Those who foolishly sought power by riding the back of the tiger ended up inside. – John F. Kennedy
Desmond Shum’s message for investors is clear: Institutions matter, and beware the siren song of the Chinese economic miracle.
One can think of Red Roulette: An Insider's Story of Wealth, Power, Corruption, and Vengeance in Today's China, Shum’s revelatory behind-the-scenes account of the life and death struggle for money and power in the People’s Republic, co-written with John Pomfret, as three different books.
The first describes how Shum, the issue of a family rendered bitter and poor because of its landlord background in post-revolutionary Shanghai, leverages his height, good looks, and athletic ability into a scholarship to Hong Kong’s Queens University, where his latent quantitative skill blossoms, launching him into what, in any other developed nation, would have been a conventional career in high finance.
The book’s other major character, Whitney Duan, grew up as the stepdaughter of a small-town official in Shandong province, just southeast of Beijing. Whitney and Desmond met in Beijing, conducted a long-term relationship, and eventually tied the knot. But their union is much more a business partnership than a conventional marriage. Not until they had become a well-established item does Whitney take Desmond to dinner with her mentor, Auntie Zhang. The meal, Desmond soon realizes, is his life’s most important job interview. He passes with flying colors, at which point Whitney reveals to Desmond Auntie’s real identity as the wife of Wen Jiabao, a high party official who would eventually become China’s premier.
The second, and major, section of the book documents how Whitney and Desmond became billionaires via a heady brew of Desmond’s financial nous, leverage, and, most of all, Whitney’s connections – guanxi – via Auntie Zhang.
Behind every Chinese business success story, from Alibaba’s Jack Ma on down – marches an army of party officials, from the mightiest Politburo member to the humblest local bureaucrat – with their hand out, without whom operations ground to a halt. Unquestionably, Shum, who almost single-handedly and from scratch built the massive logistical hub at Beijing Capital International Airport and steered the multi-billion-dollar funding of the Ping An Insurance Company, China’s second-largest life insurer, is a man of some talents. Equally necessary to the couple’s success, however, was his wife’s expertise in navigating the party hierarchy.
One of the most colourful party rent-seekers was the airport customs chief, Du Pingfa: “Fat, in his mid-fifties, and so bald that his head resembled a khaki-colored cue ball,” Du saw the logistics for center the windfall it was, demanding, among other goodies, a four-hundred thousand square foot office for his 300-member workforce, replete with international-grade badminton and tennis courts, a large theater, a banquet hall, and onsite four-star accommodations; left unsaid is the certainty of more tacit personal compensation.
The third book-within-a-book, the final chapters that describe the Hobbesian world of high-level Communist Party politics, is the most riveting. The trajectory of the Shum/Duan enterprise hit that particular brick wall on October 26, 2012, when The New York Times’ David Barboza broke the story of the massive ill-gotten wealth of Wen Jibao’s family, estimated at about $3 billion. Ironically, Wen himself had relatively clean hands; it was the rest of the clan, from Auntie Zhang on down, who fed most gluttonously from the trough. In the end, Whitney Duan became the family’s sacrificial lamb; five years later, on September 5, 2017, she simply disappeared, her whereabouts unknown to both her family and to Shum and their son, who by this point were living in England. She was last seen in the Genesis Beijing, a sprawling $2.5 billion development built by her and Shum just a stone’s throw from both the Forbidden City and Tiananmen Square.
Shum also provides a lucid, and revealing, narrative of the titanic struggle between Xi Jinping and Bo Xilai. After the chaos of the Cultural Revolution, party officials realized that the only safety lay in their families, particularly in the long-term protection provided by their offspring. Both Xi and Bo were “princelings” of the highest level, the sons of Mao’s revolutionary lieutenants. Rising in tandem through the party apparatus, they inevitably became scorpions in the bottle of high-party politics. Both were elevated to the all-powerful politburo in 2007, but then Xi almost immediately got promoted to its inner circle – the Standing Committee – ahead of Bo, at which point in the elite game of Politburo intrigue, Bo’s end was only a matter of time and events.
On November 15, 2011, the body of Neil Heywood, a shady British influence peddler, was found in the seedy Lucky Holiday Hotel in Chonquing, Bo’s fiefdom. Heywood, it turned out, was an associate of Bo’s wife, who subsequent investigation revealed had poisoned him over a business dispute. When the city’s police chief, Wang Lijun, went to Bo with the evidence, Bo rose from behind his desk and struck Wang who, fearing for his life, sought asylum in the U.S. consulate in Chengdu. This tawdry episode provided Xi with more than adequate pretext to send his biggest rival to prison for corruption.
If Shum’s long journey has a message, it’s that nearly all party officials and their families are on the take, and that power is exercised by selectively targeting one’s enemies with the almost inevitable evidence of same. The book’s most flagrant example of this malignant discretion involved an unfortunate Shanghai party secretary named Chen Liangyu, who was removed in 2006, then sentenced to an 18-year imprisonment, for misusing pension funds. Chen’s real crime was failing to pledge allegiance to the then party chief, Hu Jintao; when the family of his replacement, Han Zheng, was discovered to have spirited away $20 million to Australia, Han was temporarily demoted to the city’s mayorship (and replaced by Xi Jinping). By 2017 he was back on top in the Politburo’s Standing Committee.
The message for investors goes the role of institutions. Unmentioned by Shum is the fact that while China, until very recently, has maintained a blistering pace of economic growth, it has most definitely not translated into high total equity returns, which over nearly the past three decades, in U.S. dollar terms, have barely kept pace with inflation. The reason for the chasm between China’s economy and stock market is rampant share dilution; a nation that fails to protect its children from tainted milk and from schools that cannot survive earthquakes can hardly be expected to respect the rights of foreign minority shareholders.
With an emperor for life and a slowly collapsing property market – the powerhouse of its economy – China’s institutional chickens seem finally to be coming home to roost. The final coda to the Shum/Duan odyssey played out on September 4, when Shum’s missing wife called him to warn off the book’s publication, a gambit which, fortunately for anyone interested in China, failed.
William J. Bernstein is a neurologist, co-founder of Efficient Frontier Advisors, an investment management firm, and has written several titles on finance and economic history. He has contributed to the peer-reviewed finance literature and has written for several national publications, including Money Magazine and The Wall Street Journal. He has produced several finance titles, and four volumes of history, The Birth of Plenty, A Splendid Exchange, Masters of the Word, and The Delusions of Crowds about, respectively, the economic growth inflection of the early 19th century, the history of world trade, the effects of access to technology on human relations and politics, and financial and religious mass manias. He was also the 2017 winner of the James R. Vertin Award from CFA Institute
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Those who foolishly sought power by riding the back of the tiger ended up inside. – John F. Kennedy