The Fall and Rise of the Rentier Class
“Are you one of this fund’s LPs?”
An investors’ reception at No. 27, the Bund, Shanghai. As attendees murmur politely to one another under the clink of glasses and raucous toasts, this seems the most natural of questions.
No. 27 is located in the center of the Bund, Shanghai’s waterfront promenade. From here, you can take in the Oriental Pearl Tower, the Citigroup Tower, and the Shanghai Tower in a single glance. Originally the headquarters of British trading company Jardine Matheson, the building was reclaimed by the Chinese government after the Communist Party took power in 1949. Today, it is the most prominent of the Bund’s many fashionable landmarks, housing the largest wine cellar in Asia, and the House of Roosevelt that stands on the site frequently hosts conferences and other events. Of these, the most common are LP receptions.
LP, or “limited partner,” refers to a limited liability partner of a venture capital firm. LPs invest in business projects but are not responsible for the intricacies of management. In the parlance of political economists, this group is referred to as the “rentier class” — people in possession of real estate, stocks, securities, or bills, and who, simply through the accumulation of interest, dividends, and rent, can generate a stable or even expanding stream of revenue.
If we were to divide a person’s income into two categories — income from wages and income from assets — then a proportional increase in the latter would signify an increase in securitization. If all of a person’s income is derived from assets, then they have escaped the confines of employment and become a rentier in toto. Traditionally, socialist countries have held rentiers in very poor regard, frequently equating them to “parasites.”
Nikolai Bukharin, an early 20th century Russian political theorist, even wrote a book on this topic, entitled “Economic Theory of the Leisure Class,” in which he expounded a Marxist criticism of rentiers, who formed the so-called leisure class of his treatise. Bukharin believed that rentiers were detached from production, making them the part of the bourgeoisie furthest removed from the proletariat. Their life’s goal was to use securities and underlying financial capital to extract surplus value from capitalists working in the sphere of production. As a result, these capitalists diverted some of the surplus value produced by workers into financial capital. Therefore, according to Bukharin, the existence of the rentier class demonstrated capitalism’s waning entrepreneurial spirit and was a clear sign of capitalism’s decline.
The last group of rentiers in Chinese society disappeared around 1966, before the start of the reform and opening-up period. In September 1954, China’s State Council passed its “Provisional Regulations Regarding the Joint Public-Private Management of Industrial Enterprises,” which declared that “enterprises under joint public-private management will be publicly led; the relevant government administrations will send representatives to oversee management in cooperation with private representatives.”
The regulations meant that private owners had essentially lost the ability to manage their own businesses. This corresponded with the State Council’s release of a new profit distribution program, in which dividends to investors — including shareholders’ stock dividends and bonuses for managers, factory directors, and members of the board — only made up around 25 percent, while the majority of the company’s profits went to the government and workers.
Data from the Chinese Academy of Social Sciences’ Institute of Economics show that at the time, the country contained 710,000 private business owners who were employed but received fixed-interest payments, and 100,000 “economic agents” who lived off on interest alone. These 810,000 people were the remnants of the rentier class. Once the Cultural Revolution broke out in 1966, their income sources dried up entirely, and the entire country was purged of private capital.
The re-emergence of rentiers probably began sometime in the latter half of the 1990s. A number of families were able to increase their asset-based income by investing in the stock market and real estate. Large-scale emergence of rentiers, however, is undoubtedly a phenomenon of the last five years, and there are several reasons for this.
First, China’s financial market entered an era of securitization. The growing popularity of trusts, funds, bonds, and equities as avenues for investment, along with the rising prevalence of business mergers and acquisitions, has allowed the realm of personal finance to massively expand its borders; concurrently, securitization has vastly increased the number of profit opportunities available. It was this foundation that heralded the rise of the true professional investor.
