of maps of who was doing the ownership and who these people were, and I had diamond companies and insurance companies and real-estate companies. And I knew it was going to be exciting unraveling that mystery, and then trying to get the Times to publish it by the end of the year. This is like October, and I’m saying, really believing that I could do this by December, which was impossible. We published the next October.

Luigi: If I am a firm, let’s say I’m Tesla and I want to start exporting in China, do they ask me for a million dollars in small bills? Or how does it take place?

David Barboza: I think China . . . I mean, that’s probably the old way. But China has gotten more and more sophisticated. You say Tesla. So, you’re a foreign company. You’re an international brand coming to China. Probably in the Chinese government, no one’s going to walk up to Elon Musk and say, “Can you pay us off and send money to the leader?” What’s more likely to happen is, when you come to China, you often need a partner. You need a local, you need a fixer, you need a government-relations person. Those people will be the ones that will figure out the sophisticated way to move that money.

One of the more sophisticated ways is not to ask for cash but to ask for a stake. So, we can set up a lot of companies around Tesla or whatever your company is, and they can be suppliers. And I can charge you higher-than-market rates. Or I have a stake in your subsidiary of Tesla. Or I bring in a person who is your Chinese partner, who you think is just like a Western-educated, great person, but actually, that person needs to have 20 percent and is going to funnel that money back to the leaders in the families.

And, remember, they’re being advised often by lawyers, by accountants, so they know many of the sophisticated ways, if you’re an international firm. They’ve been doing it for a long time.

If you’re a local firm, there’s cash payoff. There’s lots of those other old ways. But if you’re a sophisticated, big company, you would rather have it through an interlocking network of shell companies, kind of like the Enron way. Which is, we can backdate things, we can change the ownership structure, we can create a series of show companies around your company that can siphon off some of that money or some of that value. We’re not just going to ask you to give us a pile of dollars.

And that’s why the case of the prime minister that I did was so interesting, because that was the turning point where they started to go for shares. And I remember asking someone, “Why do you pay them in shares?” And they said, “When we paid them in cash, then once our company had trouble, they were already out. We wanted them to be a stakeholder. To be a long-term shareholder. And so, we decided to pay them through company shares over time through lots of vehicles.”

Bethany: In your experience, did Western companies that came to China to do business innately know this? And if they didn’t already know this, what was their reaction when they learned it?

David Barboza: If any company that does business in China tells me, “I know there’s a lot of corruption in China, but I’ve never seen it,” I completely just roll my eyes and say, “That’s impossible.” But, of course, a lot of companies know that they can’t talk about this because of FCPA. And, in fact, one of the trends, the early trends that I was writing about and wanted to work on the biggest story about in China was, many of the multinationals . . . The old way was, we put an American or someone from Taiwan or someone from Hong Kong as the head of our China operations. But the problem is, they’re not really mainland Chinese. They’re from Hong Kong, maybe their Mandarin’s not so good, but the Americans and the foreigners trust them.

But the increasing trend when I was there is a local mainland Chinese is the partner. And with that local partner, they really knew how to play the local game. And they knew how to take care of those officials and those families. And they also knew that we don’t want to know about that at the big company. So, set up a consulting firm, set up something. But you do get FCPA training, so make sure we don’t know, don’t tell us, so that when you go down, if something happens, we say we had no idea. We just blame that local partner. I think this is the prevailing trend now.

And also, those local partners, they may not only be paying off an important person in China, but they may also be siphoning off money themselves. I wrote about the GSK case. One of the things that we found in the GlaxoSmithKline corruption case was, not only were they paying bribes to doctors to prescribe, but the people, locals running GSK, the Chinese managers of GSK, had created a series of companies inside GSK that supplied all sorts of equipment and things. And so, they had extra salaries. Why should I, the general manager, I’m taking this big risk with corruption, why should I make $100,000 or $200,000 when I can siphon off several million? And it would be very hard, especially if I teamed up with the other locals, for the bosses that come in from New York—they don’t know Chinese, they don’t read Chinese, we can run them in circles. We can have our own operation; we can report fake numbers to them.

It’s really kind of a scary thing for multinationals that they can’t really know what’s going on in China. They don’t want to know some of the things. They have to trust their local partners. Obviously, many of those local partners are trustworthy people, but I would tell you a lot are not.

