Economy

Markets

Industries

Insights

Reports

Events

Handing over family business Chinese-style

(China Daily)
Updated: 2009-11-24 08:04

The children of most of the people who got rich first after the reform and opening up have grown up into adults today. But the "second affluent generation" is drawing public attention for all the wrong reasons: rich brats racing in their cars through crowded streets or using the Internet to flaunt their wealth.

Local governments in the coastal areas, which have tasted the fruits of development the most, are organizing training classes for the "second affluent generation" to enable them to take over their family businesses.

The ability of these rich youths to run their family companies successfully is not only important for the development and upgrading of private entrepreneurship, but also for accumulation of private capital. If China's entrepreneurs cannot resolve this issue in the near future, it would be difficult for modern industry to develop and grow stronger.

Most of the rich businesspeople face the same problem today: How to pass on their wealth to their children. Industry and trade was highly developed in ancient China despite society's emphasis on agriculture. But even then there were few time-honored enterprises because after two or three generations, family businesses generally vanished.

Business enterprises had short lives in ancient China because of three factors. The first was family inheritance. Family property vanished gradually after a couple of generations because of the legacy of distribution among all male offspring.

The second factor was wrong investment of human and material resources. The first choice even for rich businessmen was to purchase land and become landlords, and then support their sons to take the imperial exam in order to enter politics. Once that was achieved, the son/s would abandon the business of his/their fathers to become part of the gentry.

The third factor was the lavish lifestyle of the succeeding generations of a businessman. It was quite common for sons and grandsons of wealthy businessmen to squander the wealth accumulated by their elders. The first factor may not apply to the "second affluent generation" of today because of China's family planning policy. But the other two are still relevant.

According to official figures, most of the children of today's businesspeople are better educated than their parents. In fact, 52 percent of the rich youths have or are studying abroad, 78 percent hold bachelor's degrees and 17 percent have master's degrees. But higher education has not made them more capable of running their parents' businesses because a remarkable number of them are in fact "black sheep" of their families.

Of course, some of them are promising and have the spirit to grind it through. But again the problem is that even they are usually reluctant to follow their elders into business, and many of the parents are not keen to see their offspring take over their companies. The goal of many of these youths is to enter the civil service.

Related readings:  Family business as usual  Find of the Month: Family Business  'Family business can pass wealth for generations'

The problem entrepreneurs face in maintaining their wealth is a new Chinese-style conundrum. What worries them further is the potential insecurity of their property. Though China has promulgated the Real Rights Law, the entrepreneurs still do not feel totally secure. They fear that the law cannot survive policy changes. For example, many businesspeople from Zhejiang province have invested huge amounts in Shanxi province's coal mines. Though the coal mines' contracts have not expired, there is a possibility that local authorities could begin a move to nationalize small private coal firms, resulting in many investors losing their money.

The notoriety associated with many of the country's business magnates is another factor that forces their children to ignore their businesses. Their notoriety does not stem only from the public prejudice against businessmen in the first three decades of New China, but also from the presumption of "original sin". But then it is true that some entrepreneurs do collude with officials and take advantage of their personal relations with them to make money or get out of a difficult situation.

Entrepreneurs cannot develop if they believe that the wealth they have amassed is enough and there is no need for their offspring to work hard, especially if their spoiled children think the same. This is the new conundrum that Chinese enterprises will encounter.

Therefore, the problem of succession for China's "second affluent generation" lies in China's social institution and can never be solved only by introducing the professional manager system followed in the West.

China has not yet set up a sound modern market system with matching and trustworthy laws. The omnipresent bureaucratic practice, in the garb of social institutions and culture, has been eroding China's market as well as private enterprises.

The first and second generations of the country's entrepreneurs, therefore, will not only have to overcome their own drawbacks, but also change the institutional environment. And they have to solve the problems of their property and future. Only by doing so, will they be able to address the crux of the problem. Or else, modern enterprises will find it hard to flourish in China.

The author is a professor of political studies at Renmin University of China.