Second, many businessmen born in the ’50s, ’60, and ’70s have found themselves caught in a production bottleneck, as their firms require industrial upgrading, suffer from a lack of innovation, and experience competition from younger entrepreneurs. This has led many older businessmen to free up enormous sums of money and try to break into the investment and financial markets instead. This group, in turn, has become a formidable investment force that is completely distinct from the stock market’s retail investors.
Third, as the middle class has expanded to number in the hundreds of millions, high-net-worth individuals at the top of the pyramid have become increasingly fond of investing in securities. Due to the profit-seeking nature of capitalism, these individuals tend to have much easier access to quality assets, further stimulating their enthusiasm for investment.
According to data recently released by Zero2IPO Research, a renowned research organization focusing on venture capital and private equity trends in the greater China region, the rentier class made 698 investments in the third quarter of 2016. Figures were released for 631 of the investments, involving a total sum of 21.76 billion yuan ($313 million). Hovering around these financial investment organizations is China’s up-and-coming rentier class.
In early June 2016, the Boston Consulting Group’s Global Wealth Report found that China’s millionaires — people with investable assets (cash, stocks, and debt securities) not including real estate valued in excess of $1 million — consisted of approximately 2.1 million families. This is the second largest group of rentiers in the world today.
The effects of a growing rentier class on a country’s economy are topics of heated debate. In 2013, French economist Thomas Piketty rocked the world with the release of “Capital in the Twenty-First Century,” his award-winning book. Piketty discovered that throughout the history of human wealth distribution, the powerful forces driving apart capital and labor have never truly diminished. In fact, apart from during wartime, most developed nations show a steady increase in inequality, and this rate of increase is accelerating.
Piketty has also studied China specifically. His findings show that as an emerging world power, China’s economic growth over the past 30 years indicates a clear bias toward those in the top 10 percent of income-earners. This means that return on capital has greatly exceeded economic growth, and also points to a gradual expansion of the rentier class.
Looking on the bright side of things, a massive rentier class will give rise to a new business philosophy. Rentiers will find more enjoyment in “intellectual consumption,” promoting literature, sports, tourism, and other industries. Well-educated rentiers will bring about a brand-new aesthetic of consumption, and more and more people will devote themselves to social charity and public welfare projects. Because of this, China will leave behind the barbaric age of unfettered materialism, and its abundance of human potential will be put to new use.
On the other hand, wealth will accumulate around rentiers at an increased rate. Particularly during periods of long-term quantitative easing, wealth inequality will become a potential catalyst of social instability. At the same time, social classes will become more and more sclerotic.
Above the fireplace in the House of Roosevelt’s visiting room hangs an enormous oil painting of the former American president from whom the space takes its name. Off to one side, the iconic red pop-art portrait of Che Guevara seems to float into view, his face expressionless, his eyes gazing into the distance.
From the point of view of a radical socialist revolutionary, Bukharin’s ideas — that all rentiers are immoral, and that only violence can restore equality — have a certain allure. Yet from the point of view of a reformer, Roosevelt’s philosophy seems to be the true crowd-pleaser. As he saw it, creating a sound social security net and instituting tax reforms to facilitate redistribution of wealth were both methods for eliminating inequality.
Since the start of the 21st century, Western economists have returned to the question they faced more than a hundred years ago. They’ve begun to seriously consider the topic of fairness in wealth distribution, and vast numbers of influential scholars have expressed their views on the subject. China, meanwhile, will need to face up to this difficult question within the next decade. Growing prosperity cannot cover up emerging conflict, and instituting reform is a race against time.
Looking out from the full-length windows of No. 27, the resplendent facades of the Pudong financial district loom large opposite the Bund, testaments to the spoils of affluence and excess. They don’t look real, and neither do they reflect the real status of the Chinese economy. Like the champagne-filled glasses at the LP’s reception, the markets are overflowing with kaleidoscopic, scintillating bubbles.
(Header image: Visitors look at a monitor displaying an image of the Shanghai World Financial Center in Shanghai, Feb. 2, 2013. Tomohiro Ohsumi/Bloomberg via Getty Images/VCG)