China Comment

Energy, Environment, and Economy

Fighting Corruption

Chinese national banks’ regional and provincial branches are audited by the state, and many state employees consider anti-corruption missions quite seriously. But to some degree, Chinese companies suffer from significant systemic corruption.

A Chinese friend served an internship over the Summer with the financial auditing arm of a provincial government. She worked on a team investigating a Shaanxi branch of a national Chinese bank’s accounting books. The team found several irregularities in the numbers, and they reported to their supervisor, who confronted the bank’s director.

The director offered to take the team to dinner and discuss the matter. He offered to pick up the check. My friend’s superior accepted and they ate, drank and discussed. The director argued that the misplaced amounts were inconsequential, somewhere around 7000 USD. He tried to convince the team to overlook the transgression in return for “help” and “benefits.”

The superior declined and the bank was fined. The director kept his job since the amount misplaced was only a “mistake” and the bank director was a “good man” who had long served. China’s system of friendship among bank officials almost guaranteed that unless the crime was disproportionately large, little negative attention would be fostered on the wayward director.

When asked what she felt about this situation, my friend seemed nonchalant. She stated it was common for bank owners to embezzle but she still admired her superior for being so “driven” in achieving his objective. She said most supervisors would probably have taken a bribe. Afterward, her team discussed the tragic situation whereby bribery and corruption are considered the status quo. They recalled their supervisor’s lament that although he always tried to quash corruption, his plans were often flummoxed. He annoyed too many in his bureau due to a “righteous” mentality, and was overlooked for promotions. He feared he could never move to a provincial-wide managerial position. Instead, for his efforts, he was stuck at a mid-level job, where he could be overruled if political considerations superseded a need for economic honesty.

China disciplined 115,000 Party members for corruption in 2005, and has dealt with an “average of 130,000-190,000 Party members each year for various types of misdeeds and crimes since the early 1980s,” according to Minxin Pei of the Carnegie Endowment for International Peace. For various reasons, “24,000 of the Party’s 68 million members” were expelled from the Party in 2005, according to Edward Cody of the Washington Post.

The country could have grown even faster without the stultifying effects of late-1990s corruption. According to Chinese economist Hu Angang, cited by Will Hutton in The Writing on the Wall, the annual cost of corruption “is between 13.3% and 16.9% of China’s [potential] GDP.” Admittedly, that number is difficult to believe and I would like to see it backed up by another independent evaluation. Still, when confronting the anecdotal evidence and the recent Gome and real estate scandals, it is not too difficult to perceive millions of RMB flowing where it should not.

My friend’s view of corruption is a common one, and she could not say she would refuse a bribe if it had been offered to her. The bank director was a powerful man and held lots of influence. Without protection, she may not dare confront such a man. She admired her heroic supervisor, but wondered whether she could emulate his courage.

Positively, the number of prosecuted corruption cases has risen in recent years. But negatively, many former Party and government members have “jumped into the sea” of business, and used government connections to flout laws, “grease wheels,” and avoid bureaucratic regulations.

Without a reevaluation and a recognition that everyone is equal under the law and none are more “equal than others,” people like my friend will hesitate in acting honorably and working against corruption. Eventually, they might do the right thing and oppose corruption, but without a change in its culture of privilege, China could face a very stormy and increasingly corruption-filled coming decade.

Links and Final Comment

Pei: http://www.carnegieendowment.org/files/pb55_pei_china_corruption_final.pdf

Cody: http://www.washingtonpost.com/wp-dyn/content/article/2006/02/14/AR2006021400672.html

It is far beyond the scope of this article to evaluate various countries’ approaches to fighting corruption. Corruption seems to be present everywhere in the world. Every few years the United States suffers something along the lines of an Enron, a Tyco, or a Bernard Madoff scandal; Germany suffers a Siemens scandal, Korea suffers a Samsung scandal, and so it goes ad. infinitum.

Note: This article was originally written in January 2008, and was recently updated.

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2 February, 2009 Posted by | China Business, China Economy, China Future | , , , | Leave a comment