China's disappearing billionaires - an alarming trend

The recent and dramatic upheaval in the Chinese economy has shaken many Western investors and signaled greater business risks in the Middle Kingdom.

Though it has received far less attention, another more ominous sign of trouble is the "disappearance" of senior executives from at least 34 Chinese companies over the last year. On Jan. 7, billionaire Zhou Chengjian, the Chairman of Metersbonwe, one of China's leading clothing companies, vanished. The company issued a statement saying it was looking into reports that he had been picked up by the police. Ten days later, he returned to work along with Tu Ke, the Company's Board Secretary.

In December, Guo Guangchang, the Chairman of Fosun, went missing for several days. When he resurfaced, his company issued a statement saying he had been "assisting in certain investigations carried out by judicial authorities." Fosun is a major private sector conglomerate that, among other holdings, acquired Club Med last year.

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What is happening to these Chinese business leaders, and what lessons do their cases hold for Western companies operating in China?

First, most of these cases seem linked to an official crackdown on corruption. Despite the remarkable growth of the Chinese economy over the last three decades, pervasive corruption continues to have a corrosive effect on the Chinese economy and society. To his credit, President Xi Jinping has recognized this, and made the fight against corruption a priority. What's troubling is the arbitrary and extralegal way this government is going about investigating these cases.

A related but perhaps more fundamental problem facing China—and those doing business there—is the government's continued failure to adhere to the rule of law. While every society, including our own, struggles to insulate legal institutions from political interference, the Chinese model is seriously broken. Last year, Chinese authorities arrested more than 200 lawyers, several of whom are still being detained. Many of these lawyers were involved in cases linked to human rights. The charges against these legal advocates often appear arbitrary and contrived. Guo Feixiong, for example, was arrested in November and charged with "picking quarrels and inviting trouble."

These cases are a symptom of a legal system that is almost wholly subservient to politics. A recent survey by the World Justice Project rates China 76 out of 99 countries in its annual "Rule of Law Index." The assessment looks at factors such as the independence of the courts, sanctity of contracts, enforcement of intellectual property protections, and access to and effectiveness of legal remedies. For those contemplating doing business in China, these gaps in protection continue to be significant.

Finally, both the effort to fight corruption and to build a stable rule of law depend on transparency and free expression, which are still seriously restricted by the Chinese government. Chinese leaders still seem to believe, for example, that they can control the Internet by maintaining a strict firewall and massive surveillance to stifle dissenting political or social voices. And they seem to be doubling down on this mistaken formula, proposing a range of new restrictions on free speech and new controls on Internet providers.

In November, to cite one example, they proposed an amendment to criminal law that would impose a seven-year sentence for "spreading rumors about natural disasters." This and other efforts to control the Internet and free expression are misguided and will ultimately prove futile. It is simply not possible to build a commercial Internet while shutting down other forms of expression using the same technologies.

What makes these actions so disconcerting is that they fly in the face of all that the Chinese government and people have accomplished, and undermine its future potential. China's economy will soon be the largest in the world. China is by far the largest manufacturing center globally, and it has the largest consumer market, with hundreds of millions of people joining its middle class. These should be heady days for Chinese leaders. And yet they cling to an outdated political model, which is neither wise, nor sustainable. Western companies doing business in China need both to understand the magnitude of these challenges and to develop business models and practices that reinforce and support constructive changes.

These could include individual or collective efforts to support needed environmental and labor reforms, more independent legal institutions, and greater engagement with Chinese civil society and professional associations, rather than passively enabling a system in need of fundamental reform.

Commentary by Michael Posner, the Jerome Kohlberg Professor of Ethics and Finance and Co-Director of the Center for Business and Human Rights at the NYU Stern School of Business.

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