China's Police Are Preying on Small Firms in Search of Cash

The Hidden Threat to Chinese Businesses #

In April 2023, police from a city in Guangdong Province traveled 600 miles north to Wuhan, detained employees of a social media company, and coerced its finance staff to transfer more than $41 million to police-associated accounts. The police claimed the company operated an illegal online casino used by Guangdong residents, an allegation the company denied. “Is this law enforcement or outright robbery?!”

Following immense financial damage, the company, employing 1,600 people, was forced to close. This event highlights a growing issue in China where police cross provincial boundaries to raid companies under loosely framed illegal activities accusations. Referred to as “profit-driven law enforcement,” this practice is compared to “offshore fishing,” likening police to fishermen venturing far for their catch.

Local governments are pressured by mounting debts, dropping tax revenues, and a squeezed economy, driving them to extract funds from businesses in various regions. The housing market decline has exacerbated the issue, cutting income from land sales and reducing investors’ confidence, leading to cautious consumer behavior and a dip in tax revenues by 5.3% for the year’s first nine months.

Blunt power is employed by provinces to extract payments from businesses, with non-tax-related income rising by 13.5%. This approach, encompassing administrative fines and back-tax demands, alarms economists concerned with its potential detrimental impact on already cautious business investments. A liquor company disclosed it had paid $12 million in back taxes spanning from 1994-2009, while a chemical engineering firm reported owing $69 million in old taxes.

The central taxation administration reassured that no nationwide tax inspections or long-term backtrack investigations were organizing, contradicting experiences of numerous businesses, such as a real estate developer tasked with paying decades-old hefty taxes. “When the tiger is hungry, what do you think would happen to the lamb?”

Audio from August captured a local official in Shandong Province threatening a Hebei Province company with $3.5 million fines over alleged pyramid sales. “It’s easy to force a business to its knees. I’m too good at it. Find a small issue, amplify it, and the business is done for.” The local government launched an investigation following the incident.

The precarious business environment began deteriorating in 2018 when nationalist sentiment pushed for the private sector’s eradication. Predatory actions intensified during the pandemic, with firms facing crackdowns, industry collapses, and respected entrepreneurs receiving extensive jail sentences as their businesses were seized. Small businesses became easy targets after central government pressure on bigger entities.

Government attempts to soothe business confidence include Mr. Xi’s assurance that private businesses are “our own people” and a draft legislation proposal promoting fair competition. However, skepticism lingers among business owners perceiving private firms as tempting targets for local governments. This cynicism extends to practices like freezing bank accounts of Yiwu merchants, affecting 13,000 frozen accounts totaling $428 million. Attempts were made to unfreeze funds with 92% unblocked.

Questions arise around controlling local enforcement actions detrimental to the economy, highlighting the lack of oversight and the need for independent judicial processes. The situation illustrates broader issues within the governance structure and operational dynamics of local law enforcement agencies across China.