Villains, Villas and Mistresses. Corruption in China

Related entries: Business Issues, General, Risk & Law

Corruption is often raised in discussions about doing business in China, and a couple of recent stories have brought the issue into focus…

    • Vice-mayor of Beijing (in charge of Olympic construction), Liu Zhihua, was arrested earlier this month for corruption and for leading a “decadent lifestyle” (the usual mistresses, luxury villas etc.). It was reported (by Reuters) that he was reported to authorities by foreign investors from whom he had asked for payments.

    • Vice Admiral Wang Shouye, one of the navy’s top five leaders, was arrested for taking US$8 million bribes from developers of barracks (reported by the Guardian). This time after being shopped by his (apparently bitter and under-funded) mistress. Depending on the result of his trial, he could become the most senior officer to be convicted to date.

These are important people, and they are being used to deliver an important message. But the arrests are only the latest action to be taken in what Reuters describes as “a huge anti-corruption drive over the last two-and-a-half years with nearly 50,000 officials prosecuted and punished up to the end of 2005”.

The fact that senior people are being arrested is a sign that even strong political connections may no longer provide protection, and that the anti-corruption drive still has gas in the tank. China Knowledge reports that China has also recently started on the second phase of its programme to implement the United Nations Convention Against Corruption, to which it signed up in 2003 (as also noted in our post “As Lobbyists Target The NPC, the Government Targets Corruption”). The report notes: “The second phase will focus mainly on international cooperation and legislation”.

Corruption, of course, is not the sole domain of powerful, but poorly-paid, officials. Ernst & Young have recently reported (via the Standard) that:

    “Fears of corporate fraud are causing one in five companies contemplating investments in the mainland and other emerging-market economies to ditch their plans…The increase in input costs and the lack of inflation in product prices is squeezing profit margins in the overall supply chain [in the mainland], which is creating a situation in which bribery could be accommodated…These practices include taking kickbacks from a supplier and offering gifts to clients to secure orders.”

What about the scale of corruption? It is hard to get any clear figures (for obvious reasons!). However, the following items give some indication:

    • The Organisation for Economic Co-operation and Development has estimated that corruption accounts for 3 to 5 percent of China’s gross domestic product (GDP), or between RMB409 billion and RMB683 billion, and (as reported by the International Herald Tribune) it estimates that around US$24 billion of “illegally gained assets” are laundered in China a year, and that the amount is rising.

    • A report by the National Audit Office (picked up by ABC Asia Pacific) reported misuse of US$36-billion dollars in government funds in 2005. ABC also noted a China’s Banking Regulatory Commission report that pointed to irregularities associated with US$73 billion in “loans and other funds” at China’s big banks.

    • The American Chamber of Commerce’s 2005 Business Climate Survey (reported in “China CEO”) lists corruption as the number 6 business challenge faced by members in China (though the situation is said to be improving).

    • In its 2005 Global Corruption Report, Transparency International (TI) gave China a score of 3.4, placing it 71 out of 146 countries. Picking out the banking sector for special treatment, a summary of the 2006 report TI notes that “The banking sector suffered a string of graft allegations involving senior executives at major state banks…Between 2001 and 2005, courts convicted 27,000 bank employees of finance-related crimes”.

The scale is obviously large (as is everything in China), but it would be wrong to think that corruption is everywhere – it is not, and I know many people doing business in China who have not had to deal with it. Then again, there is the thorny issue of definitions…where is the line between “corruption” and “guanxi”? When is a gift more than just a token? Is paying a good salary to the son of an official sufficiently different from paying the official directly? Is the “fee” that has been requested by a local government department really a bribe? Should that business trip really have included a visit to Disneyland? And what about all those “commissions” paid to intermediaries?

Ultimately these are questions of individual and corporate ethics, and of degree (and, in some cases, law). But they are questions that all businesses should ask themselves at the outset – and the answer should be effectively communicated throughout the organisation.

On one issue though, there is a clear answer. Corruption is bad for business in the long term, and it is bad for China. It can also be very, very bad for anyone who gets caught. As with managing other risk issues in China, the main message is – don’t leave your head (or your morals) on the plane.

See news sources:

    Shadow of corruption hangs over Olympics
    Beijing’s vice-mayor, charged with the construction of new venues for the Olympics, has been arrested on corruption charges. China’s Olympic committee: “He had no links with us.”

    Beijing Olympics organisers seek distance from sacked official
    Reuters South Africa, South Africa – Jun 12, 2006
    … In China the leadership of the ruling Communist Party has embarked on a huge anti-corruption drive over the last two-and-a-half years with nearly 50,000 …

    Mistress turns in ‘corrupt’ Chinese vice admiral
    Guardian Unlimited – 15 Jun 02:31AM
    A senior Chinese naval officer faces corruption charges after he was turned in by a disgruntled mistress.

    In China, a boom in graft
    International Herald Tribune, France – Jun 18, 2006
    … poor,” said Liao Ran, the program coordinator for South Asia and greater China at Transparency International, an independent anti-corruption organization based …

    Fraud fears keeping firms out of China
    The Standard, Hong Kong – Jun 18, 2006
    … Morris said that firms in the mainland and Hong Kong are most susceptible to bribery and corruption-related frauds, as well as financial statement fraud. …

    Corruption cost China 36-billion dollars in 2005
    ABC Asia Pacific

    China to step up on battle against corruption
    China Knowledge Online, Singapore – Jun 14, 2006
    … The Chinese government is due to begin Phase II of its program to implement the United Nations Convention against Corruption, reported the China Daily. …

    Transparency International

5 Responses to “Villains, Villas and Mistresses. Corruption in China”

  1. Jeremy Gordon Says:

    The latest from China on the topical issue of corruption comes from Hu Jintao, on the 85th anniversary of the Commuynist party (on 30th June). The President stated (on national TV) that “Anti-corruption and building a clean government are an important strategic mission. We cannot slack off for one moment”…”Corruption is still rampant in some fields, as cases of cadres abusing power for personal gains are frequently reported,” and that this “harms the people”. Expect more news on this…

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