Why is it important for secure property rights to exist? How do entrepreneurs in China manage to grow businesses despite the lack of secure property rights?

In economics and political science theory, secure property rights are fundamental to economic growth. If you give business people basic security, then they will grow their businesses and their assets. It has been proven by many researchers that secure property rights in the long term will lead to economic growth. This is why the rule of law is very important for running a business.

China is very puzzling. There have been a lot of new laws written because the government wants to signal to the business world that it cares about this issue. But the puzzle exists because we know it is a country that has weak enforcement of the rule of law.

One solution is for business people to join politics. The People’s Congress provides individual opportunities for business people to network with politicians. In doing that, entrepreneurs can signal their political connections to the lower level politicians, who are potential predators and they can expand their networks to those who serve in the legislature. They use their political connections to fend off predatory actors.

There are many other solutions available. Entrepreneurs can nurture their individual relationships with important politicians, utilize Swiss bank accounts invest their money abroad, or secure their property rights by other means. But my research mainly focuses on the first method.

How does the lack of secure property rights affect the way entrepreneurs do business in China?

Because of the lack of secure property rights, political connections become even more important. Partial property rights is one solution that entrepreneurs discovered. There are no universal property rights, so they seek to secure their individual property rights by joining politics or diversifying their assets. They also become Party members. According to an earlier literature on the subject, when an entrepreneur wears a “red hat,” his business develops better.

Through these informal institutions, Chinese entrepreneurs find ways to make friends with politicians. In this way, they develop connections which provide protection.

Is the concept of partial property rights applicable to other authoritarian regimes? What conditions are required in a state for such property rights to emerge and function?

When you see a country that has weak rule of law, a thriving private sector, and informal relationships between business people and the government, entrepreneurs find innovative ways to develop connections with politicians. These are the places where you are most likely to find partial property rights.

According to Stanislav Markus’ book Property, Predation, and Protection, private entrepreneurs in Ukraine and Russia tend to make alliances with other actors, such as foreign actors or NGOs.  In joining those alliances, entrepreneurs find a new way to protect their property. But, this still cannot be considered universal property rights.

How does the need for political capital to maintain property rights affect the efficiency of firms and the efficiency of the markets in China? What is the downside of seeking political capital?

When you think of a high functioning political economy, individuals do not have to spend any time or effort in building connections with politicians for the purpose of seeking property security. There is a huge efficiency loss that could be better spent growing businesses. The time, money, and effort spent are the main downsides of this system.

Another downside is that the connections formed by entrepreneurs and the government breed distrust among the citizens toward both the government and entrepreneurs. This distrust could be seen when the anti-corruption campaign was gaining so much support. Individuals realized that the Chinese government and Party had experienced a lot of corruption, and that one source of corruption comes connections between the state and the business world. This threatens the legitimacy of the party, which is essential for the regime.

Have Chinese entrepreneurs found the right way of protecting their property in a regime without the rule of law?

Entrepreneurs are not really competing with the government, but they are depending on the government to give them resources, like permits, land, contracts, etc. Some private entrepreneurs use the following metaphor: The government is like the parent, and the state-owned sectors are the legitimate sons and daughters of the family. The entrepreneurs are like the sons and daughters of the concubines. So, they really have to fight hard to compete for resources, time, and fair treatment. Using the People’s Congress is a very innovative way for them to defend themselves.

They have multiple ways to secure their property rights, and some entrepreneurs use the legislature. However, this is very difficult to do. Not everybody has the opportunity to get a seat. Although it is an effective strategy, it cannot work for everyone. In certain areas and sectors, it can be more effective. Overall, it is a very innovative strategy.

With the state seizing control of Anbang Insurance Group, the state seems unafraid to disregard the political sway of large companies. Why can the state, in this case, disregard the methods entrepreneurs normally use to protect their private property?

Anbang’s case is unique in that it is a company with “red capital.” The line between the state and business is very blurry. Wu Xiaohui is the grandson-in-law of Deng Xiaoping, so even if he has this private company, he still has a huge amount of political capital.

It is very complicated, more so than if a private company was taken over by the state. There are a lot of political nuances behind it and we have to wait and see what is happening.

This is not a perfect example of partial property rights in action, but it is a higher level of politics. Individuals and researchers need more information before making a judgement. This is more an example of “red capital,” which is very China specific, but some cases are popping up in Iran and Russia.

What are the implications on the security of private property moving forward given the state takeover of Anbang Insurance Group?

Entrepreneurs and people in related industries in China are less worried than the Western media seem to be. This is because Anbang still has shares in a lot of different companies, like Minsheng. Minsheng was in trouble before Anbang was investigated, so some shareholders in Minsheng see this as a good thing. They have a really complicated ownership structure, and they think that maybe the state is starting to clean up this structure.

Anbang has been handed over to the China Insurance Regulatory Commission (CIRC), which is the association of insurance companies in China. Some say that this takeover will only be two years, and afterwards it will be given back to the shareholders. But, we will have to wait for two years to see what the role of the CIRC will be in reforming the company.