A memorial service in Yangshi for Zeng Chengjie.
On July 12, 2013, businessman Zeng Chengjie, 54, was taken from his jail cell at the Second Detention Center in Changsha, the capital of China's southern Hunan province, brought to an execution ground, and shot. The authorities did not inform Zeng's family. The next day, his younger daughter Zeng Shan, hearing rumors of what had happened, rushed to the Changsha Intermediate People's Court to discover her father's name on a list of executed prisoners posted on an outer gate. "I became desperate," she says. "I couldn't believe it." Two days later, her brother was unceremoniously handed a red pouch containing Zeng's ashes. A shocked Zeng Shan still can't accept her father's fate. "I never saw my father's body, so sometimes I think he is still alive somewhere," she says. "If the legal system here is fair, I don't think my father should have been executed."
Many in China agree. Even in a country where capital punishment is commonplace and the courts are often a tool of political repression, Zeng's execution sparked concern, bewilderment and anger. He has become a cause célèbre among many local businesspeople and lawyers fearful that they too could become victims of an opaque legal system and an overbearing government.
Zeng was sentenced to death in 2011 for illegal fundraising and fraud. Prosecutors asserted that his company, Hunan Sanguan Real Estate Development Group, was a massive Ponzi scheme that Zeng used to swindle investors out of more than $130 million. The accusations have earned Zeng the dubious distinction of being nicknamed China's Bernie Madoff, after the American financier who pleaded guilty in 2009 to committing one of the largest frauds in U.S. history. Zeng's supporters, however, tell a different story, of an honest, hardworking entrepreneur who became a scapegoat for dubious but widespread business practices, and a victim of capricious Communist Party cadres. Zeng himself always professed that the charges against him were false. In a 2009 letter from prison, he wrote: "I didn't commit a crime."
Guilty or not, his death exposes a dark side of the world's second biggest economy. China is a marvel of hypercharged growth and burgeoning prosperity — a gargantuan export machine and a rising superpower. But it is also a place where fortunes rise and fall on the whims of bureaucrats, the rule of law is spotty, and the line between legal and illegal is murky. Zeng's story opens a window on a China that many CEOs and economists, fixated on the country's boundless potential, rarely factor into their rosy forecasts — the part where many don't play by the rules and the risks of doing business go beyond profit and loss. Driven to achieve the Chinese dream, Zeng willingly threw himself into this cauldron of opportunity, uncertainty and chance — indeed, he took advantage of it. But rather than the one-dimensional evildoer the authorities make him out to be, Zeng was a product — and symbol — of a hydra-headed economic system that has brought torment as well as benefit to China.
Underground Economy
That system is "state capitalism." More than three decades of reform have not quite loosened the tight grip bureaucrats have on the economy. Above all, they have an inordinate amount of influence over where money — the lifeblood of any business — is directed. Loans from banks usually go to the politically powerful or officially anointed: state-owned enterprises, targeted industries or business folk with guanxi, or connections. (Many such loans are for wasteful, grandiose projects — which the top leadership is cracking down on.) Everyone else scavenges for cash to start companies, operate factories or build buildings. They turn to "shadow banking," alternative financial networks and lending practices through which the ordinary or desperate can tap funds.
Despite its name, there is nothing inherently nefarious about shadow banking. These diverse forms of financing activities have arisen in response to market forces, linking businesspeople who need money with those who have it. Most are legal and conducted by financial institutions, like trusts. But other types are informal and sometimes exist between what's lawful and what isn't — widely practiced but on shaky legal footing. Companies raise money directly from the communities in which they do business or other private pools of cash, often at exorbitant rates of interest. It was in this netherworld of financial cloak-and-dagger that Zeng, seeking capital, dived into.
In recent years, as the funding demands of Chinese businesses have grown and the government has attempted to control debt by reining in the banks, shadow banking has escalated in size and scope. JPMorgan Chase estimates that shadow banking in China, broadly defined, nearly doubled between 2010 and 2012, to about $6 trillion, or almost 70% of the gross domestic product. The rapid expansion of this often risky and poorly regulated financial arena has sparked concern that China could be vulnerable to a crisis as devastating as the meltdown that enveloped Wall Street in 2008 — sending shock waves through the global economy.