In April 2023, police officers from a city in southern Guangdong Province traveled 600 miles north to Wuhan, detained 25 employees of a social media company and coerced its finance staff to transfer more than $41 million to accounts associated with the police.
The police claimed that the company operated an online casino, illegal in China, that was used by Guangdong residents under the officers’ jurisdiction. The company denied the allegation.
“Is this law enforcement or outright robbery?!” the company, Changxiangban, said in a statement posted on its official WeChat social media account.
This past April, the company, which had 1,600 employees, said it was forced to shutter. The damage to its business had been too great.
In the past few years, the Chinese police have been crossing provincial borders to raid companies and milk their books.
In China’s official discourse, the practice has been categorized as “profit-driven law enforcement.” In Chinese news media and social media, it’s called “offshore fishing,” likening the police to fishermen who venture far out to sea for their catch.
Local governments across China face mounting debts, falling tax revenues and escalating pressure to explore new sources of income. To help fill the budget gaps opened by the country’s economic downturn, law enforcement agencies are preying on businesses outside their home regions over what are often made-up or exaggerated criminal charges.
Business crackdowns are part of China’s political fabric. Winds shift and a chief executive is taken away, or sometimes entire sectors fall out of favor.
The current money grabs are different. The practice has become so widespread that in the past few weeks the Politburo, the Chinese Communist Party’s principal decision-making committee, as well as the central government and the public security ministry that oversees the nation’s police force, has instructed officials at all levels to regulate business-related policing and stop profit-driven law enforcement.
The money grabs are a sign of just how financially desperate local governments are. The country’s housing market has unraveled. Income from land sales, which used to make up about a third of local government revenue, fell by nearly one-third last year from the peak in 2021, according to the finance ministry.
As China’s housing problem grew into a crisis of confidence, businesses became reluctant to invest, and consumers are keeping their purses tight to their chests. The country’s tax revenues fell 5.3 percent in the first three quarters of this year. Many local governments are unable to pay interest on their debts, provide some public services or even pay their employees.
Provinces are resorting to blunt power to squeeze businesses near and far. In the first three quarters, revenues from nontax-related income nationwide rose 13.5 percent. The increase worries economists, who fear it means that companies paid more administrative fines and back-tax fines than before.
Extracting more money from businesses already wary of investing is, of course, probably not the best way to help the economy.
A liquor company reported in a June regulatory disclosure that it had recently paid $12 million in back taxes from 1994 to 2009. On the same day, a chemical engineering company in Zhejiang Province disclosed that a notice from the local authorities said it owed $69 million in back taxes from decades ago.
The disclosures triggered so much concern that the central taxation administration felt compelled to say it was not organizing nationwide tax inspections or planning retrospective investigations going back 20 or 30 years.
But many businesses said that was not true. A real estate developer told me that his company had been forced to pay hefty taxes tracing back two decades, and that the local government made sure nobody talked about it to the news media or on social media.
“When the tiger is hungry,” the developer told me, “what do you think would happen to the lamb?”
In an audio recording that was widely shared in August, an official in a local business administration bureau in Shandong Province threatened a company in neighboring Hebei Province with $3.5 million in fines, claiming the company was involved in pyramid sales.
It was “easy” to force a business to its knees, the official said in the recording. “I’m too good at it. Find a small issue, amplify it, and the business is done for,” he bragged. That official’s local government, in a statement on its official WeChat account, said it was investigating inappropriate speech by its staff.
China’s business environment took a nosedive in 2018 when nationalist bloggers, scholars and officials urged the government to eliminate the private sector. They were following the lead of the country’s leader, Xi Jinping, who had made it clear that he wanted bigger and stronger state-owned companies.
Predatory actions against the private sector have intensified since the pandemic. Beijing cracked down on some of the most successful companies, wiped out whole industries and sentenced some of the country’s most respected entrepreneurs to lengthy jail time, taking over their companies.
After the central government went after the big shots, an entrepreneur who is in self-imposed exile in Japan told me, the local governments knew that the little guys were easy targets.
Beijing has been making promises and gestures to try to boost business confidence. Mr. Xi said last year that private businesses and entrepreneurs were “our own people.” Last month, Beijing issued draft legislation on the promotion of the private sector. The proposal said it was aimed at ensuring fair market competition.
But none of the businesspeople I talked to believed it. To local governments, they said, private businesses are like delicious fatty pork dangling out in the open. Ultimately, the police heed the direction of their local governments.
Since 2021, many police departments across China had frozen bank accounts of merchants operating in Yiwu, a city that was home to possibly the world’s largest wholesale market for small goods. It happened to so many merchants, who call themselves “frozen buddies,” that Yiwu had to set up an assistance center.
The police claimed to be cracking down on money laundering and scams. The merchants said they did not know that they sold things to people whose bank accounts were involved in potentially criminal activities. The police often froze all of a merchant’s accounts, paralyzing businesses.
By the end of April 2023, the assistance center had registered more than 13,000 frozen bank accounts totaling $428 million. The Yiwu government, working with law enforcement departments nationwide, managed to unfreeze 92 percent of the money.
Freezing accounts became so prevalent that the central public security ministry issued a detailed notice in September with guidelines, according to a copy that I reviewed.
I asked lawyers and entrepreneurs how it was possible that Mr. Xi and the Communist Party could silence the free speech of 1.4 billion people and impose harsh “zero Covid” rules for a year, yet not be able to rein in the police and local officials doing huge damage to the economy.
“Because the rule of law is the fundamental means of control,” said Li Jinxing, a former lawyer who defended many businesses in similar cases. “Courts must be independent to exercise proper oversight. If the courts and the police are in cahoots, how can there be any control?”
Besides, he continued, there are more than 2,000 counties in China, each with a police bureau. Why, he asked, would they listen to Xi Jinping? “Can Xi pay their salaries or feed them?”
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