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.”

Independent academic research also confirms that a very large portion of corruption cases falls into the category of commercial transactions that involve interactions between officials and private businessmen. According to one study that examined 2,802 corruption cases reported from 2000 to 2009 in Jiancha Ribao (Prosecutorial Daily), a publication of the Supreme People’s Procuratorate, 1,583 (56 percent) of them fell into four areas: government procurement and construction contracts (731); land, real estate, and urban planning (307); finance, investment, loans, allocations, and payment of funds (298); administration of commerce, enterprise management, and restructuring of enterprise ownership (247). Another study of 142 party chiefs, mayors, heads of municipal people’s congresses, and chairmen of municipal people’s political consultative conferences who were prosecuted for corruption between 1983 and 2012 shows that 115 of them were involved in illegal activities in sectors such as approvals of land transfers, real estate development, loans for enterprises, tax reductions, stock market listings, restructuring of SOEs, construction contracts, and approvals of mining rights. Research on corruption in the real estate sector in China also indicates that the immense profitability generated by rent-seeking, unclear property rights, and segmented regulatory authority in this sector attracts collusion between officials and developers.

Key Findings

A summary of the key characteristics of the fifty cases that have been exposed in the media since the early 1990s provides useful clues about the collusion between officials and private businessmen. In terms of the seniority of the officials involved, seven chief perpetrators were provincial-level officials, twenty-five occupied prefecture-level positions, fourteen were county-level officials, and four held subcounty positions. Compared with the cases of maiguan maiguan we saw earlier, the chief perpetrators included in the sample cases in this chapter are more senior (60 percent of the officials in this sample held prefecture- or provincial-level positions, compared with 40 percent of the officials in Chapter 3). The nature of the main corrupt activities—commercial bribery—and the higher ranks of the chief perpetrators likely account for the larger amounts of total corruption income generated by officials who collude with businessmen than officials who sell government offices (even though income from maiguan made up less than one-half of their total corruption income in most cases). As for geographic representation, the chief perpetrators were from twenty-one provinces, an indicator that collusion between officials and businessmen is a national phenomenon.

In terms of total corruption income, the median total corruption income gained by the chief perpetrators in these cases is 9.5 million yuan, almost 50 percent higher than that reaped by the chief perpetrators in collusion among SOE executives whose corrupt activities were detailed in another sample of fifty cases reported in the media since the early 1990s. The mean corruption income of officials selling offices is 3.8 million yuan, about 40 percent of the corruption income gained by those colluding with businessmen. The median number of officials involved or implicated in the fifty cases here is eleven, the same as for the cases of colluding SOE executives but much lower than the median number of positions sold (twenty-seven) by officials in the fifty cases in Chapter 3. The smaller number of individuals involved or implicated in collusion with businessmen again likely reflects the higher status and greater power held by the chief perpetrators represented here. More senior officials can simply order their subordinates to grant favors to private businessmen, instead of directly recruiting them into the collusive ring.

One striking aspect of the data provided in the fifty cases of corrupt officials colluding with private businessmen is the long duration of the corruption and the high probability of promotion for the chief perpetrators even when they are engaged in corrupt activities. The median duration of corruption (between the onset of corrupt activities and arrest) in these cases is eight years, one year more than that in cases of selling offices and collusion among SOE executives (seven years). Among the fifty chief perpetrators who colluded with private businessmen, forty-two received promotions while committing their crimes. The relatively long duration of corruption and the high probability of promotion (84 percent) indicate that the detection risk is low. Also notable is the fact that officials who collude with private businessmen, as we theorize, engage in multiline businesses that include maiguan maiguan as a sideline and, more crucially, as a means of building a collusive network. Of the fifty chief perpetrators, thirty- four (or 68 percent) were explicitly charged with maiguan maiguan. Based on the sectors in which collusion between officials and private businessmen occurs, our sample confirms our hypothesis that contested property rights and multiagency approvals necessitate collusion, both within the bureaucracy and between the bureaucracy and private businessmen. In the fifty cases, collusion is concentrated in four sectors: real estate and land transactions (in thirty-four cases); infrastructure and construction (twenty-eight); mining (thirteen); and SOE restructuring (ten). These four sectors are generally considered the most corruption-prone because of the enormous profits that can be realized through collusion. In the case of land, real estate transactions, mining rights, and SOE restructuring, the profitability comes chiefly from the severe undervaluation of the underlying assets. In infrastructure and construction, rents are embedded in the large size of the contracts, cost inflation, and substandard quality.

In terms of the last positions they occupied before they were arrested, a large number (eighteen) were county- and prefecture-level party secretaries, the most powerful politicians in these jurisdictions, and eight were mayors and executive deputy mayors, officials directly in charge of local economic affairs. Local party chiefs are well positioned to capitalize on their near-dictatorial power, as explained by our model of vertical collusion. Since they wield virtually unchallenged clout in the appointment of key officials in local administrative agencies (in many cases they give these appointments to those who bribe them, thus gaining their loyalty), they can easily ask these officials to help private businessmen who have bribed them. The only official who has direct administrative responsibility in local government is the mayor or county magistrate. Although they have the ability to collude with lower-level officials in local administrative agencies, they are less able to compel compliance from their subordinates because they do not control personnel appointments. This is the principal reason why the majority of chief perpetrators in our study of collusion among officials and between officials and private businessmen are party chiefs in counties and prefectures.

The data from the fifty cases of collusion between officials and private businessmen also confirm the overall positive correlation between seniority inside the CCP and total corruption income: Officials with higher ranks gain greater corruption income than those with lower ranks.9 Of the twenty-five individuals whose total corruption income was above the median (9.5 million yuan), six were provincial-level officials, fourteen were prefecture-level officials, and five were county-level officials. Two factors account for this disparity. More senior officials have longer durations of corruption during which they can generate more illicit income. In addition, they wield more power, allowing them to trade bigger favors for larger bribes. However, lower-level officials who can determine the disposal of valuable state-owned assets, such as land, mines, and SOEs, also have considerable capacity to raise their corruption income. Of the five county-level officials who gained above-median total corruption income, four received outsized bribes for giving state-owned assets and infrastructure contracts to private businessmen. But officials who have gained less total corruption income may have one consolation prize: lighter punishment. As usual, the severity of punishment for officials caught for corruption involving private businessmen depends mostly on the total amount of corruption income. Of the twenty-five chief perpetrators whose corruption income was at or below the median of 9.5 million yuan, only six (24 percent) received life, suspended death, or death sentences. By contrast, of the twenty- five officials with above-median corruption income, we know the sentences for twenty-two. Eighteen of them were given life, suspended death, or death sentences. What is noteworthy about the punishment of corrupt officials is that only a small number of them were actually executed because suspended death sentences are always commuted to life sentences. In our sample, only four officials, all of whom committed particularly egregious crimes, even by the standards of the CCP, received the death penalty.

Minxin Pei is Tom and Margot Pritzker ’72 Professor of Government and George R. Roberts Fellow, and director of the Keck Center for International and Strategic Studies, at Claremont McKenna College.

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