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On February 16th, Bao Fan, the founder, controlling shareholder, and chairman of investment bank China Renaissance, suddenly ceased communication. Ten days later, China Renaissance announced that Fan was assisting with an investigation, but the details of the investigation and whether or not he is being charged are unknown. Unfortunately, these incidents are not rare in China and occur frequently.
Therefore, we have decided to revisit cases of wealthy individuals who have disappeared in China, examine how it impacted their companies’ stocks, and provide investors with conclusions to draw from these cases.
Who are the businessmen that have disappeared in China?
In China, it is not uncommon for businessmen to disappear without explanation. One notable example is the founder of the e-commerce giant Alibaba, who criticized the global financial regulatory system and the Chinese fintech sector’s lack of innovation in October 2020.
In response, Chinese regulators banned Ant Group, in which Alibaba holds a significant stake, from going public on November 2nd, and Ma disappeared from public view for an extended period. He was replaced as a judge on the television show “Africa’s Business Heroes,” and his whereabouts and activities were unknown until he reappeared on January 20th, 2021, after a period of radio silence.
After that, Ma has been seen briefly in various countries but has refrained from making any public statements, which is a significant departure from his previously active public lifestyle. Ma used to play guitar at concerts and even acted in a short action film alongside Hong Kong cinema legends.
Similarly, in February 2020, Ren Zhiqiang, a prominent Chinese construction magnate, criticized the Chinese leadership and specifically the Chairman of the Communist Party of China (CPC), Xi Jinping, for their incompetence in handling the coronavirus outbreak in China. However, in mid-March, Ren disappeared under mysterious circumstances. In April, it was revealed that he was under investigation for corruption, and in September, the Chinese authorities announced that Ren had been sentenced to 18 years in prison.
Chinese billionaires have been known to disappear without much explanation. In December 2015, the founder and CEO of Fosun, Guo Guangchang, vanished for several days before resurfacing with the news that he was “assisting judicial authorities in their investigation.”
The founder of Shanghai Metersbonwe Fashion & Accessories, Zhou Chengjian, went missing for a week in January 2016 with no clear explanation.
In November 2015, the director of a Chinese brokerage firm, Guotai Junan Securities, went missing for an entire month, leaving the company to appoint a temporary replacement. When he returned to work, the company stated that he had been helping authorities in an investigation that did not involve him or the company. However, the details of this investigation remain unclear.
If you plan to invest in Chinese stocks, you should be prepared for unforeseeable events such as this.
Who else is disappearing in China?
In the People’s Republic of China, it is not uncommon for individuals to go missing. There is even a designated section on English-language Wikipedia called “Cases of Missing People in China.”
One notable example is the disappearance of Chinese tennis player Peng Shuai in November 2021, after accusing a member of the Communist Party of China (CCP) Politburo, Zhang Gaoli, of rape. Although Peng has made contact with individuals outside of China on a couple of occasions, her current whereabouts and situation remain unclear. She has deleted her accusations against Gaoli posted on Weibo and has withdrawn from tennis.
Another group of individuals who are frequently reported missing are Uyghurs, a Turkic Muslim minority in the western province of Xinjiang. Activists advocating for Uyghur rights have been known to disappear, and large concentration camps have been established in the province where many Uyghurs are being detained. These circumstances have led to the imposition of sanctions by the United States on various Chinese companies.
In 2018, actress Fan Bingbing went missing after news surfaced that she had been evading taxes. Government officials reportedly took her away to an unknown location, and she remained out of public view for 100 days. She later admitted her wrongdoing, paid a hefty fine of nearly 884 million yuan (about $179 million), and returned to the public eye.
Interpol President Meng Hongwei, however, faced a different fate. He disappeared mysteriously after arriving in China in September 2018. The Chinese authorities later announced that they had detained him on suspicion of bribery, and he resigned from his position remotely.
In January 2020, Hongwei was sentenced to 13.5 years in prison for allegedly taking bribes amounting to approximately $2 million. Interestingly, his wife was granted political asylum in France and claimed that the trial was politically motivated and that Hongwei did not actually take any bribes.
Entrepreneurs in China are not immune to being embroiled in political scandals, as demonstrated by the case of Sui Min, founder of Dalian Shide Group, who had close ties to political opponents of the current Chinese leader and was imprisoned until his death in 2015 after a trial.
