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As inequality grows, the second generation of China's ultra-rich class wants to avoid becoming a target. |
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China’s economy could become the world’s biggest within the decade, it’s also one of the most unequal.
China’s Spoiled Rich Kids Learn to Avoid the Wrath of Xi Jinping
As inequality grows, the second generation of China's ultra-rich class wants to avoid becoming a target.
Over the years, China’s rich kids have become synonymous with obscene displays of wealth: Posing next to Bentleys and Lamborghinis, showing off stacks of yuan on social media and giving pets gold Apple watches, to name a few.
These days, however, that’s become more of an exception than the rule. Yes, they still hoard luxury goods and order $500 bottles of champagne, and occasionally somebody sparks outrage by driving a Mercedes into the Forbidden City. But on the whole they’re starting to understand it’s better to keep their heads down, particularly after President Xi Jinping’s government started targeting billionaires in the past few years.
“We learned how to behave when we saw our friends’ families taken down and jailed,” said Tu Haoran, 32, founder of Fantasy Entertainment, one of China’s largest DJ agencies. “There have been too many cases around me since 2016. Everyone is playing the low-profile card now. You don’t have to let the world know that you make some money. What’s the point of being high-profile?”
Things are set to become more precarious for the extremely wealthy in China, from Jack Ma on down. While the economy could become the world’s biggest within the decade, it’s also one of the most unequal — a problem only made worse by the pandemic. And Xi is stepping up efforts to ensure wealth is more evenly distributed among the nation’s 1.4 billion people ahead of 2022, when a once-every-five-year change in leadership could see him hold on to the presidency for a third term.
At a major Communist Party meeting in October to discuss future economic plans, Xi told officials that China’s development was “unbalanced and insufficient.” He added that “common prosperity” should be the ultimate goal as he looks ahead to the 100-year anniversary of the founding of the People’s Republic of China in 2049.
Xi’s statement appeared to mark a shift from former leader Deng Xiaoping, who said it’s fine for some people to “get rich first” when he initiated market-friendly reforms in the 1980s that turned China into a manufacturing powerhouse. Yet Deng also made clear that China, as a socialist country, couldn’t have permanently rich and poor classes, said Enodo Economics chief economist Diana Choyleva.
Under Xi, China is “no longer in catch-up mode,” she said. “It’s no longer OK for some people to be rich and get richer while poor people remain poor or get poorer.”
That’s a problem for the privileged children of ultra-wealthy elites, known in China as “fuerdai,” many of whom asked to be identified only by their last names during interviews conducted over the past few months. Their parents got rich during China’s boom, gaining early access to overseas markets, monopolizing brand-new industries or building massive portfolios in nascent stock and property markets. It was a time when everyone was getting wealthier; their families just pulled way ahead.
Now evidence is emerging that distinct social classes are hardening, presenting a new challenge for the Communist Party.
Tough climb
China lags the U.S., Russia and most of Europe in social mobility
Source: World Economic Forum
In the World Economic Forum’s inaugural social mobility index released in January, China ranked 45th of 82 countries, below the U.S., Russia and most of Europe. A Credit Suisse Group AG report in October warned that wealth inequality has “risen quite quickly” after China’s transition to a market economy: At the end of 2019, China had 5.8 million millionaires and 21,100 residents with wealth above $50 million — more than any country except the U.S.
Some fuerdai have grown up completely insulated from the rest of society. Huang, 25, never thought he was well-off until he learned about finance while he was studying at New York University’s Shanghai campus. His father made hundreds of millions of yuan investing in health-care companies that boomed in the 1990s, and he’d spent his childhood hanging out with other kids from similar backgrounds.
“I was like ‘wow, I didn’t know I’m this rich,’” he said. “I don’t have to work my entire life.”
After graduating he founded an investment fund with some friends, seeded by their parents and backed by one of the country’s biggest investment banks, which was also stocked with the children of high-ranking Communist Party members. Yet while everyone there has plenty of cash, he said his top priority is proving that he’s the best in his field.
“In the past I bought a Dior shirt because I thought it would make me look fancier, but now I want the shirt to look more valuable because I’m wearing it,” Huang said. “Rich kids are very different from those that grew up in the 80s. Most people around me know what they are doing, instead of just wasting daddy’s money.”
For the majority of people in China who aren’t born into that elite, it’s becoming harder to climb the social ladder. As is often the case when countries develop, the rich can give their children a leg up in education and property ownership — two common pathways to upward mobility.
A 2018 report by the Organisation for Economic Co-operation and Development found that it would take seven generations for someone born into the bottom 10% in China to approach mean income, compared with five in South Korea and four in Japan. While China scores well on access to education in the WEF index, the quality of schooling remains poor outside of urban areas, and wages are relatively lower for a larger percentage of the population than other countries.
