Putting up money has its privileges

When Zhang Rongde ponied up $12 million to build a steel plant in this dusty town in central China, local officials offered the out-of-town entrepreneur tax savings, cheaper electricity rates and the title of “honorary citizen.”

In the U.S., an honor such as that might come with a symbolic key to the city. In Qinyang, it came with a red booklet that was like a get-out-of-jail-free card.

If stopped by police for a traffic violation, Zhang could flash the passport-sized pamphlet and officials would waive him along. If he happened to be in a club or hotel that was being raided, the honorary citizen would be assured of going about his business without being disturbed.

The booklet also gave him hefty discounts at medical clinics and priority for his children’s enrollment in the town’s best schools.

“This is kind of like a promotion,” said Zhang, a tall, rugged man who moved to this city of 470,000 from the southeastern province of Fujian. He said he never took advantage of his status -- “I’m a law-obeying citizen,” the 63-year-old former soldier declared -- but some of the 60 investors in other ventures who received the honor did.

That Qinyang would go to such lengths to reward investors speaks volumes about China’s economic development today -- and the price that’s paid for it. It underscores the extraordinary challenges facing the central government as it tries to slow unbridled growth in many localities, improve the rule of law and get a grip on the widening rich-poor divide.

The honorary citizenship scheme was exposed late last year and halted by Beijing, but not before it sparked outrage among Qinyang residents.

“What do we usually say? Equality before the law,” fumed Wang Qinjun, 37, who sells computers. “Then how could these people enjoy such privileges, just because they are richer?”

In a nation where local officials have long been rewarded for high economic growth, Qinyang was hardly alone in courting business leaders.

In Chongqing, public security officials created a special service to protect 128 entrepreneurs, even though fewer than 30,000 police officers serve the entire metropolitan population of 32 million, according to China’s official news agency. Chongqing’s public security officials declined interview requests but in a fax denied the existence of such a service.Zhangzhou, in southeastern China, gave the children of the top 100 taxpayers 20 extra points on their high-school entrance exams. After drawing criticism, the city halted the practice.

“It’s a general phenomenon in many places,” said Ren Jian- ming, a professor of public policy at Tsinghua University in Beijing, referring to such perks.

But, he added, “offering special privileges is such a shortsighted policy that will ruin social justice in the long run and eventually offset the development achieved.”

Qinyang’s program was launched quietly in 2004, part of a drive to lure out-of-town businesspeople to this city, northwest of Zhengzhou, the provincial capital. Like many places in Henan province, China’s most populous and one of its poorest, Qinyang’s economy had languished as investors flocked to more developed areas along the coast.

But the city recently began promoting its advantages to outsiders: abundant minerals and ultracheap labor. The honorary status, promised to nonresidents who invested at least $6 million, was meant to be icing on the cake.

Regional government figures show that the city attracted hundreds of millions of dollars in outside investment in the last three years. They included a battery maker from Zhengzhou; an aluminum company from Zhejiang province, just south of Shanghai; and a fertilizer producer from Guangdong province.

No one at those companies would consent to an interview. Qinyang city officials have told investors who received honorary citizenships not to talk with the media, some of them said.

Gao Yuan, head of Qinyang’s press office, insisted that honorary citizens would never be exempt from punishment for major traffic violations or crimes.

“All the privileges we offered were within the permits of the law,” he said. The red booklet states that police would not fine or confiscate an honorary citizen’s driver’s license except in cases of large and serious accidents.

Qinyang police wouldn’t comment.

Along Qinyang’s pockmarked streets, signs warn drivers that the penalty for speeding can be as high as $250 -- a fortune in a city where the average annual income is $1,000 -- and that drunken driving won’t be forgiven: “A drop of wine for the driver, two lines of tears for the family,” one slogan reads.

But on a big billboard near the town center, Qinyang’s priorities are made clear: “Leaders serve the public; departments serve grass roots; government staff serves taxpayers; entire society serves investors.”

Some Qinyang residents shrugged at the honorary citizen policy, as if to say that’s the way the game is played. But Bai Yinjie, investment manager of a construction materials company, which like other local businesses wasn’t offered the privilege, could hardly believe it.

“I understand that Qinyang needs external investments,” said Bai, whose Swan PVC Profile Co. is planning to spend $25 million to expand its factory in town. “But it’s unnecessary to violate the law. This will cause many troubles.”

What happened in Qinyang stems in part from China’s unwritten policy of “development as absolute,” said Hu Xingdou, an economics professor at the Beijing Institute of Technology. “Officials didn’t regard as important the damage of this policy to the government’s image as well as to the legal system.” But now, Hu said, the central government is cracking down.

Besides promoting social harmony, Community Party leaders want to keep the economy from overheating. China’s economic output has been surging at 10% or more in recent years, but the growth has been unbalanced.

Most of it is coming from exports -- which have rankled trading partners such as the U.S. -- the hot property market and excessive investments in factories, which are soaking up energy and devastating the environment. Beijing wants to tame this beast, but at the local level development is still the top priority.

“Each layer of government tries to boast and make accomplishments, and when they leave they don’t care about what they leave behind,” said Zhang Rongde, the steel plant investor in Qinyang.

Zhang, an army veteran with broad shoulders and a thick southern accent, made his millions over four decades of business in textiles, shoes, toys and plastic.

In 2003, when he came out to Qinyang, China was already suffocating from a plethora of smelters that were churning out steel and iron for the nation’s booming construction market. Beijing has been trying to cool investment in this sector, among others. But in the first quarter of this year, Chinese exports of steel surged 150% from a year earlier.

Zhang saw opportunities in Henan province, with its hearty supply of semiskilled laborers who earn on average $120 a month, less than half the going rate in southeastern China, and an abundance of coal and other minerals in nearby Shanxi province.

Qinyang officials made land available to him at a fair price, Zhang said, and promised a subsidy on electricity that would save him more than $100,000 a year and a modest tax rebate. Zhang laughed at the honorary citizenship. He said he has a chauffeur who’s careful on the road.

“If I went to entertainment clubs, they wouldn’t find trouble with me anyway,” said Zhang, who lives a spartan life, sleeping in a room next to his office in a three-story building on the steel plant’s grounds. His wife and children, all grown, live in Japan and Canada.

Zhang complains that Qin- yang’s government has yet to reduce his electricity rate, and he hasn’t gotten a penny back in taxes. As for the honorary status, he said, officials came by this year, and, just as easily as they had issued the booklet, took it back.

don.lee@latimes.com