China's Crony Capitalism: The Dynamics of Regime Decay

October 2, 2016 Topic: Politics Region: Asia Tags: ChinaCorruptionCapitalismCommunismBusiness

China's Crony Capitalism: The Dynamics of Regime Decay

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.