That points to a more pressing political problem for Xi: Hitting a target of doubling per capita income from 2010 levels before the Communist Party celebrates its 100th anniversary in 2021. As part of that, his government just announced that China has eradicated extreme rural poverty even as the pandemic exacerbates the divide between rich and poor.
In May this year, Premier Li Keqiang told Communist Party officials that 600 million Chinese people, almost half of the country’s population, are living on a monthly income of 1,000 yuan ($150) — comments that shocked many citizens in a nation producing at least one billionaire a week.
While China’s early containment of the virus allowed its economy to recover faster, tens of millions of low-income workers suffered disproportionately. Luxury spending returned quicker than purchases of staples like food and home appliances, indicating the wealthy are bouncing back more quickly.
Faced with an increasingly hostile U.S., Xi is now focused more on ramping up the domestic economy. And part of that involves targeting a concentration of wealth in the tech sector, which now boasts some of China’s wealthiest people.
When Jack Ma became a billionaire in 2014, he was praised on Chinese social media for generating wealth and creating jobs. Yet internet users were almost gleeful last month to hear of the last-minute suspension of Ant Group Co.’s $35 billion initial public offering, criticizing Ma for daring to challenge the Chinese government.
Many of the rich young fuerdai are well aware that messing with the Communist Party is the quickest way to lose everything, and potentially end up in jail or whisked away like actress Fan Bingbing, who was secretly held for several months in 2018 over tax evasion. But they also don’t think the government will move quickly to seize their income, with many noting recent speeches from Xi speaking about the value of entrepreneurship to drive growth.
“My stance is really to follow the path that the government leads — I know our fate moves in tandem,” said Wang, the son of a billionaire media tycoon, while sipping on champagne at a recent brunch in Shanghai.
“In China, the ‘hate rich’ culture has lasted for a long time, since the Cultural Revolution,” he added, referring to political upheaval targeting China’s elite that began in the 1960s and decimated the economy. “For me and my friends, this generation, one thing we have in common is that we want to create our own wealth, instead of fearing our fathers’ wealth gets taken away.”
Wang’s father wants him to stay under the radar. None of the companies in his business empire are linked to the younger Wang’s name and the two have been careful to keep any mention of their connection off the internet. Wang says his father gives him a “limited” allowance and won’t let him have a credit card to prevent him from spending extravagantly and drawing attention to himself.
The early part of Xi’s tenure saw an anti-corruption campaign lock up thousands of officials, including a former member of the Politburo Standing Committee, the highest-ranking body in China’s political system. Still, top party officials have rebuffed occasional calls to publicly declare their assets, and disclosures of the personal wealth of senior officials is one of the most sensitive issues among those in power.
Rich and Poor Classes
China's top 1% of earners hold a greater share of wealth than the bottom 50%
Source: Paris School of Economics' World Inequality Database
Proposals to implement taxes on inheritance, property or wealth have been discussed for years, but never acted on in part due to fears of hurting China’s emerging middle class. Levying those sorts of taxes wouldn’t solve China’s inequality problem, according to Xie Fuzhan, president of the Chinese Academy of Social Sciences, a prominent government think tank. “In my view our biggest challenge remains how to make the pie bigger, and how to better distribute the pie,” he said.
Any redistributive taxes could also hurt or expose the wealth of public figures, said Roberta Chang, a partner at law firm Hogan Lovells in Shanghai.
“We know wealthy Chinese, and in particular government officials, love to buy property,” she said. “So there’s a political consideration to that.”
Still, Xi’s government is watching the rich more closely than in the past. In particular, it has set up automated systems that monitor money flows and required more disclosure for sending funds abroad, making it harder for China’s ultra-rich to move cash offshore.
There are still loopholes, however. Wealthy Chinese can set up trusts with nominee structures, transfer billions of dollars’ worth of assets to relatives and obtain foreign passports. One creative method is for owners of companies listed in China to let their Hong Kong units run low on cash, then apply to make a cash injection to prop up the Hong Kong business, according to a former employee at a Chinese state-owned bank, who asked not to be named describing the practice.
Yet nowadays even shifting money overseas is becoming more perilous as suspicions of China expand across the West, from the U.S. to Europe to Australia. For many fuerdai like Fantasy Entertainment's Tu, the safest route is to “just do our job, pay taxes, and behave.” While his dream of forming a DJ business developed from his love of clubbing during his university years, now he just wants to be known for creating a profitable company.
Tu’s father gave him 2 million yuan ($300,000) to start the business even though he disapproved of the idea, assuming it was an excuse for Tu to keep partying under the guise of work. But the company now makes more than 12 million yuan a month in revenue, Tu said, and he no longer has to rely on his family for cash.
“What I fear the most these days is that ‘tall trees catch the most wind,’” said Tu, citing a Chinese idiom that cautions against drawing too much attention to oneself. “Having some wealth, but not being super rich, is the safest.”
