Navigating the Webs of Guanxi: An Overview of Corruption in China.
“Corruption is an inevitable accompaniment to social progress,” said the People’s Daily in the late 1990s. Whilst times have changed for businesses operating in China, navigating the intricate web of personal connections and business bureaucracy remains paramount to success and daunting to most foreign small and medium-sized enterprises (SMEs).
During China`s first boom in the 1990s, it was almost impossible to secure a loan outside the aegis of a state-owned enterprise. Individuals who wanted to try something entrepreneurial used their mutual support network – known as guanxi – to obtain chops and permits, borrowed money from their direct families, and closed deals with “gifts” to the right officials. The process was tightly controlled by local, provincial and central governments and their SOEs.
One of the few private companies to find legitimate ways of raising capital was Orient Group, which in 1994 became the first private company to be allowed to list shares. The group’s founder, Zhang Hongwei, said that in China, “…..doing business is different from doing business in other places: you only spend 30% of your effort on business. The other 70% is spent with dealing with all kinds of inter-personal relationships”.
Fast forward to 2012 and how much has really changed? State owned enterprises are still at a major advantage versus their smaller, private sector competitors when it comes to accessing credit from the banks. When the government turns off the credit taps, it’s always the smaller firms that suffer first, and yet, these are the companies that contribute most to China’s GDP growth. In June 2012, Andrew Wedeman released a series of analysis on corruption data in China since the early 1980s. Citing data on cases involving mid-level to senior officials and significant sums of money, Wedeman reconfirmed what other studiers of Chinese corruption have been saying for years: since the early 1990s, the regime has only become more corrupt.
The questions at hand, then, are twofold. First, how can we explain the paradox of sustained economic growth under a regime that practices predatory corruption? And second, what type of corruption is China really plagued by? According to the annual Corruption Perceptions Index published by Transparency International (TI), the Republic of China was ranked well under countries like Canada (#8) and the US (#24), coming in at a clean #32. Although the use of third-party survey data will always call an index’s results into question, public perception in 2011 seemed to lean towards a moderate stance on shadowy practices in the Great Republic. How then, does this corruption go unnoticed?
Some scholars have argued that one of China’s saving graces was to undertake economic reform before corruption got too bad. Because the transition to a market economy was initiated in the 1980s (when corruption was limited to petty plunder), dynamic growth was achieved before significant corruption set in. As to the intensification of corruption in recent decades, many blame the sale of land-use rights and privatization of state-owned enterprises (Wederman, 2012). Although privatization continues to allow previously inefficient areas of the Chinese economy to flourish, the transition process is filled with opportunities for officials to pocket a quai. Effects on growth seem negligible in the short-term: as the Chinese government continues to allocate trillions of dollars in fixed investments towards development, what does a few million here or there matter? Unfortunately, the long-term costs of this scenario are borne by the state-owned banking system, which is forced to back poor, corrupted investments like high-speed railways.
So what does this all mean? Well, not very much in the near future. Although the Party has promised to assume a stronger stance on corruption, we all know not to put too much faith in abstract vows. China’s export sector still accounts for roughly 2-3% GDP growth annually – money that is out of the reach of Chinese officials, and just about enough to offset the price of corruption. Unlike many corrupt governments that became progressively cleaner as democratization and development followed their natural course, China is an autocracy unimpeded by legalities. Finally, as TI’s index indicates, corruption in China is often viewed as merely one more element of the status quo.
Ultimately, it’s a one sided game. The fact that one can’t win in China without effectively navigating the different relationship structures and favours that are expected is well known. While the government talks a good game about wishing to stamp out corruption at all levels, its corridors are stuffed with individuals who would be far from exonerated during any full-scale investigation. In fact, studies have shown that the Party’s corruption prosecution rates have actually fallen relatively since 2000 (although the bureaucracy has expanded, prosecution numbers have remained roughly the same 2,500 each year).
Instead, the government can wield the corruption axe at will. Got a rowdy, trouble making provincial governor who is getting above his station? Kaboom! Corruption charges, life in prison. Got a multinational organization that isn’t playing by the rules or is winning a bit too much market share from local players? Kaboom! Senior managers are found to be currying favour illegally via corruption. Ten years each inside a Chinese prison, or deportation and disgrace for their company. Got a major scandal on your hands that you need someone to blame for (here queue a railway accident or earthquake)? Kaboom! The Minister for X is to blame due to his gross mishandling of his office and, yup, you guessed it, corruption.
Corruption is certainly not unique to China, nor are Western organizations the saints that they proclaim themselves to be. But as development persists, and corruption continues to make food unsafe, exacerbate uneven development and threaten sustainability, the time may come for China’s Premier to persecute its looters more severely.