Luigi: Let me be a bit naive here. All these companies have big accounting firms that are supposed to audit their accounts. We know that auditors don’t have a mandate to fan out fraud or corruption. However, they have an obligation that if they see something that looks like it, or they have suspicion, they have to report upward what they’ve seen. So, how can American audit firms audit the Chinese operations of their multinationals in good faith and report that everything is fine?

David Barboza: They can’t. I’ll tell you why this is so interesting and complicated. The major accounting firms of the world, the PWCs, et cetera, they have to set up a local operation. And a lot of those are like franchises. They’re not even really in control of them. China, for its state security law, doesn’t even let regulators like the SEC get close to those records. That’s one of the battles with the US government in China, is the US would like . . . Even listed companies, and even Alibaba, the SEC could not go into China and get the records.

And these are not the same as the accounting firms and the standards that they have outside. There are local firms, the firms are told, a lot of what you’re doing is a state secret. You would never tell a company—GE or name a company—if you go to GE or one of these big companies and say, “Well, we found that the chairman of our local operation was paying off the family of a leader,” the families of leaders, their names are forbidden in the media. You can’t publish them on the internet. When I searched for the family that I was looking for, they can’t even be published in Chinese online. So, those are state secrets.

And this is a state security matter. And, by the way, anyone who worked for me as a translator or a researcher was reminded every week at the lunches that they went to, occasionally, with the state security agents, “What is David doing? Where is he going? You realize that this is China, and we know where your family is, and you need to be loyal to China, and these are state security issues. You could be arrested for doing the wrong thing.”

Those audit firms and those locals are not going to protect a foreign company from the Chinese government. So, yes, some of them are better than others, but Luckin Coffee kind of stuff happens all the time. How often does that happen because an audit firm talked about it? It’s really because of a short seller or some journalist or something was leaked out.

I just wrote about this company, H&A, which is a Chinese company. It is Enron squared. This is related-party transactions, the son and brother of the chairman set of companies, which bought and sold items to H&A. Everyone has known this has been a fraud for a long time. It became a $100 billion company, and it only recently collapsed. We’re a long way from China having a trustworthy system of auditing and regulatory oversight.

Bethany: Does it matter in the end? When you think about the flood of American money into China, even as, thanks to your reporting, all of this has become more and more known, yet the flood of American corporate money into China hasn’t slowed. Does the corruption matter, both for the flood of money, international money, into China and for China’s long-term success? And if it matters, at what point does it start to matter?

David Barboza: I think what matters for the companies is their return. Well, two things, their return, and also, how much of a PR problem is it? If China censors the press and makes it very difficult for Western journalists to find out about my global company’s corruption in China, then I don’t have a PR problem. The bottom line is the return.

If you tell me, “Well, you’re going to come and you’re going to make $100 million, but you’re going to have to pay $5 million in bribes.” I’m like, “Fine. I’ll do that.” Many companies will probably say, “We’ll take that wager.”

As long as China is growing—and it’s the fastest growing, it’s the future, it’s been incredible what this model has been able to do for global companies. As long as you have that calculation, you’re only going to get out when the corruption is greater than your investment or you stop making money. Or you got caught in a corruption scandal so big. I mean, look at GSK, $500 million. Are they out of China? No. Qualcomm. I think something like $500 million to a billion. You’re going to get out when it’s not profitable to be in.

In some ways, you can say China has the perfect model for global companies. What other country in the world can grow 8, 9, 10, 12 percent a year for 20 years and deliver you unbelievable profits, and also let you manufacture everything at a very low cost, and have a relatively small number of corruption cases involving companies like yours?

It’s actually . . . When you look at the US cases against multinationals, the FCPA cases, most of those are self-reported, 99 percent, I think, are self-reported. The company called us, and they told us they were violating the books and records and were corrupt. So, those are a tiny, tiny percentage.

Actually, if I were to be cynical, I would say China is the dream market for global companies.

Bethany: I was thinking, as you were talking, that China is the reality of business, while American companies’ vision and value statements are the idealized form of businesses.

David Barboza: Yes. Yes, exactly. I would say many of the Americans I meet in China, they’re either incredibly naive or they’re pretending to be incredibly naive. China is a very nice culture. It’s a very welcoming culture. You’re treated so well when you come to China. They probably have no idea that everyone that’s welcoming them has 99,000 strategies for how to profit from this relationship.

