The Unintended Consequences of China’s Anti-corruption Drive

Nick Marro

In November 2012, China’s outgoing President Hu Jintao told the next generation of Chinese leaders that systemic corruption could lead to the downfall of the party and the state. With his anti-corruption drive well into its second year, President Xi Jinping seems to have taken that warning to heart. But it isn’t just Chinese government officials feeling the heat: US firms operating in China have also suffered unintended consequences of the campaign, in areas ranging from government access to investment decisions.

Understanding the anti-corruption campaign

The anti-corruption campaign, which began as a crusade against graft and extravagant government spending, has affected leaders of China’s state-owned enterprises (SOEs) in fields including oil, power, telecommunications, transportation, and steel. The driving force behind the campaign is the Central Commission for Discipline and Inspection (CCDI), a watchdog agency headed by Wang Qishan that deals with corruption among party members.

In January, media reports said that the CCDI had punished 182,000 officials for disciplinary violations in 2013 as part of the anti-corruption campaign, with additional actions taken in 2014. The campaign, which aims to take down high-ranking officials known as “tigers” and low-ranking officials known as “flies,” has led to the investigations of around 40 high-level officials this year. Officials who have come under investigation include current and former municipal and provincial party secretaries, vice governors, and vice chairmen.

To date, the highest-ranking takedown is retired General Xu Caihou, who was officially expelled from the party under charges of bribery on June 30. Xu was a former vice chair of the Central Military Commission, a former member of the Politburo, and ironically, the former secretary of the Discipline Inspection Committee of the Central Military Commission. Eight other major generals have also been expelled from the party on charges of graft following his case.

The only higher-ranking party member currently being investigated is Zhou Yongkong, China’s former security czar. Zhou, who at one time held arguably one of the most powerful positions in China, was a former member of the Standing Committee of the Politburo and oversaw the country’s police, paramilitary, intelligence, and legal forces. The results of the investigation may soon be published, according to the Chinese media.

A changing government affairs landscape

Although Minister of Finance Lou Jiwei said this month that the anti-corruption campaign would have a limited effect on China’s commercial environment, sales in some sectors, such as China’s luxury goods, food, automobiles, and travel markets, have been hit hard by the campaign. Corruption concerns have also caused officials to be more hesitant in making potentially risky decisions, including the approval of new investment and procurement projects. An April report from Bank of America Merrill Lynch projected that the anti-corruption campaign will cost the Chinese economy up to $100 billion in 2014, as hesitant government officials scale back on investment decisions to avoid unwanted scrutiny from the central government.

US-China Business Council (USCBC) conversations with foreign business executives indicate that the campaign is impacting business in a number of ways. Many government affairs (GA) representatives say that the GA landscape has noticeably shifted since the anti-corruption campaigns began. Local officials are much more hesitant to take decisive actions, and meetings with them—whether for conducting outreach, securing project approval, or maintaining government relations—are now harder to secure. The regulations on official behavior have created new concerns about private meetings or even functions in non-government approved hotels. As such, there has been a noticeable trend of “reluctance” among local officials to meet with companies, both domestic and foreign.

Moreover, following the decentralization trend, government affairs experts have told USCBC that local governments have become hesitant to implement national regulations, particularly since local interpretations often vary tremendously from one locale to the next. Experts told USCBC that local government officials hesitate to act unless they are completely sure that their actions have the support of the central government, and that they will not bring unwarranted attention. As one industry expert noted, “It is easier for an official to do nothing and retire comfortably, than do something risky and be sent to jail due to a perceived misstep.”

Anti-corruption and anti-trust investigations

In discussions with member companies, USCBC has learned that parts of the anti-corruption campaign have been linked to anti-trust investigations. Commercial bribery—which can include the giving of gifts, special discounts, or donations—is being treated by the government as a tool for market manipulation. And any issues of bribery that could affect market operations or consumer interests—such illegal distribution activities—may be treated as violating fair competition rules. The government’s overall message is that commercial actions that threaten the development of China’s consumer-driven economy will be investigated.

Furthermore, the 2013 mass line campaign, which focuses on rooting out bureaucratic inefficiency and extravagance, has played a key role in this year’s growth in antitrust and anti-corruption investigations by the State Administration of Industry and Commerce (SAIC), according to USCBC members. These members say that future SAIC investigations are likely to focus on overcharging and unfair competition in the e-commerce, automobile, and interior design industries, along with a continued focus on commercial bribery.

Anti-corruption trends in SOEs

Government officials are not the only targets of Xi’s anti-corruption efforts. In 2013, the anti-corruption campaign saw the firing of 31 senior SOE executives in sectors including oil and telecom, with 10 sacked for corruption and discipline violations, and another eight dismissed for poor business management. In April, the chairman of one of China’s largest SOEs was investigated and expelled from the party. And in early July, state media reported on the investigation and expulsion of Jiang Jiemin, the former head of China’s State-owned Assets Supervision and Administration Commission (SASAC), the main agency responsible for managing China’s SOEs.  

These corruption investigations come after recent government scrutiny of SOE operations. These investigations found that in 2013, SOEs spent RMB 7 billion ($1.1 billion) on overseas travel, public vehicles, and hospitality, and RMB 6.5 billion ($1 billion) on welfare programs such as worker social security. According to Chinese media, such spending has been underreported by as much as RMB 97.6 billion ($15.7 billion).

China’s state media has argued that enhanced scrutiny of SOEs will strengthen SOE reform as more firms are diversified into mixed-ownership models. By cracking down on corrupt practices, both external and internal regulation will be improved to increase enterprise efficiency. Despite this, top-level SOE reform has been slow, with plans still in the drafting stage and timetables unclear, so how the anti-corruption campaign affects SOE management in conjunction with restructuring remains to be seen.