-- Richard Macauley and Claire Che
— With assistance by Jing Li, and Venus Feng
Kids Learn to Avoid the Wrath of Xi Jinping
As inequality grows, the second generation of China's ultra-rich class wants to avoid becoming a target.
Over the years, China’s rich kids have become synonymous with obscene displays of wealth: Posing next to Bentleys and Lamborghinis, showing off stacks of yuan on social media and giving pets gold Apple watches, to name a few.
These days, however, that’s become more of an exception than the rule. Yes, they still hoard luxury goods and order $500 bottles of champagne, and occasionally somebody sparks outrage by driving a Mercedes into the Forbidden City. But on the whole they’re starting to understand it’s better to keep their heads down, particularly after President Xi Jinping’s government started targeting billionaires in the past few years.
“We learned how to behave when we saw our friends’ families taken down and jailed,” said Tu Haoran, 32, founder of Fantasy Entertainment, one of China’s largest DJ agencies. “There have been too many cases around me since 2016. Everyone is playing the low-profile card now. You don’t have to let the world know that you make some money. What’s the point of being high-profile?”
Things are set to become more precarious for the extremely wealthy in China, from Jack Ma on down. While the economy could become the world’s biggest within the decade, it’s also one of the most unequal — a problem only made worse by the pandemic. And Xi is stepping up efforts to ensure wealth is more evenly distributed among the nation’s 1.4 billion people ahead of 2022, when a once-every-five-year change in leadership could see him hold on to the presidency for a third term.
At a major Communist Party meeting in October to discuss future economic plans, Xi told officials that China’s development was “unbalanced and insufficient.” He added that “common prosperity” should be the ultimate goal as he looks ahead to the 100-year anniversary of the founding of the People’s Republic of China in 2049.
Xi’s statement appeared to mark a shift from former leader Deng Xiaoping, who said it’s fine for some people to “get rich first” when he initiated market-friendly reforms in the 1980s that turned China into a manufacturing powerhouse. Yet Deng also made clear that China, as a socialist country, couldn’t have permanently rich and poor classes, said Enodo Economics chief economist Diana Choyleva.
Under Xi, China is “no longer in catch-up mode,” she said. “It’s no longer OK for some people to be rich and get richer while poor people remain poor or get poorer.”
That’s a problem for the privileged children of ultra-wealthy elites, known in China as “fuerdai,” many of whom asked to be identified only by their last names during interviews conducted over the past few months. Their parents got rich during China’s boom, gaining early access to overseas markets, monopolizing brand-new industries or building massive portfolios in nascent stock and property markets. It was a time when everyone was getting wealthier; their families just pulled way ahead.
Now evidence is emerging that distinct social classes are hardening, presenting a new challenge for the Communist Party.
Tough climb
China lags the U.S., Russia and most of Europe in social mobility
Source: World Economic Forum
In the World Economic Forum’s inaugural social mobility index released in January, China ranked 45th of 82 countries, below the U.S., Russia and most of Europe. A Credit Suisse Group AG report in October warned that wealth inequality has “risen quite quickly” after China’s transition to a market economy: At the end of 2019, China had 5.8 million millionaires and 21,100 residents with wealth above $50 million — more than any country except the U.S.
Some fuerdai have grown up completely insulated from the rest of society. Huang, 25, never thought he was well-off until he learned about finance while he was studying at New York University’s Shanghai campus. His father made hundreds of millions of yuan investing in health-care companies that boomed in the 1990s, and he’d spent his childhood hanging out with other kids from similar backgrounds.
“I was like ‘wow, I didn’t know I’m this rich,’” he said. “I don’t have to work my entire life.”
After graduating he founded an investment fund with some friends, seeded by their parents and backed by one of the country’s biggest investment banks, which was also stocked with the children of high-ranking Communist Party members. Yet while everyone there has plenty of cash, he said his top priority is proving that he’s the best in his field.
“In the past I bought a Dior shirt because I thought it would make me look fancier, but now I want the shirt to look more valuable because I’m wearing it,” Huang said. “Rich kids are very different from those that grew up in the 80s. Most people around me know what they are doing, instead of just wasting daddy’s money.”
For the majority of people in China who aren’t born into that elite, it’s becoming harder to climb the social ladder. As is often the case when countries develop, the rich can give their children a leg up in education and property ownership — two common pathways to upward mobility.
A 2018 report by the Organisation for Economic Co-operation and Development found that it would take seven generations for someone born into the bottom 10% in China to approach mean income, compared with five in South Korea and four in Japan. While China scores well on access to education in the WEF index, the quality of schooling remains poor outside of urban areas, and wages are relatively lower for a larger percentage of the population than other countries.
That points to a more pressing political problem for Xi: Hitting a target of doubling per capita income from 2010 levels before the Communist Party celebrates its 100th anniversary in 2021. As part of that, his government just announced that China has eradicated extreme rural poverty even as the pandemic exacerbates the divide between rich and poor.