My own view is Americans doing business in China don’t know the half of it. They’re probably, I get flown in, they take me to the factory, I see great things, it all looks so fun. And then they take me to a great dinner, and they treat me, and then they send me to the airport. And, behind the scenes, they could be doing anything they want, because I want to hear a positive story in a growth country. I want to see my numbers go up. I don’t want to see the details, and probably you wouldn’t show me the details anyway.

Bethany: I think that’s a great point that we’re all always biased toward seeing what we want to see. And that is incredibly true of companies doing business in China.

How do you think the pandemic changes these dynamics, if at all, in the sense that China has gotten worldwide opprobrium for its handling of the pandemic at the start? And yet China arguably is emerging from this on a healthier footing than certainly most of the West.

David Barboza: The positive for China in the pandemic, is how it handled it. It showed the world that maybe this authoritarian model, at least it’s good for a pandemic, to deal with a pandemic.

In the business and economic sense, I think it’s certainly a positive for China that while the rest of the world is a mess, that its economy is open, it’s gaining more trade, its factories are churning out everything. They can actually take a bunch of old state-owned factories and sell stuff all over the world, because you can’t even open your country to make this stuff. How are you going to produce things?

And, basically, we now wake up and see almost everything is made in China, and almost everyone is tied into China, and they have leverage that we never thought China could have. I mean, that’s one reason why we started the magazine, The Wire magazine, is because of that China in the world, understanding China in its role outside of China. That’s what we’re mostly writing about, China outside of China, how that plays and how that affects every company.

If China is the standard for what a movie should be that Hollywood produces, well, we’re all going to be watching movies that Chinese like, because they’re the biggest market. If China decides what Louis Vuitton bags should look like, we’re all going to be having Louis Vuitton bags. China is going to change all of these things, because the world is going to coalesce around the biggest market.

For a while, the biggest market has been the US, so the rest of the world gets what America likes. Well, now, the rest of the world is going to get what China likes. That’s going to be a very different world.

Bethany: Well, it’s fascinating, because we all tend to think of China’s system as being antithetical to ours, or opposed to ours, or opposite to ours. And yet the accumulation of wealth and the income disparity in China looks quite a bit like the US. And so, that leads to a question of how fundamentally different our systems actually are. And, for every allegation of fraud and cronyism in China, I think, well, here’s the US.

Luigi: First of all, it’s not my style to defend people. I tend to be more on the attack, but this time, I have to defend the United States. It’s not as bad as China. I think that, with all the criticism we have of the people who govern us, I don’t think that you have a prime minister who accumulates $3 billion on the job.

Bethany: I don’t think it’s as extreme, but the same forces are in place. US presidents generally become very wealthy once they leave office, because it is the connection to political power that enables them then to gain great wealth after, at least by most people’s standards. Not $3 billion of wealth, but often tens of millions of wealth. And so, there is a critical role in the US, for all that we think we have a free-market system, crony capitalism pervades every aspect of it. People who have access to political power tend also to get money. So, no, not $3 billion, but some of the same forces are at work, for sure.

Luigi: It’s true that US presidents get paid a lot for their speeches. And, by the way, not just US presidents, also former central bankers, for example. First of all, we’re talking about a different order of magnitude. It is pretty shocking that Janet Yellen made, what? $7 million or $8 million in speeches after she stepped down from the Fed? But we’re talking about millions, not billions.

Bethany: But I think that people with proximity to political power in the US can use that to become quite wealthy. You’re right, it’s an order-of-magnitude issue. It’s not on the scale of what you see in China. But they can, and if they choose not to, it’s because they make the moral choice not to. Not because the option isn’t available to parlay political power or access to it into money.

I think my argument is that the same dynamic exists in the US system. The order of magnitude is absolutely different, but you still see some of the same forces at work.

Luigi: Of course, human nature is equal everywhere. And, when you have power, you try to get money. And, when you have money, you try to get power. So, the system is the same, but, I think, the transparency that comes with a US type of system limits that.

Bethany: Agreed. But I thought when David said that Enron was something to be admired in China, because of its cleverness, because of how they got away with it, I thought that was a really telling comment. And it was interesting that part of his discovery, part of his discovery process as he got there, was how systemic the corruption was, and how endemic it was to the way in which China functions. There is probably something to that very lack of transparency, as well as this really unique mixture in China of capitalism, communism, and nepotism, that some of that’s at work in the US but to nowhere near the same degree.

