Key Summary from Books: Red Roulette

RED ROULETTE: AN INSIDER’S STORY OF WEALTH, POWER, CORRUPTION, AND VENGEANCE IN TODAY’S CHINA

by Desmond Shum

Growing up hungry and alone in Shanghai instilled in my dad a fear of forming deep connections with those around him. He hated owing anyone anything and just wanted to rely on himself. That same outlook was instilled in me, and, even today, I’m still uncomfortable feeling indebted. Only later, after I met the woman who’d become my wife, would I learn how isolating this can be. In the ebb and flow of life, if you’re never beholden to anyone, Whitney would say, no one will ever be beholden to you and you’ll never build deeper relationships. Although I spent years fearing my father, I now see him as a lonely figure who battled the world alone.

My mother’s family didn’t suffer under Communist rule. After the 1949 revolution, the Chinese Communist Party used families like my mother’s as a source for foreign currency and to break the Cold War trade embargo that the United States had slapped on China. The Party called these families “patriotic overseas Chinese,” a signal to authorities inside China to go easy on those relatives who’d stayed behind. At one point, the Communists asked my grandfather to run the Hong Kong subsidiary of China’s state-owned oil company, the China National Petroleum Corporation.

At that same time, from an early age I experienced this yawning gap between the world outside my home, where I was recognized as a leader, a raconteur, an athlete, even a nice person, and the world of our tiny flat, where my parents seemed thoroughly disappointed with me. Perhaps this is common among kids from China, where expectations are high and criticism constant, and where parents believe that children learn by failure, not through success. As I matured, the tension grew between these two worlds.

The Chinese Communist Party divided the world into enemies and allies and, to win support internationally, aggressively cultivated “foreign friends” such as left-wing intellectuals, journalists, and politicians. Each time a group of “foreign friends” showed up at my school, the best math students would be trotted out to perform calculations on the blackboard and the best athletes would be summoned for a gym class—all part of a great Communist Chinese tradition of bamboozling incredulous fellow travelers into acknowledging the brilliance of Chinese Socialism.

My mother returned to Shanghai several times to plead with the authorities to let my dad join us. The cost of those trips all but bankrupted her. Thanks to Deng Xiaoping, the authorities in Shanghai were done prosecuting people for having relatives or living overseas. Still, the Chinese government was loath to allow families to leave together, wanting to maintain leverage over people abroad by making family reunification hard. Finally, after two years, my mom succeeded in nagging so tenaciously that the authorities relented. To this day, she remembers the name of the official who let my dad go. I

It took me years to acknowledge it, but witnessing my parents’ labor in Hong Kong to get us back up the ladder affected me profoundly. We were in desperate straits. For three years, we squatted in someone else’s living room. We had no bathroom of our own. We were barely making ends meet. But my parents both knew what life felt like at the other end of the tunnel. They understood what they had to do to make it through. So they went for it. I learned this lesson at their feet.

Crawling up the class rankings at Queen’s College taught me a lot about my capabilities. I’m not lazy per se, but I do have a tendency to slack off. Once accepted at Queen’s College, I took it easy. I only did what was necessary. But that’s because somewhere inside me, I had this innate belief that when I needed to I could step on the accelerator and get the job done. These traits stayed with me throughout my professional life.

China had enacted heavy duties on imported beer—upward of 40 percent—to protect Chinese breweries. Tait Asia brought beer into Hong Kong and resold it to companies that figured out a way to move it into China duty-free. We didn’t want to know how that happened as long as sales and profits increased. It wasn’t just ChinaVest, of course. Anyone doing business in China did it this way, circumventing the rules in search of profit. I quickly learned that in China all rules were bendable as long as you had what we Chinese called guanxi, or a connection into the system. And given that the state changed the rules all the time, no one gave the rules much weight.

We dated and did fun things like hiking and catching a movie. But what set our relationship apart were our discussions. Aligning our goals constituted her idea of romance. I’d never experienced this approach to a relationship, nor had I ever encountered anyone who was so certain that her way was the right way. Early in 2002, we met at the marble-encased coffee shop of Beijing’s Grand Hyatt and talked for three hours. Whitney grilled me on my approach to marriage. She steered me, in a way no one else had in the past, to look clinically at my personal life. I’d never been much of a ladies’ man, but I was more Western in my outlook toward relationships. If things happened, go with the flow. As Hollywood romances say, follow your heart. Whitney had no truck with that approach. “You,” she announced, “need a better approach.” She and I actually did a SWOT analysis, a checklist used to assess a business. Separately, we broke down the Strengths, Weaknesses, Opportunities, and Threats to our emotional ties. Then we compared notes.

