Corruption: A look at China Now

Corruption: A look at China Now

1. Introduction:

No doubt you question why I should single out China. And you’d be right to ask. Corruption is not a new phenomenon; nor is it exclusive to certain countries. Any reader may not look any further than his own country to witness the practice in varying forms, degree and range. And if I may be permitted to make a suggestion, to those of you living in western ‘developed’ countries, start by looking at the ‘lobbying’ industry. The Corruption Perceptions Index (CPI) defines ‘corruption’ as "the abuse of entrusted power for private gain". China ranks 77^th out of 158 countries: from another perspective North America ranks fourteenth, so those of us defending our personal position may not be so defensible as we might suppose.  

Over the last generation, corruption in China has drawn as much attention as the economic reforms and progress with which it is linked. And more recently, the results of corruption in the form of quality controls has summoned even more regard from the media. But the corruption of today has many roots stretching from long ago in traditional history to today’s plain and simple greed. The status of high moral values and discreet social behaviour once practiced by most prior to 1919 has been now usurped by the high status of wealth and power.  And these dichotomies between traditions and state-society relationships have been practiced now for a very long time…time enough to become established as the status quo. Corruption is a great concern within itself but more troubling are the underlying tensions that seems to be its cause. The state has been unable to addresses these underlying problems successfully and its ability to support rapid, drastic change is undermined by social resentment. Chief among these problems is insecurity and its ever accompanying brother, greed. Most in China understand that the state will not look after them so that they must look after themselves and high return on investment rates and low risk factors promote the intangible temptation to take what you may want.

Today, China’s economic success and national credibility is threatened by this corruption as was most recently evidenced by the regrettable Tiananmen Square incident. But this is nothing to the thousands of protests carried on each day of smaller varieties but nevertheless troubling to the regime’s stability. While these reactions are concern enough, we are worried that corruption, unless checked in some fundamental way, will run out of control and worsen.

2. Reasons and Causes

There are some (Kwong et al, p 175) that while acknowledging that corruption has been part of China for 5,000 years and is unlikely to disappear entirely. The causes of the corruption of today in its rampant forms, dates from after the cultural revolution if not the time of liberation of 1949. It is suggested that after the cultural revolution higher principles representing the morality of the country, changed status and were replaced with the status of power and wealth, which in turn was made possible by corruption.

On the streets, it is said, that, “The only way to get rich in China is in the dark.” And I recently read that anything can be accomplished in China except abolishing smoking in the capital. In fact even that is possible if the kickbacks from the tobacco industry and tax collectors were not so lucrative. In fact, it is true, if the right authorities want something accomplished…anything is possible. Look at the two countries of China and Vietnam who attacked SARS in a head-on basis. This could not have been accomplished in any democratic or so called developed nation; we would have had armed protests. And this tendency towards corruption follows the food chain all the way down to  private entrepreneurs and as I have observed, even to widows and school teachers.

A recent antidote tells of a school teacher who had no connections with a prominent university but who wanted to achieve the status and stability of being a university professor, was told that the appointment would cost 100,000 RMB under the table (about 2 years salary for a professor). But the opportunities as a professor are much more lucrative than those of a lowly middle school teacher, so that the return on investment would be justifiable as 1:1, where the payout equalled 1 of year work rather than four years.

3. Risk

Lax enforcement

 

The apparently harsh penalties by the Chinese law enforcement agencies, in the form of lengthy jail terms and even execution often impress the casual outside observer. The most recent case involved the highest official in the Chinese drug department who had embezzled or received in bribes, over $1 million for overlooking poorly tested drugs, to passing, out and out fake drugs.

 

But appearances are deceiving. Despite the few high profile cases, studies show that Beijing punishes only a small number and percentage of offenders in corruption cases. For example, nearly 80 percent of the 130,000–190,000 CCP members disciplined and punished by the CCP annually since 1982 got at most a warning. Only 20 percent were expelled from the party. Less than 6 percent were criminally prosecuted. In recent years, half of those convicted of corruption received suspended sentences and did not serve any jail time. Therefore, the odds of an average corrupt official going to jail are at most 3 out of 100, making corruption a high-return, low-risk activity.