Luigi: You know that the term nepotism stems from nephew in Italian, and it actually was invented for a pope that had a child. And because you didn’t want to say that the pope had a child, you said it was a nephew. And so, that was called nepotism.

Bethany: I had no idea, but, of course, everything interesting comes out of Italy, so I’m not surprised.

Luigi: Or maybe everything corrupt comes out of it.

Bethany: I was trying not to go to the pejorative, so . . .

Luigi: But I think that that’s, in part, the story. I think that, in China, it is a combination of very strong family attachment, a huge amount of discretionary power—because, unlike in many other countries, the central power is still very effective—and a lot of money to be made. The market is so big. The market opportunities are so big that if I am a local officer in China and my “yes” can make you a fortune, why don’t you share a bit with me? Rather than sharing with the country at large, maybe in the form of taxation, you share with the local officer in the form of a bribe, but bribes that are very well disguised these days with business participation, shares, and stuff like that.

I love the story that David told, that in the old days, bribery took place in cash, and now people realize that they prefer to bribe with shares, because you are committed for the long term rather than just for the short term.

Bethany: Right. But, again, I’d argue, there’s a similarity to how the US functions as China moves toward less-transparent means of giving bribes. If you think about, for instance, some of the scandals we’ve seen with companies’ boards of directors, where the boards are essentially, in some ways, being paid in order to keep quiet, or to not raise objections to what’s going on in the boardroom. And again, it’s a difference of degree, but it’s the same sort of fundamental attitude.

Luigi: Yeah. But I think the degree does matter and the pervasiveness does matter. And also, the moral sanctioning does matter. It seems to me, from what I got from David, is that not only is this pervasive, but it’s also not really frowned upon. It’s something that everybody knows that is taking place, and they look the other way.

Bethany: I hear you, but then I would point to the financial crisis in the US, which, while perhaps not criminal, the argument after the fact was, “Well, we can’t prosecute anybody, because these are all good guys. And these are all the people we know, and we’re all in it together. And so, therefore, nobody did anything wrong. This is a 100-year storm” that, as Jamie Dimon said, the CEO of JPMorgan Chase, “couldn’t have been predicted." And that was the mantra from those in power.

And, again, it’s not outright, explicit corruption in the same way, but it was a way of doing business that was sanctioned by all of those in power. And then, after the fact, all of those in power agreed that the way of doing business would be sanctioned.

So, again, a difference in degree, and perhaps explicit corruption versus implicit corruption. I’d maybe summarize the difference a little bit differently, which is to say that in the US, when these things happen, we make a really big deal about them. And we write books about them, and we produce TV shows, and we excoriate those involved as if these are the exceptions. And then, when the next one comes along, we do the same thing. Whereas in China, people just pretend it doesn’t happen.

Luigi: Yeah, but that gives a confidence and security that makes people go deeper, increasing the amount and making the system worse. One thing that stuck with me from the interview was the fact that he said that, basically, China is the dream market for corrupt companies, because it’s a growing market where you can make your earnings be whatever you want, and nobody’s ever going to report you.

I think that the level of a society is steered by what we are willing to accept in this dimension. And, it seems to me, China is a step below the United States, even if we’re going fast in that direction. I’m not underestimating that we are on the same trajectory, but I fear that, number one, China is worse.

Number two, I think China is dragging us down, because the other thing that shocked me from the interview is that David said pretty clearly that everybody knows about this. And so, all the systems that we have in place, that we are very proud of, like the Foreign Corrupt Practices Act, the audit rules with Sarbanes-Oxley, with all these people that are paid very richly to check, they’re all looking the other way.

Bethany: Yeah. But the thing that stood out to me was when he said, if somebody says that they don’t know about any fraud in China, somebody doing business there says, “Well, wait, I’ve never encountered this,” he knows right away that they’re lying, because he knows that’s not true.

And, to your point about dragging us down, I think it’s our American companies’ single-minded focus on profit at the expense of any kind of morality that allows what happens in China to drag us down. But when you look at what US companies are willing to do in order to do business in China, it does make you cynical, for sure.