China’s actions in these situations often go against its own laws. Hong Kong, until recently, had the autonomy to refuse extradition requests from mainland China, providing a potential haven for those seeking to escape Beijing’s surveillance.
Despite this, some individuals, such as Xiao Jianhua, a billionaire and executive director of the investment company Tomorrow Group, who was affiliated with elite groups opposing the current Chinese regime, were illegally seized by mainland police in Hong Kong without permission from local authorities in January 2017.
He was detained in China for an unspecified period while authorities seized Tomorrow Group’s assets on the grounds of undisclosed ownership information. In August 2022, Jianhua was convicted of corruption and fraud and received a 13-year prison sentence, along with an $8 billion fine.
In another instance, businessman Desmond Shum fled China before being imprisoned, while his ex-wife and colleague Whitney Duan vanished in 2017. Duan only contacted Shum in 2021, just before he was set to publish his memoirs in the West, which discussed political corruption in China. Despite her prolonged absence from the public eye, no charges have been brought against her.
Overall, not only entrepreneurs, but anyone can be abducted in China.
Why do people disappear in China?
Because Chinese political institutions allow it.
Shuanggui
In the People’s Republic of China, members of the Communist Party of China (CPC) were subjected to a system called “shuanggui” for decades. This system, which involved being required to “appear at a specified time and place,” was essentially a form of extrajudicial persecution and was not based on Chinese laws. Anyone in the CPC could be held accountable for alleged or proven disciplinary violations, such as corruption, which often resulted in their extrajudicial detention for days, weeks, or even months.
Shuanggui detainees were typically held in hostels or training centers for CPC members, who number around 88 million. According to Western human rights organizations, detainees were often subjected to torture during their confinement. The Central Commission for Discipline Inspection of the Communist Party of China (CCDI CPC) oversaw Shuanggui.
Shuanggui usually ended when the detainee confessed to the violation, and depending on the severity of the charges, they were either pardoned or handed over to law enforcement agencies.
Liuzhi system
Towards the end of 2017, the Chinese government declared that the system of shuanggui would be replaced by liuzhi, which means “specified place” or a designated location where detainees are held. This was due to the establishment of the National Supervisory Commission (NSC), which was created to combat corruption and has special powers.
The NSC has taken over the responsibilities that were previously under the Central Commission for Discipline Inspection (CCDI), but it now has a broader jurisdiction that encompasses not only members of the Communist Party of China (CCP), but also officials in fields such as science, education, and healthcare.
Furthermore, liuzhi is not limited to officials, as demonstrated by the case of a contractor in Guangzhou who was detained and interrogated under this system for accepting bribes amounting to nearly $91,000, despite not being a member of the CCP or a government official.
The newly created National Supervisory Commission (NSC) in China now has wider powers to combat corruption, extending beyond members of the Communist Party of China (CPC) to include officials in various fields, as well as contractors working with the government. This means that approximately 300 million people may fall under the NSC’s jurisdiction. However, the implementation of the liuzhi law, which replaced shuanggui, has been controversial.
In April 2018, Chen Yong, the driver of a Fujian party official, disappeared while under investigation by the NSC. He was held in isolation for almost a month before being returned to his family, but he was already dead. The official explanation was that Yong died during questioning, but his wife was not shown a video of the interrogation.
The liuzhi law, in theory, has the potential to detain anyone due to the significant presence of the state in the Chinese economy, with state-owned enterprises accounting for a significant portion of the country’s GDP (around 23-28%). For instance, the state can contract a private company for services and then accuse the company of corruption or invest in a particular company on the stock exchange and detain its management for an indefinite period.
Although the liuzhi law has a legislative basis for combating corruption, similar to Shuanggui, it is a severe measure. Detainees under the NSC may be denied access to legal representation for up to six months, and the case of the Fujian driver illustrates the law’s misuse. Like Shuanggui, liuzhi operates outside the regular judicial system.
Occasionally, data on the use of Liuzhi in NDC is released in different provinces, and independent experts analyze this information to estimate the number of Liuzhi detainees throughout China. As of the end of 2021, there were 57,819 Liuzhi detainees in China.