Whitney’s argument appealed to my analytical side. She seemed to have a magic formula for success, which was especially intriguing because my formula had clearly lost its mojo. Whitney’s view of passion, love, and sex was that we could grow into them, but it wouldn’t be the glue that would bind us. What would cement the relationship would be its underlying logic—did our personalities match; did we share values, desire the same ends, and agree on the means? If so, everything else would follow. Early on, we both agreed on the ends. We wanted to leave something behind, to make a mark on China and the world. This had been my goal for years and Whitney shared it. As to the means, Whitney exuded confidence that she’d found the ticket to success. I put myself in her hands.

Whitney gave me a crash course in China’s political system. In the West, political parties only wielded power when they won elections and took control of the government. In China, the Chinese Communist Party had no competition. The Party secretary in a county, city, or province outranked the county chief, mayor, or provincial governor. Even China’s military, the People’s Liberation Army, was legally not the army of the Chinese state. It was the Party’s army.

Like Edward Tian at AsiaInfo, Whitney discovered that to unlock the door to success in China she needed two keys. One was political heft. In China, entrepreneurs only succeeded if they pandered to the interests of the Communist Party. Whether it be a shopkeeper in a corner store or a tech genius in China’s Silicon Valley, everyone needed sponsors inside the system. The second requirement was the ability to execute once an opportunity arose. Only by possessing both keys would success be possible. That’s what Whitney set out to do and how I entered the picture.

Wen’s personality saved him. It’s probably going too far to say that at heart he was a political eunuch. However, he was extraordinarily careful; he never insulted or threatened anyone. He managed up and avoided any association with political factions. More so than most officials, he stayed in his lane. To get to his position, he obviously had to have ambition, but it was a restrained type of ambition that didn’t threaten his comrades at the Party’s heights. When Zhu Rongji was termed out as premier in March 2003, Wen became a natural compromise candidate to replace him.

Wen’s strong suit became a weakness. He did seem to possess a vision for a freer, more open China. After his old boss Zhao Ziyang was muzzled under house arrest, Wen was the only Chinese leader to continue to speak publicly about universal values, such as freedom and democracy. Still, Wen very much hewed to the rules of the Chinese power structure, which strictly limited the jurisdiction of the premier. Wen’s job was to run the government. Only Hu Jintao, the Party general secretary, who outranked Wen, could push for political reform. And he never did.

The financial success of Wen Jiabao’s wife and kids is summed up in the Chinese proverb: “When a man attains enlightenment [or in this case the premiership], even his pets ascend to heaven.” That said, neither Whitney nor I believed that Premier Wen was fully aware until very late that his family members had become billionaires. I believed Wen’s daughter charged foreign companies hefty fees for her connections. Winston was running New Horizon and Auntie Zhang was meeting with scores of people hawking opportunities. Meanwhile, each family member was collecting luxury cars. But the premier seemed to have little idea what it meant. When Auntie Zhang came home with a fat rock on her finger, or a priceless jade bracelet, Wen would admire it with the eye of a geologist, not of a seasoned jeweler. Wen had never spent a day in a commercial enterprise. When he was a lowly official, he went to the government canteen and downed whatever food was put in front of him. At home, he ate whatever the cook prepared and had no conception of the cost. He’d never checked out an Hermès store. The only time he ever visited a mall he brought along an entourage. He had no idea that a handbag could cost $10,000 or more. There was something in him that recalled George H. W. Bush’s 1992 visit to a grocery store and his puzzled reaction to a barcode scanner. The day-to-day lives of average people seemed a mystery to Premier Wen.

Our deals required more work. None were sure bets. You needed judgment on two levels. The first was basic due diligence. That was where I came in. I analyzed the industry and had a good sense of the market. I did the legwork, visiting the site and delving into the details. The second type of judgment was an ability to size up a proposal’s political cost.

Peiying made the arrangements for all of China’s Party pooh-bahs flying into Beijing. Each time a political heavyweight landed, Peiying would be in the room. He used this face time to great advantage. As the top honcho at so many airports, Peiying controlled access to monopoly businesses. He sliced them like cake, doling them out to the relatives of top government officials. He helped the family of China’s president Jiang Zemin secure a license to sell duty-free products in Beijing via a firm called Sunrise. This was a model for the type of business the red aristocracy liked. Sunrise shared the duty-free business at the Beijing airport with a state-owned firm, China Duty Free Group. These duopolies were an emblem of China’s economy, with a red family controlling one firm and a state-run entity controlling the other.

Throughout the airport project, I, like all businessmen in China, paid extremely close attention to the macroeconomic policies and the political whims of the central government. Every time we requested an approval, our application had to show how the project aligned with the shifting political and economic priorities of the Chinese Communist Party.