And then, it makes me wonder, since everybody feels like they have to make compromises to their supposed moral principles in order to do business in China, because God forbid you get left out of such a huge and growing market, it comes back to the conversation we’ve had about the necessity of government rules and regulations to define a fair playing field or a playing field upon which people are going to compete. Because if you don’t have that, then, of course, everybody has to figure out how to do business in China in any way possible, because their stock is going to get hammered otherwise, and they’re going to get left behind. And so, if there ever were a case for a clearer set of rules around it, maybe it’s here.

Luigi: Yeah. And what worries me even more is what David said that China is also an additional power that is so big that, even from a purely market point of view, it’s going to shape the tastes and it’s going to shape the norms of the entire world. I grew up in Italy, shaped by the jeans and the Coke and the products that Americans were selling all over the world. And I think the next generation will grow up with the products that China wants, which is fine. I don’t mind, actually, I prefer Chinese food to Coke.

But the more important point is they’re also going to be extremely influential in term of business norms, particularly so because not only are they a big market, but they’re also a big market that can be influenced by just a couple of players, precisely because they’re not a democracy. And, as a result of that, if the Chinese government says, “We don’t want to do business with you, because you spoke in favor of the minority Uyghurs, or because you said something about Hong Kong,” then all of a sudden you are cut out of one of the largest markets in the world. We have seen what happened with the Houston Rockets, where the general managers tweeted . . .

Speaker 10: A tweet backing pro-democracy demonstrations right here in Hong Kong. The NBA makes billions of dollars in the Chinese market. And it’s apparently siding with Beijing, calling Daryl Morey’s tweet “regrettable.”

Luigi: The National Basketball Association went on its knees to try to say, “Please admit us back.” The same thing happened to a player in Europe who is a German player, but of Turkish origin, that he felt very strongly because he’s also Muslim, so he feels very strongly about the Muslim minority in China. And he’s basically been blackballed by many football associations now, because they want to show their games in China.

Bethany: Yeah. It raises a really interesting question that maybe we’re not paying enough attention to, which is that we take for granted America’s ability to shape the world culturally and in terms of business norms, at the very moment when that might be going away, and the world will look really, really different if it’s China shaping those norms, and not us. It’s something we’ve taken for granted for a really long time, and it’s changing underneath us.

Luigi: Yeah. And we have to be careful, because inevitably people might interpret you as being anti-Chinese, and I am not anti-Chinese. The issue is, it’s not a democracy in the Western sense of the word. There are not some fundamental freedoms, including the one to expose the problems. And David Barboza had to run away from China, and they closed down the office of The New York Times for a while as a result of that. So, that gives you a sense of how aggressive this is, and everybody was up in arms when Trump was saying the press is the enemy of the people, which was terrible. But, I have to say, there was a lot of bark and not as much bite. China does bite, and that makes a difference.

Bethany: So, what do you make of China today? And Xi Jinping’s efforts at reform?

Speaker 11: Chinese president Xi Jinping has launched an anticorruption campaign and overseen investigations into the country’s wealthiest and most powerful. More than 100,000 have been jailed for embezzlement and bribery.

Bethany: Do you think they’re real? Do you think that this changes China going forward?

Luigi: I don’t. I see Xi Jinping as concentrating more of the power. If you see the pattern, from the famous moment of the handover of Hong Kong to China, there was a hope that was maintained that China will evolve in the direction of the Western world. With Xi Jinping, that hope has disappeared. In fact, China is becoming more of an autocracy. The occasional scandals are just designed to make it easier for Xi Jinping to get rid of some of the people.

If everybody’s corrupt, then you can use anticorruption cleanup as a way to get rid of your enemies. Just pick who you’re going to prosecute, because you’re going to find a reason to prosecute.

Bethany: It’s control disguised as a cleanup, right? I think these recent moves involving Tencent and Ant are pretty fascinating, too.

Speaker 12: China putting the brakes on the world’s biggest IPO. Ant Group’s listings in both Shanghai and Hong Kong have been suspended.

Speaker 13: Ant Group and Chinese regulators apparently have now reached a restructuring plan that will turn Jack Ma’s fintech giant into a financial-holding company.

Speaker 14: The Chinese authorities wanted to imply somehow that they needed to get more control over Ant Financial.

Speaker 15: Now it will come under much greater scrutiny of Chinese authorities.

Bethany: It’s setting a different standard in China for how firms have to behave, which is 100 percent control-based.

