China's Crony Capitalism: The Dynamics of Regime Decay

A close-up Chinese 100-yuan note. Flickr/David Dennis

An excerpt from Minxin Pei's new book.

Editor’s Note: The following was adapted from China’s Crony Capitalism: The Dynamics of Regime Decay by Minxin Pei. Copyright © 2016 by the President and Fellows of Harvard College. Used by Permission. All rights reserved.

Chinese political elites engaged in collusion with private businessmen would have no difficulty understanding Willie Hutton, who reportedly said that he robbed banks because that was where the money was. By forming dense networks of connections (guanxi) with private businessmen, officials can generate lucrative profits by, as Xi Jinping, the general secretary of the Chinese Communist Party, points out, turning the public authority entrusted to them into instruments to seek private gains. The economics of collusion between political elites and private businessmen in a one-party regime is straightforward. The political power controlled by the officials in a one-party state can be converted into immense wealth quickly. However, this conversion is difficult to execute without colluding partners in the private sector. Most Chinese officials who have the ability to seize state-owned assets have also incurred considerable sunken costs—their lifelong investments in their political careers in the party. Abandoning a rewarding position inside the regime is unattractive. That is why family members of these officials, but not the officials themselves, are in the private sector. Chinese political elites have another disadvantage in converting monopolistic political power into economic wealth themselves: their lack of the entrepreneurial skills needed to realize the full market value of the state-owned assets under their control. Even for those who may have such skills, openly giving up a successful and promising political career carries enormous risks. From their own experience they will understand that private wealth unconnected with political power is inherently insecure under a predatory regime. More importantly, by exiting, they may also provoke the wrath of the party for displaying disloyalty. That is perhaps why only relatively few officials have opted for xiahai, or jumping into the sea of commerce. A keyword search for “mayor jumping into the sea” in the China Knowledge Resource Integrated Database (cnki.net) yields twenty references for the period 1994–2015. A search for “county or city party secretary jumping into the sea” returns only one reference. A close examination of these references shows that in the twenty-one-year period, a grand total of ten officials, seven prefecture-level and three county-level, have quit their government positions to become senior executives in private companies or to lead buyouts of bankrupt SOEs (in two cases).

Therefore, the optimal solution for officials eager to cash in on their political power is to set up their immediate family members in business or to find partners in the private sector. This strategy allows these officials to remain inside the regime and at the same time amass wealth through the use of their power. For private businessmen, this partnership is also attractive because it can unlock the enormous value embedded in the state-owned assets under the control of these officials. Of course, collusion with Chinese officials may lead to the loss of both fortune and freedom if their criminal activities are discovered. But on balance these risks are worth taking because, for private entrepreneurs, the near certainty of windfall profits from collusion far outweighs the downside of detection.

Such compelling logic has made the marriage between power and money the defining characteristic of crony capitalism in China. In practice, this union manifests itself in the collusion between government officials who control the allocation and disposal of valuable state-owned assets and economic resources and private businessmen trying to seize these assets. Although aggregate official data on corruption do not provide much information on collusion between officials and private businessmen, it is reasonable to hypothesize that these activities make up a very large share of all uncovered corruption cases because collusive corruption accounts for roughly 40 percent of corruption cases in some localities and also because commercial bribery, classified as one of the “crimes committed through the use of one’s office” (zhiwu fanzui) when the recipient is a public official, accounts for a large share of corruption cases. The work report of China’s chief prosecutor in 2013 revealed that during the five-year period of 2008–2012, the Chinese procuratorate filed 165,787 cases of zhiwu fanzui involving 218,639 individuals, including 13,173 officials holding the rank of county or chu (department) and above (950, and thirty of them were, respectively, bureau- or prefecture-level officials or provincial or ministerial officials). Based on annual data provided by the Chinese Supreme Procuratorate, close to 60 percent of the cases in the category of zhiwu fanzui are “major” embezzlement and bribery cases involving more than 50,000 yuan. For instance, in 2011, the Chinese government prosecuted 32,567 cases classified as “crimes committed through the use of one’s office.” Commercial bribery cases in “natural resources exploitation, trade in property rights, and government procurement” accounted for 10,542 cases. Of the 32,567 cases of “crimes committed through the use of one’s office,” 18,464 (57 percent) were labeled “major cases of embezzlement and bribery.”

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