We played a similar game with a vast array of bureaucrats. Each approval was obtained through connections. Each connection meant an investment in a personal relationship, which meant an awful lot of effort and even more Moutai. Forging personal ties and establishing guanxi was the most difficult part. Guanxi wasn’t a contractual relationship per se: it was a human-to-human connection, built painstakingly over time. You had to show genuine concern for the person. The tough part was that I had so many relationships that needed managing, but I also had a project on my back with a deadline. I had to squeeze all of these interactions into a pipe, and the diameter of the pipe was time. Obviously, I had to delegate, but the more I got directly involved in relationship building the more approvals we received.

The whole idea was to reinforce the sense of belonging. This was critical in a system where the rules regarding what was legal and what was proscribed were full of vast areas of gray, and every time you wanted to accomplish anything you had to wade into the gray. In the West, laws are generally clear and courts are independent, so you know where the lines are. But in China, the rules were intentionally fuzzy, constantly changing, and always backdated. And the courts functioned as a tool of Party control. So that’s why building this sense of belonging was so crucial. To convince someone to venture into the gray zone with you, you first had to convince him or her to trust you. Only then could you take the leap together. To do that the two of you would research each other’s background, like Whitney had with Auntie Zhang. You’d talk to former colleagues and you’d spend hours cultivating each other so you could understand who each other really was. Auntie Zhang could vouch for Whitney and me on a macro level. But on the local level, it was up to me.

As early as July 1, 2001, the Party had officially changed its policy on capitalists when then Party boss Jiang Zemin made a speech that welcomed all leading Chinese, including entrepreneurs, into the Party’s ranks. Even though Jiang wrapped this announcement in Party-speak, calling it the “Three Represents,” that word salad couldn’t mask the momentous nature of this change. Communist China’s founder, Mao Zedong, had relegated capitalists like those in my father’s family to the bottom rung of society. Deng Xiaoping had given them a leg up by acknowledging that with economic reforms a small group would “get rich first.” Now, a generation later, Jiang Zemin was inviting entrepreneurs to join the Party and enter at least the margins of political power. It was enough to make you dizzy. Even high up in the Party, the elite seemed to be preparing mentally for a change. In 2004, Chen Shui-bian was reelected as the president of Taiwan, the island of 23 million people that the Communists have long claimed belongs to China. In 2000, Chen had become the first opposition candidate to be elected Taiwan’s president, ending five decades of one-party rule by the Nationalist Party. Taiwan’s democratization process shook Communist Party bigwigs because they saw in it a potential road map for mainland China and thus a threat to the Party’s monopoly on power. After his reelection, Chen announced that it was time to go after the riches of Taiwan’s Nationalist Party. When the Nationalists ran the island, they’d treated its economy as their party’s piggy bank.

At Aspen, I learned how people with money had always participated in the political process. China’s system was the outlier in that sense, denying its capitalist class a say in the direction of the country. But those of us who identified as capitalists wanted a voice. We wanted protection for our property, our investments, and other rights. We wanted, if not an independent judiciary, at least a fair one where judgments were made on the basis of law and not on the whims of the local Party boss. We craved predictability in government policies because only then could we invest with confidence. Whitney, who was a Christian, also wanted more religious freedom. At the very least, she wanted the Chinese government to acknowledge that a Chinese person could love God and love China at the same time.

Startled at the liberal tendencies of my fellow capitalists, the Chinese Communist Party, starting in the mid 2000s, moved to weaken the moneyed class, uproot the sprouts of civil society that we’d planted, and reassert the Party’s ideological and economic control of Chinese society. As part of this effort, the Party sought to bolster state-owned enterprises to the detriment of private firms.

This type of attitude wasn’t confined to our project; it infected the entire economy. “State-owned enterprises march forward, private firms retreat” became the new buzzwords, signaling a shift at the top of the Party. State-owned firms began to carry out forced mergers with successful private companies. Entrepreneurs had been the engines of China’s growth, but we were never trusted. Ever since it had seized power in 1949, the Chinese Communist Party had used elements of society when it needed them and discarded them when it was done.

As part of a campaign to centralize power, the Party began to parachute officials in from other regions. China’s state-run press agitated against what it called “dirt emperors,” local bigwigs who disregarded directives from Beijing. But the new brand of official created new problems because these characters arrived with the intention of staying for only a few years before moving out and up. They searched for quick wins to justify a promotion. For sure, the old system had its drawbacks. There was corruption, and dirt emperors often would run a locality like their private fiefdom. But the local officials also understood their communities and knew what was needed and what wasn’t. Many had feelings for the place because they didn’t want to be cursed when they left power and retired nearby. They worked for the benefit of family and lifelong friends in the locality. They were willing to focus on long-term, legacy projects. And because of their ties to the community, they could get things done.