  The same 2006 study (Pei, 2007) of 3,067 corruption cases found that only half of the people accused of engaging in corruption were related to land claims and infrastructure cases. This trend can be seen in the number of local land officials who have either quit or been fired from their positions. Half of these have been sentenced and some executed. Corruption is also rampant in the activities of land transfer. Typically land is acquired through coercive means and resold at inflated prices to those offering the highest bribes. A 2005 survey by the Ministry of Land Resources found that of sixteen cities half of the transactions were illegal. They had found that between 1999 and 2005, over one million cases were transferred illegally.

China’s financial sector is similarly fraught with corruption. Kickbacks for loan approval, massive theft by insiders, misuse of funds, and large-scale fraud are routine in Chinese banks, brokerage houses, insurance companies, and rural credit cooperatives.

People involved in this type of fraud at the highest levels of government. Other areas involved are transportation, communication and Insurance industries.

 

4. Types of Corruption

Corruption takes on many forms. Many people think the Communist Party wants to end the corruption, Mr. Pei says, citing public executions and long prison sentences. The appearances, though, are deceiving. In the 1980s, Mr. Pei says, few corrupt officials stole more than one million yuan ($135,000). Now, even lowest-level officials routinely steal "tens of millions of yuans." All in all, Mr. Pei, Pie, 2007) says, corrupt government officials steal 3 per cent of the country's $13-trillion (U.S.) economy ($1.9 Billion). These crimes, he says, "represent a large transfer of wealth from the poorer to the richer, to a tiny group of elites." In fact 35% of the corruption occurs within SOEs which are owned by the PLA. The PLA also owns 70% of the companies on the China stock exchange.

Various Types of Corruption:

Judicial system: judges are paid off and innocents are punished

Police: extortion and illegal activities carried out by the police themselves

Licenses, Infrastructure and Public Utilities: companies pay a 3%-5% levies on projects they undertake.

Land Administration: misappropriation of lands, illegal transfer of land use rights.

Tax Administration: bribes to secure tax exemption; generally the farther away from Beijing, the higher the corruption through taxes

Customs Administration: the waving of import taxes. Now less likely after WTO

Public Procurement and Contracting: this is the type of bribery that extends form the very top to the bottom since there are no General Contractors who take full responsibility for the project and since there is no “pride of ownership” or anyone who takes over the building after it is finished. It is just sold to someone else who is looking no further than a profit.

Environment, Natural Resources and Extractive Industry: watch out for local officials overlooking environmental laws in spite of the potential damage.

Labour Market: the Hukou (or social registration system) restrains people not from migrating to other cities but from receiving the same benefits as permanent residents of the city. Also the fake document factories that will print up any fake document for whatever purpose. These can be printed in any language. They advertise by chalking their cell numbers on the sidewalks.

Banking: it is not uncommon to pay bribes to receive loans; banking is a SOE and therefore its corruption is directly connected to the CCP and PLA.

Nepotism: Of China’s new billionaires, about 2,900, 90% are the children of senior cadres. At the start of reforms, in 1979, Deng Xiaoping said: “Let some people get rich first.” It is now clear who he had in mind…in Qingdao, Shandong, his granddaughter owns a luxury 5 star hotel on the beach claiming to be worth 63 million dollars.

5. What to do About It?

Now that we know that we will encounter corruption when we do business in China, what do we do about it? For rest assured that you will come face to face with it. Well, there are only two roads to take: the high and the low.

We may have heard of the famous story of Texaco refusing to pay bribes so adamantly in Africa that many of its Jeeps and convoys go past borders unmolested. But ask yourself: how many companies are clamouring to get into African countries (except Chinese companies)? For the same reason that Chinese restaurants don’t improve their services…if you are not happy with the service…then move on. Someone else will walk in the door within a few minutes to take your place. At the moment, from the Chinese perspective, services don’t have to be improved…business is great!

