Free markets in trouble

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The recent arrest of a leadingRussian businessmanon chargesranging from tax evasion to theft of state property is being been seen as a battle with major consequences for the future of democracy and the rule of law in Russia. Less noticed has been a similar struggle in China, where Yang Rong, an entrepreneur who used his own funds to create the first Chinese company traded on the New York Stock Exchange, has faced both expropriation of his private property and a trumped-up threat of arrest for getting on the wrong side of provincial authorities.

The parallels in the two cases, each arising in a country where private property rights are still evolving, are instructive.

Both China and Russia need foreign investment to develop. The application of the rule of law is essential to securing a positive, stable investment climate, where property rights are respected, courts are independent and the government does not interveneto punish businessmen with whom it has political disagreements. To attract foreign investment, both RussiaandChinamust demonstrate they protect the property rights of local businessmen with basic fairness.

Like some of Russia's most prominent businessmen, Yang Rong built his business into a large, publicly traded firm that met not merely local, but global standards in world equity markets. Eventually, Yang Rong's Brilliance China grew into the No. 1 minibus maker in China.

It also became one of China's most successful manufacturing companies. In less than five years, its earnings per share multiplied 18 times in value, as Western investors took advantage of its status as the first Chinese business to become publicly traded on the New York Stock Exchange in half a century.

Like Russia's embattled business leaders, Yang Rong made certain that his company generated benefits for investors. But, also like them, he then ran afoul of politics.

In Russia, President Vladimir Putin is reportedly offended by certain oligarchs' personal political ambitions, including funding candidates for the Duma and potentially challenging Putin's control. In China, Yang Rong offended Gov. Bo Xilai of Liaoning Province by planning to build an automobile plant in another province, depriving the provincial governor of credit for the new investment and inadvertently interfering with that governor's personal political ambitions.

Mr. Bo has employed tactics similar to those of Mr. Putin, who has variously, arrested and jailed businessmen,charged them with offenses such as tax evasion and fraud, and froze significant stakes in their companies. Liaoning Province seized all of Yang Rong's assets in Brilliance China, some $300 million of publicly traded stock, and transferred control of the company from the private sector to provincial bureaucrats. It then seized some $390 million of Yang Rong's other property. When Yang Rong sought due process in Beijing, Mr. Bo arranged to derail the case by claiming he had committed"economic crimes" without bothering to specify what those crimes were. Agents of the province also ransacked the house of Yang Rong's wife, an American citizen. The only fortunate thing is that, unlike some of Mr. Putin's targets, Yang Rong was protected from wrongful arrest by securing safe haven in the United States.

Today, Yang Rong is awaiting resolution of his case from his home in California. He has lost control of his company and is unable to return to China, but, as a U.S. resident, he is taking the opportunity provided him by our legal system to obtain the due process of law denied him so far in China. He has retained U.S. lawyers, including my firm. And, as U.S. officials have advised Chinese officials, no one in the U.S. government will try to intervene in the case he has brought against Liaoning Province in federal court, because, here, private property rights are protected through a judiciary that is truly independent.

The situation in Russia and the Chinese province's treatment of Yang Rong send a very powerful negative signal to U.S. businessmen and outside investors. The message is clear: Despite all of the progress each country has made, politics is sometimes more important than the rule of law and protection of private property.

Foreign investors must take this into account because the decisions by the powers that be in Russia and China have enormous implications for the future climate for investment and rule of law in both countries. And American policy makers, in the administration and on Capitol Hill, will be watching.

Bob Dole, a former Senate majority leader, was the 1996 Republican candidate for president.