I came to believe that in China a long-term business model wouldn’t work. I began to understand what some of my entrepreneur friends had been telling me all along: the smart way to do business in China was to build something, sell it, take money off the table, and go back in. If you invest $1 and you make $10, you take $7 out and reinvest $3. But if you keep $10 in, chances are you’ll lose it all. The Communist Party seemed increasingly threatened by entrepreneurs. A segment of society with means was getting more independent. Entrepreneurs like us were pushing for more freedom, more free speech, and in a direction that was less under the Party’s control. The Party was very uncomfortable with us wading into waters that it controlled.

In 2007, Xi Jinping got his big break in an affair that revealed much about China’s political system. A year earlier the Party secretary of Shanghai, Chen Liangyu, had been removed from his post as part of a corruption investigation involving the misuse of hundreds of millions of dollars from the city’s public pension fund. Chen’s downfall really wasn’t about corruption, however. It was a political hit job masquerading as a criminal case. It came because Chen refused to swear allegiance to China’s then Party chief, Hu Jintao. Chen had been a major player in what was known as the Shanghai Gang, led by Hu’s predecessor Jiang Zemin. When Hu had taken over from Jiang in 2002 as Party chief, Jiang had declined to relinquish all of his Party posts, staying on as the chairman of the Central Military Commission for an additional two years. Jiang had also packed the Standing Committee of the Politburo with his cronies; for several years, Jiang’s men held five of its nine seats, preventing Hu from doing anything without Jiang’s approval. So, in 2006, when Hu’s loyalists saw an opportunity to take down Chen Liangyu, a prominent Jiang loyalist, they struck. When Chen was forced from office in September 2006, he was replaced by Shanghai’s mayor, Han Zheng. Han had only been in office for several months, Auntie Zhang told us, before it was discovered that one of his family members had stashed more than $20 million in a bank account in Australia. The Party couldn’t purge Han, too, because it would’ve been bad for the stability of the leading financial center of China to have both its Party secretary and its mayor ousted in swift succession. Auntie Zhang told us that Han Zheng was allowed to return to his old post as mayor while Xi Jinping was appointed Shanghai’s Party chief. Han Zheng, too, would be forgiven his sins; he joined the Politburo’s Standing Committee in 2017 and was appointed a vice-premier, showing that in China political alignment and loyalty trump everything else.

In 2013, about a year after Xi Jinping had launched his anti-corruption campaign and a year after the Times story on the Wen family wealth, Auntie Zhang told us that she and her kids had “donated” all of their assets to the state in exchange for a guarantee that they wouldn’t be prosecuted. She said other red families had done the same. There was another reason behind this action. The Party wanted to rewrite history. In the future, if the Party faced allegations of tolerating systemic corruption, it could claim that these red families, in “donating” their wealth to China, had only been serving the state. All this seemed pretty surreal to Whitney and me. But then again, China’s Communists had a long record of stealing private property and distorting the truth.

In July 2012, as Xi prepared to take power, a document circulated from the Party’s General Office titled “Briefing on the Current Situation in the Ideological Realm.” The report, known as Document Number 9, warned that dangerous Western values, such as freedom of speech and judicial independence, were infecting China and needed to be rooted out. These ideas, the document said, were “extremely malicious” and would, henceforth, be banned from being taught at China’s schools and universities. The document also blasted the move to a more independent media, ordering Party organizations to redouble their efforts to rein in muckraking periodicals.

There’s a hill on the outskirts of Beijing called Xiang, or Fragrant, Mountain that’s dotted with pavilions first built in the twelfth century. Thousands of stone stairs lead to the top and I took a lesson from the mountain into my daily life. Instead of focusing on the peak, I fixed on the step in front of me, knowing that if I did that, I’d get where I needed to go. This lesson remains relevant to me today. Control what you can control. Don’t bother with the rest. You will always, I tell myself, get out of the pool. Still, it was a hard time. A friend of more than two decades was intent on screwing me. And the mother of my son was trying to turn me into a pauper.

That give-no-quarter feature is a function of the Communist system. From an early age, we Chinese are pitted against one another in a rat race and told that only the strong survive. We’re not taught to cooperate, or to be team players. Rather, we learn how to divide the world into enemies and allies—and that alliances are temporary and allies expendable. We’re prepared to inform on our parents, teachers, and friends if the Party tells us to. And we’re instructed that the only thing that matters is winning and that only suckers suffer moral qualms. This is the guiding philosophy that has kept the Party in power since 1949. Machiavelli would have been at home in China because from birth we learn that the end justifies the means. China under the Party is a coldhearted place.

About Journeyman

A global macro analyst with over four years experience in the financial market, the author began his career as an equity analyst before transitioning to macro research focusing on Emerging Markets at a well-known independent research firm. He read voraciously, spending most of his free time following The Economist magazine and reading topics on finance and self-improvement. When off duty, he works part-time for Getty Images, taking pictures from all over the globe. To date, he has over 1200 pictures over 35 countries being sold through the company.
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