In May this year, Premier Li Keqiang told Communist Party officials that 600 million Chinese people, almost half of the country’s population, are living on a monthly income of 1,000 yuan ($150) — comments that shocked many citizens in a nation producing at least one billionaire a week.
While China’s early containment of the virus allowed its economy to recover faster, tens of millions of low-income workers suffered disproportionately. Luxury spending returned quicker than purchases of staples like food and home appliances, indicating the wealthy are bouncing back more quickly.
Faced with an increasingly hostile U.S., Xi is now focused more on ramping up the domestic economy. And part of that involves targeting a concentration of wealth in the tech sector, which now boasts some of China’s wealthiest people.
When Jack Ma became a billionaire in 2014, he was praised on Chinese social media for generating wealth and creating jobs. Yet internet users were almost gleeful last month to hear of the last-minute suspension of Ant Group Co.’s $35 billion initial public offering, criticizing Ma for daring to challenge the Chinese government.
Many of the rich young fuerdai are well aware that messing with the Communist Party is the quickest way to lose everything, and potentially end up in jail or whisked away like actress Fan Bingbing, who was secretly held for several months in 2018 over tax evasion. But they also don’t think the government will move quickly to seize their income, with many noting recent speeches from Xi speaking about the value of entrepreneurship to drive growth.
“My stance is really to follow the path that the government leads — I know our fate moves in tandem,” said Wang, the son of a billionaire media tycoon, while sipping on champagne at a recent brunch in Shanghai.
“In China, the ‘hate rich’ culture has lasted for a long time, since the Cultural Revolution,” he added, referring to political upheaval targeting China’s elite that began in the 1960s and decimated the economy. “For me and my friends, this generation, one thing we have in common is that we want to create our own wealth, instead of fearing our fathers’ wealth gets taken away.”
Wang’s father wants him to stay under the radar. None of the companies in his business empire are linked to the younger Wang’s name and the two have been careful to keep any mention of their connection off the internet. Wang says his father gives him a “limited” allowance and won’t let him have a credit card to prevent him from spending extravagantly and drawing attention to himself.
The early part of Xi’s tenure saw an anti-corruption campaign lock up thousands of officials, including a former member of the Politburo Standing Committee, the highest-ranking body in China’s political system. Still, top party officials have rebuffed occasional calls to publicly declare their assets, and disclosures of the personal wealth of senior officials is one of the most sensitive issues among those in power.
Rich and Poor Classes
China's top 1% of earners hold a greater share of wealth than the bottom 50%
Source: Paris School of Economics' World Inequality Database
Proposals to implement taxes on inheritance, property or wealth have been discussed for years, but never acted on in part due to fears of hurting China’s emerging middle class. Levying those sorts of taxes wouldn’t solve China’s inequality problem, according to Xie Fuzhan, president of the Chinese Academy of Social Sciences, a prominent government think tank. “In my view our biggest challenge remains how to make the pie bigger, and how to better distribute the pie,” he said.
Any redistributive taxes could also hurt or expose the wealth of public figures, said Roberta Chang, a partner at law firm Hogan Lovells in Shanghai.
“We know wealthy Chinese, and in particular government officials, love to buy property,” she said. “So there’s a political consideration to that.”
Still, Xi’s government is watching the rich more closely than in the past. In particular, it has set up automated systems that monitor money flows and required more disclosure for sending funds abroad, making it harder for China’s ultra-rich to move cash offshore.
There are still loopholes, however. Wealthy Chinese can set up trusts with nominee structures, transfer billions of dollars’ worth of assets to relatives and obtain foreign passports. One creative method is for owners of companies listed in China to let their Hong Kong units run low on cash, then apply to make a cash injection to prop up the Hong Kong business, according to a former employee at a Chinese state-owned bank, who asked not to be named describing the practice.
Yet nowadays even shifting money overseas is becoming more perilous as suspicions of China expand across the West, from the U.S. to Europe to Australia. For many fuerdai like Fantasy Entertainment's Tu, the safest route is to “just do our job, pay taxes, and behave.” While his dream of forming a DJ business developed from his love of clubbing during his university years, now he just wants to be known for creating a profitable company.
Tu’s father gave him 2 million yuan ($300,000) to start the business even though he disapproved of the idea, assuming it was an excuse for Tu to keep partying under the guise of work. But the company now makes more than 12 million yuan a month in revenue, Tu said, and he no longer has to rely on his family for cash.
“What I fear the most these days is that ‘tall trees catch the most wind,’” said Tu, citing a Chinese idiom that cautions against drawing too much attention to oneself. “Having some wealth, but not being super rich, is the safest.”
-- Richard Macauley and Claire Che
— With assistance by Jing Li, and Venus Feng