Taking the high road in China while trying to carry on doing business, is futile. You just won’t get anywhere, but your competitors who have chosen the low road are flourishing. But by dealing with it, you can make choices. The only thing you must worry about is that you’re paying the right person.

I can’t tell you how many horror stories I’ve heard about the nice North American company who spent two years taking the wrong people to lunches and dinners. This comes from either poor experience or by trusting someone (which comes from poor experience. And herein can lie the proverbial endless cycle: how do I get experience without getting hurt…how can I avoid getting hurt without having had experience? You have to take the risk and learn fast, which leads us to another topic, who do we send to China to break the ice.

6. Management 

You are a bright, aggressive, experienced executive. You have proven your abilities on the home front by successfully opening many new outlets for your company and now you are finally getting your just rewards.

The head office has just informed you that you will be spear-heading the “China Initiative” and will be expected to open the new overseas Asian operation by the following year.

Moreover, your spouse and kids are encouraged to join you; (the Chinese, the head office has learned, respect family unity). It is such a complete surprise and future challenge that you just cannot gather it all in; and as you have just finished informing your wonderfully supportive spouse you both sit down speechless and dumbfounded at the prospect, staring at each other with mouths open. Your children are gleeful, and return their attention to the television, vaguely envisioning a kind of China wherein exists an older picturesque version of Disneyland.

“Don’t worry”, the head office informs you, “We will give you lots of training and cultural sensitivity workshops to prepare you.” More often than not, management perceives this initiative in terms of months, or one to two years. Any venture into China should be considered long term: five years minimum to work well. Of course, in some circumstances, with a joint venture partner where supply of goods is the only consideration, trade can take place relatively soon.

So often, though this is a simplified scenario, companies eager to break into the China market, send such promising, enthusiastic young, aggressive executives into the gaping maw of the huge market of China without adequately preparing either the employees or their families. It is a very costly mistake and one that can ruin the reputation and bottom line of an otherwise successful firm.

Within the next two months of preparation before departure, you have learned through the misguided efforts of your company HR department the polite way to greet the Chinese, the gift giving protocol; the business card exchange, the topic taboos and the ever important “Ni hao” (Hello) and “Xie xie” (Thank you).

Your accommodation has been approved and your official company ‘Interpreter’ will greet you at the airport. Bon Voyage! See you in Beijing.

The Chinese businessman views his Western counterpart with a curiosity that you might give an innocent or neglected child. They are kind, courteous, and exceedingly accomplished hosts, but they are very well versed in the most refined of intellectual manoeuvrings learned over a history of thousands of years. The North American penchant for the aggressive, “let’s do it” attitude, so valued in our own culture, is looked upon as hasty, emotional and ill advised behaviour. The Chinese have been learning for the past 28 years since 1979, how to deal with Westerners and now, Westerners had better learn how to deal with the Chinese businessman; and learn fast.

Language is the basis of all culture and Chinese is not a difficult language to learn to speak but if you are an executive expatriate in China you must learn the language. Of course you will have to rely on an interpreter at first, but the sooner you can speak the language the better. In any event, it makes good sense for any company looking to deal with the Chinese in the future to be training their staff on the rudiments of the language and have at least one person fluent in the language. A Chinese interpreter, though generally helpful, in difficult negotiations, cannot always either understand the nuances of the negotiation or cannot convey your precise point. And, if the interpreter himself or herself is a Mainlander, he or she will always formulate the North American message in a Chinese way, and in the process, distort your intentions. Once this is done, the Westerner may perceive progress but be quite disappointed later on as the negotiations proceed but eventually fail.

Of course you will not become fluent in the language immediately; that will take at least five years. But someone from your firm should be with you who is fluent enough to grasp and convey important points from your company’s perspective. Similarly, and more importantly, the Westerner should pay very close attention to non-verbal language, and watch the Chinese delegation as closely as the delegation will be watching you.