Luigi: But what I heard is the story of Ant Financial was also a way to show the world the Communist Party is still in control and they can do whatever. That they are not afraid. If you burn billions of dollars in order to enforce something you care about, this is literally a good signal. In economics, we say that burning money is a signal. Here, they will literally burn money as a signal that they are really in power and they can do it.

I think it was Mao who said, “You hit one to educate a hundred.” That’s exactly what they’re doing. They are using this as an example for the rest. And the world is watching.

Bethany: Yes. It is that capitalism and communism can coexist, but communism is in control, not capitalism. And I think I saw a piece, I think it was in Bloomberg, about how Jack Ma had given a very dismissive speech right before the Ant Financial IPO was pulled. And it was clear evidence that certain kinds of speech and challenge to the Communist Party just simply are not going to be permitted.

Luigi: I think you’re absolutely right. And I think that the point you raised earlier, the connection between capitalism and democracy, is incredibly important, because I think that the success of the Chinese corrupt model is worrying me, not only from a capitalist point of view, but also from a democratic point of view. Because if the rest of the world becomes as corrupt as China, I think it’s difficult to maintain that level of corruption and democracy the same time.

And so, the simplest way is to actually get rid of democracy, not get rid of corruption. Getting rid of corruption is extremely difficult, but getting rid of democracy, unfortunately not.

Bethany: I thought there was a fascinating statistic, incredibly relevant to this idea that communism is somehow a purer system. When we were researching this episode, I came across a 2016 study from Peking University, which said that in China, the richest 1 percent of households hold a third of the country’s wealth, while the poorest 25 percent only owned 1 percent of its wealth. And so, if there ever were a contradiction to the idea that communism means economic equality for all, it’s that statistic.

Luigi: Yeah, but I should say, and this is an easy one, is that Chinese communism is not really communist, maybe it’s communisn’t.

Bethany: That is obvious, but it still made me laugh. Well, it comes back to the point that you mentioned, and it’s a very dispiriting observation, but maybe just as China’s method of capitalism might be dragging the US down, it’s also that US-style capitalism has perhaps dragged the pure ideal of communism down. And so, perhaps both countries are evolving and following a race to the bottom and evolving to be more like each other, rather than true to the best ideals inherent in our different systems.

Luigi: More than like each other, I think they get the worst from the other side. Not only the worst, because the Chinese communist system has imported a dynamic growth from the capitalist system that is very good. And we should not ignore the fact that China did create a lot of wealth and did lift a lot of people out of poverty.

Bethany: I think one thing that could be done is less naiveté in our view of China, and thank goodness for people like David Barboza, who have exposed the fact that great wealth has been accumulated by those in control, because that’s the way communism has always worked. There’s communism for most people, and then great wealth for those at the top.

That’s one solution, just continuing to point out that, yes, our system in the US has its problems, but it’s not as if the perfect system has been invented by anybody anywhere.

Luigi: You’re absolutely right. The other idea is that, following a bit what Paul Romer was saying, that when you don’t like something, you tax it. Maybe we should start considering taxing business in China more seriously. If there are these negative spillovers on our norms and the way companies are run and all this stuff, maybe we should do less of it. And, in economics, we know one thing well, if you want to reduce the production of something, you tax it. And so, if you want to reduce business with China, you tax it.

Bethany: Yeah. It’s interesting to think about whether we need a revised Foreign Corrupt Practices Act, whether we need something that more explicitly sets rules that capture the continued evolution of corruption in China. And that specifically is aimed at creating a noncorrupt and level playing field for US companies operating there. And I’m not well-enough versed in the intricacies of the Foreign Corrupt Practices Act to know what else we might need. But maybe it’s not enough to capture the continued evolution of corruption.

Luigi: Yeah. The problem is, then you need to agree with all the major Western countries, because if you go alone and, say, France and Germany are exempt from that, you’re basically conceding the market to them, which maybe is a price worth paying, but it’s something that clearly will be used against you to try to stop it.

Bethany: You’re absolutely right. In a global economy, the US, if we ever had the power to unilaterally make that decision, we don’t have it anymore. And then, it becomes an argument that US companies are being put at a huge disadvantage relative to the rest of the world, which already exists with, that’s already an argument with the Foreign Corrupt Practices Act. And it happens to be true.

And, you’re right, that’s an idea with challenges.