In general, Liuzhi and other practices align with the nature of China as a rather opaque country, where even gathering official statistics is a major challenge.
The actual population is unknown due to decades of the one-child policy, which led to many unregistered children being born and existing. Economic statistics by regions add up to a higher sum than the official GDP, as regional authorities tend to exaggerate their numbers on economic growth. There are numerous other problems as well, and it should be noted that China ranks 95th out of 140 in the Rule of Law Index.
An interesting fact is that the English language has an old 19th century verb “to shanghai” (from the name of the Chinese city of Shanghai), which means abduction.
Why this is bad for Chinese stocks
In short, because they reduce incentives for investing in China.
China Renaissance, the same investment bank mentioned in the Bao Fan story, played a role in merging several Chinese startups, including ride-hailing services Didi and Kuaidi, food delivery services Meituan and Dianping, and travel platforms Ctrip and Qunar.
By financing Chinese startups, the investment bank has a significant impact on the stock market in China, indirectly encouraging the emergence of new companies and services that attract more money to the exchange.
All these disappearances of entrepreneurs have a very negative impact on the value of their own companies’ stocks:
- Following Jack Ma’s initial disappearance, the shares of Alibaba began to decline, and they are now nearly four times cheaper than at the time of his disappearance.
- In December 2015, the director’s disappearance caused Fosun’s shares to drop by 18%.
- News of government takeover negatively impacted the shares of companies under Tomorrow’s control.
- After the founder of Shanghai Metersbonwe Fashion & Accessories went missing in 2016, the company suspended trading of its shares for a period.
- China Renaissance’s shares suffered a significant drop of nearly 30% within a week after the director’s disappearance.
The vanishing of founders and directors has an adverse effect on the investment climate since it raises the question of why investing in stocks is worthwhile when the company’s key decision-makers can suddenly disappear, and its assets may be confiscated.
Negative instances, such as Chinese regulators compelling founders of JD.com, Pinduoduo, ByteDance, and Kuaishou to resign from their management roles in 2022 without facing legal charges, exist even without the occurrence of kidnappings.
There seem to be no logical explanations for this, and it is highly probable that Beijing is apprehensive about the potential development of politically unsuitable aspirations among these startup founders. Such restructuring is disadvantageous for these companies’ shareholders since it was the founders who steered these companies to success, and their removal suggests unfavorable prospects for the companies. Additionally, any entrepreneur with even modest success is now susceptible to similar scrutiny.
Kidnappings are also causing distress among affluent Chinese citizens. Wealthy individuals are emigrating from the country, presumably to avoid the risk of being detained for extended periods during another extrajudicial investigation. Capital outflow has resulted from over 10,000 affluent citizens leaving the PRC annually.
Consequently, there is a reduction in the amount of capital within China or, in the best-case scenario, inadequate growth. This situation is unfavorable because significant investments are necessary for further economic development in China.
The increase in Chinese stocks is dependent on economic growth. Since China is not yet a highly developed country, investing in it is worthwhile only if returns are higher than what is possible in the US. Alternatively, one could transfer the same funds to the US where, at the very least, the wealthiest individuals are not at risk of being abducted without a trace.
Of course, one could argue that the US also seizes assets from individuals from countries deemed “hostile.” However, the crucial difference is that they seize these assets from foreign nationals, not from Americans themselves, while in China, primarily Chinese investors and entrepreneurs are subject to oppression.
To be precise, Chinese citizens are hesitant to invest in stocks even if the economy is growing. The real estate market in China is overpriced and is considered more dependable by the general public.
It’s doubtful that foreign investors will heavily invest in the Chinese market due to the Western world’s inclination towards isolating China because of its increasing geopolitical aspirations.
Furthermore, China is no longer perceived as the most promising region for foreign investments. Countries such as Malaysia, Vietnam, and other smaller neighboring nations are more appealing. These countries have a larger total population, higher exports to the US, and significantly lower labor costs that are growing slowly compared to China.
These rapidly developing countries offer Western investors the opportunity to earn huge sums of money due to the low base effect, similar to what China offered in the 1990s and 2000s. Therefore, it would be more beneficial for China’s leadership to create an environment that retains money and talent within the country, as there are no other significant sources of development for China.
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