The emergence of super-rich in China

While few people may realize it, China is rapidly catching up with the U.S. in terms of the number of billionaires. The NYT talks about this unprecedented phenomenon, pointing out that only a year ago there were 15 billionaires in China, but today – depending on the source of estimates – there are already 66 or maybe as many as 100. Most of them found their fortunes in real estate speculation and manufacturing, and amazingly many of them are only in their 30s.

What’s the source of this incredible new wealth? Two words: “shang shi,” of initial public offering.

Thanks to the capitalist stock mania sweeping the Communist mainland, Chinese private and state-owned companies issuing stock for the first time are becoming the most valuable companies in the world — at least on paper — often overnight. On Tuesday, Alibaba.com, one of China’s biggest Internet companies, had a blockbuster stock offering, raising nearly as much as Google and soaring 193 percent on its first day of trading. That came after the debut on Monday of the state-owned energy company PetroChina on the Shanghai Stock Exchange. Its market valuation ran up to more than $1 trillion, topping that of any company in history.

But many analysts remain skeptical about the sustainability of this trend. First, there are many questions on how Chinese stocks are valued, since many state-owned companies retain large amounts of untradeable government shares. Second, weak corporate governance makes the basis for sky-high stock values doubtful as well. The finances of most Chinese companies are unclear and so does the decision-making structure. In fact, this is part of the reason why China’s nouveaux riches by and large choose to remain low-key, fearing greater scrutiny of the sources of their wealth.

IFC report on corporate governance models in China confirms that:

Corporate governance is a new concept in China and most managers and boards remain unaware of basic governance procedures, often confusing governance with general management. … The private sector has clearly become the engine of growth, seemingly offering enormous investment opportunities. But the structures in place at private companies are often immature. … State-owned enterprises … carry the legacy of the state-dominated decision making regime. They often have complex and opaque corporate ownership structures, overlapping new and traditional bodies of corporate control, and reporting practices that are focused on satisfying the information requirements of the authorities rather than the needs of investors.

Is China heading toward even more billionaires or a stock market bubble burst of epic proportions? Unless China manages to improve its stock valuation and corporate governance practices, the latter seems more likely. But in the meantime there are also deeper socio-economic issues to consider here: How can entrepreneurship flourish in a system that is state-dominated rather than rules-based? And how can the emergence of super-rich be reconciled with China’s official communist philosophy of egalitarianism?