Monday, April 15, 2013

China and Corruption

Corruption is thriving in China, this tends to weaken transparency and bring into question how much faith you should have in its government. In Shanghai and Beijing, where big corruption scandals involving top officials have been exposed in recent months, new cases of alleged high-level wrongdoing are still coming to light. In Beijing the state-owned media reported last week that Zhou Liangluo, the chief of Haidian district, home to many of the city's universities and high-tech companies, had been detained for allegedly engaging in shady property deals. In Shanghai it emerged earlier this month that Yin Guoyuan, a former deputy head of the housing bureau, was being investigated for similar reasons. China recently charged former railways minister Liu Zhijun with corruption and abuse of power, it is the latest step in a graft investigation into the scandal-plagued railways.

In the case of the former railways minister he faces either a lengthy jail sentence or possibly death, how severely he is dealt with will be an indicator of how seriously new Chinese President Xi Jinping Xi takes his fight on corruption. Liu “practiced favoritism and carried out malpractice, misused his power and caused big losses to public property and the interests of the state and the people”, the official Xinhua news agency said. “As a worker for the state, Liu Zhijun used his position to help others seek gain, illegally accepted wealth and assets from other people. The numbers involved were huge and the circumstances very serious,” Xinhua added. Liu took huge bribes and misused his position to help the chairman of an investment company get enormous illegal profits.

Scandals such as these have stoked debate within the Communist Party and more widely in China about the need for better ways of dealing with corruption. Failure to contain wide spread corruption among Chinese officials poses one of the most serious threats to the nation’s future economic and political stability, says a new report from the Carnegie Endowment.  Minxin Pei, an expert on economic reform and governance in China, argues that corruption not only fuels social unrest and contributes to the rise in socioeconomic inequality, but holds major implications beyond its borders for foreign investment, international law, and environmental protection. Pei paints a sobering picture of corruption in China, where roughly 10 percent of government spending, contracts, and transactions is estimated to be used as kickbacks and bribes, or simply stolen.  

Pei examines the root causes for China’s rampant corruption, slow economic reforms, lax enforcement efforts, and reluctance by the Communist Party to adopt political reforms, he expresses concern that the ensuing economic losses are jeopardizing  financial stability. He notes that even though the Chinese government has more than 1,200 laws, rules, and directives against corruption, implementation is spotty and ineffective.  Few corrupt officials go to jail, less than three percent, this makes corruption a high-return, low-risk activity, even low-level officials have the opportunity to amass an illicit fortune. The amount of money stolen through corruption scandals has risen exponentially since the 1980s, it is concentrated in sectors with extensive state involvement, such as infrastructure projects, real estate, government procurement, and financial services. The absence of competitive political process and a free media make these high-risk sectors susceptible to fraud, theft, kickbacks, and bribery. 

The cost of corruption is incalculable. "Crony communism" and the corruption that comes with it undermines social stability  and sparks tens of thousands of protests each year. It contributes to China’s environmental degradation, deterioration of social services, rising cost of health care, housing, and education. China’s corruption also harms Western economic interests, particularly foreign investors who risk environmental, human rights, and financial liabilities, and must compete against rivals who engage in illegal practices to win business in China. He says the U.S. government should devote resources to tracking reported cases of corruption in China, increase legal cooperation with China to prevent illegal immigration by corrupt officials and money laundering, and insist on reforms to China’s law-enforcement practices and legal procedures.

Despite much anxious rhetoric, the Communist Party is not on the brink of collapse, but the anger it generates among the people and how party members actions are so at odds is it with the ideals the party espouses. Still it appears that China's leaders are in no mood for serious reform. While it has not yet derailed China’s economic rise, sparked a social revolution, or deterred Western investors, it would be foolish to conclude that the Chinese system has an infinite capacity to absorb the mounting costs of corruption. Eventually, growth will falter. With ghost cities, and a banking system that can not be trusted, I content that the reason that inflation is easing in China may be the result of domestic demand waning. This could be the first signs of a hard landing. As China continues to produce funny, fuzzy, and flimsy numbers the world will begin to question and eventually lose faith in its flawed system. We may now be seeing the first cracks are beginning to show.

Footnote; For more on China and the bubble that is being created please read the post below,                                  


  1. A lot of people that I personally know rely much on their income protection cover in case of unemployment. I guess this only means more people are losing their trust on their corrupt officials.