So often, I hear of expatriates that arrive with the best of intentions and greatest degree of integrity, leave for home, defeated in spirit and undertaking. Sometimes, the executive is making progress but the company has neglected to prepare the spouse and children for the cultural shock of China and they become unhappy and feel alienated. The poorly prepared executive is placed in the position of having to save his job or his marriage or both. And when the executive, who although not entirely successful, has made many inroads and friendships since his or her arrival, must now abandon those inroads, in which everything gained, however small, is lost.

The company either regroups and plans to send another executive out, perhaps better prepared, or abandons doing business with the Chinese on their turf.

This scenario is a real shame, since all of business is accomplished in China through relationships. Not simply the “guanxi” that is certainly required, but the friendship that goes along with the reciprocal nature of “guanxi”: the trust. This takes time, of which the Chinese are always prepared to give. Often, time, is used as a tool to force agreements which are disadvantageous to the Westerner because pressed for time, he or she doesn’t want to return home empty handed.

Such similar stories abound in corporate North American companies. I know of more than one Canadian company and many American companies who have sent their point men ahead to reconnoitre the area, as it were, and who have wasted hundreds of thousands of dollars in living and travel expenses over a year, only to learn that they had been taking the wrong people to lunch.

Asked later, by head office, the expatriates invariably exclaim that they felt that everything was going well. “The Chinese seemed to like our product or service; they introduced us to many factories and logistic chains but we never got to the stage of signing a contract.”

Welcome to China!

7. Conclusion

 China's corruption is linked both to its traditional heritage of the CCP and to its new market-mixed economy. It is currently a severe problem and one which can be envisioned as ruinous in the future. The economic system is undergoing profound change, creating enormous opportunities both legitimate and illegal. The decline of communist and pre-communist values has given way to greed and cynicism, hampering reforms through the legal system. Top down elitists plunder assets, while the new mixed class of entrepreneurial and bureaucratic elites enrich themselves and challenge the old system. These trends are producing unrest and mistrust throughout China wherein lessons are learned from observations.

 

There are reasons for serious concern. First, corruption in its most serious forms requires money, access to money, or special expertise, and thus is most likely to benefit the well-connected and newly rich (the New Mandarins). As such, it widens the income inequities among people and regions, with the majority remaining poor and feeling abused by the increasingly corrupt system. If, as it is likely, such income disparities will continue to grow, and the resulting mass discontent could threaten the stability of the social order and the legitimacy of government and the CCP. And second, corruption is seen by some intellectuals as leading China toward a kind of "anarchy...a paradise for those who have money and power." In short, corruption is making it more difficult to govern China from Beijing, and in the absence of clear alternatives to Party-state dominance this is a serious matter. This is a curious state as it mimics the traditional role of Emperor, as citizens often did not know from dynasty to dynasty who their ruler was because of poor communications.

 

Corruption may trigger a dynamic process moving China further toward rational and institutional government--or it could disrupt social progress and wipe out the remarkable economic accomplishments of the last decade. All depends upon whether the government has the capacity and the will to confront the political aspects of the corruption crisis. As noted above, much of the public is outraged about some forms of corruption, but lacks legitimate channels through which to express those grievances politically (and since 1989, is confronted with obvious evidence of the dangers of trying to do so). Other forms of corruption are more widely tolerated, but this both reflects and intensifies the current crisis of values. The result is that while corruption is one of the most serious threats to China's future, it will be very difficult to address the problem in effective and legitimate ways.

Given the tenacity of China's regime, and the resilience of its people, it is risky to predict any single outcome of this dilemma. It is clear to us, however, that the current situation, in which extensive corruption coexists with rapid growth and only limited political response, cannot continue indefinitely. Economic reforms have reached a crossroads, but where China will go next is a question for its citizens. They will take us there, but rest assured, we will all be affected.

 

Sources

Julia Kwong. Armonk (New York): M. E. Sharpe. (Studies on Contemporary China.) 1997. xv, 175 pp.

Pei, Minxin, Carnegie Endowment for International Peace, Corruption Threatens China’s Future, Policy Brief 55,  October 2007