For a brief period it has been argued, corruption may have stagnated, but over her lifetime corruption has been an integral part of Chinese governance.
“Ming and Qing China…. We estimate corrupt income to be between 14 to 22 times official income resulting in about 22% of agricultural output accruing to 0.4% of the population.” (176)
If the typical American knew the prevalence of corruption in China they would question every single “business expense” associated with China.
“We find strong evidence that firms’ Entertainment and Travel Costs)compromise a mix that includes expenditures on government officials both as ‘grease money’ and ‘protection money,’ expenditures to build relational capital with suppliers and clients, and managerial private consumption. Overall, ETC have significantly negative effects on firm performance…” (177)
One has to wonder how the people that are elected to look after the best interests of shareholders can justify this type of financial malfeasance. Perhaps they consider it “a cost of doing business in China”, or simply part of her culture.
“When I grow up I want to be a corrupt official, then I can have anything I want.”
– Quote from 6 year old girl Chinese student on the first day of class (178).
I live in a country mired in corruption. A country whose government officials have an unreported and untaxed ‘gray income’ of around $800 billion (179).
Minxin Pei claims that about 10% of government spending goes to corruption, and it is usually estimated that from 3-15% of the economy is impacted by illegal activities.
Numbers this big are hard to fathom – so think of it like this. If you consider 10% to be a representative number for the impact of corruption in China, then in 2010, either through lost taxes or outright theft, every minute China lost about $1.1 million dollars. That’s about 3.5 times the minimum wage of an NFL football player (180).
Every twenty days, China spends as much on corrupt gray market activities as the US spends in a year on subsidies for higher education (181).
If all those Chinese communist party members took their dirty money and formed a country, they could form the 16th largest country in the world, just behind South Korea in size (182).
In fact, things have gotten so bad here that Hu Jintao, the leader of China’s communist party and president, has said that corruption threatens to topple the party, a sentiment he shares with others (183).
Mr Hu should know, as his son was implicated in a corruption scheme in Africa (184). China appears to have a love-hate relationship with bribery. It is a relationship that has become part of its DNA.
Types of Corruption in China
Bribery in China is like the Medusa, it has many ugly heads.
The problem is that in China, it is often difficult to say exactly what a bribe is. It is not defined by law per se (185). The gift-giving culture of China obscures the line between good will and currying favor, which can often lead to unintended consequences (186).
Sometimes a bribe is nothing more than a wad of cash tucked in an envelope – a ‘hong bao’, or red envelope as it is called here.
This method is straight forward and not favored by most. The reasons for the unacceptability of this method are cultural norms and ‘guanxi’ in China.
First off, it may offend the sensibilities of an official to be brazenly offered an outright bribe. Such an aggressive move is easy to spot and thus more likely to lead to problems.
Thus, it is much more culturally sensitive, when bribing in China, to offer a “gift”, to build the relationship – this is guanxi.
By offering gifts, one is playing the long term Chinese game of buying a local official. The problem is so severe that Hong Kong businesses report they spend about 3-5% of their investments in mainland China on gifts and maintaining guanxi (187).
The types of bribes offered in China although numerous. They typically include: buying property for an official, paying for houses, boats or cars, paying for a child’s education, luxurious travel packages, jobs for children and family members and expensive gifts.
Far from the days of the groveling civil servants, today’s communists are more picky (188). Allegedly, 50% all luxury gift purchases by Chinese are given as bribes. And just this year, China became the world’s leading consumer of luxury gifts.
That is a lot of Rolex’s to happy party officials.
But what does that mean? Are we talking a few diamond cuff links or something? The answer is a little more complex than that.
For instance, the luxury goods market for China in 2009 was about $7.8 billion. At a rate of 50%, this means that about $3.9 billion worth of luxury gifts were given as a bribes at that time.
In order to understand just this one facet of Chinese bribery, consider this. Del Monte Foods Corporation had revenues of about $3.8 billion for the entire year in 2010. Considering Del Monte was the 521st biggest US company in terms of sales, that means the communist leaders received a lot of Herme’s scarves, Rolex’s (189) and 24 carat gold gift boxes (190).
As a matter of fact, when Fu Xiaodong, a famous Chinese artist, was asked why his paintings were so expensive, he said it was because they were bought as bribes (191).
Don’t expect that $15,000 Rolex to get you results today, the Chinese are very patient. Offering bribes in China is like playing Go or chess, one needs patience and must read the ‘tea leaves’ so to speak.
And remember Chinese courts? The ones staffed by judges that have never studied law? Those same courts will be charged with overseeing your legal cases, should you file in China. The judges in those courts are not only beholden to the party, but also easily manipulated.
And should corruption be charged, it is the communist party discipline section that will investigate, not the judges (192). How is that for having the deck stacked against you?
Don’t They Get a Bullet to the Head for That?
While it’s cache to say that a bullet in the head is the answer to corruption in China, the reality is more benign. According to Minxin Pei, the odds of being sent to jail after you are convicted and found guilty of corruption in China are extremely low, at 3% (193).
Think of it like this, you have a better chance of drawing a blackjack (195) in a game of twenty one than actually doing time once you have been found guilty of corruption in China. In China, the single party system has stacked the deck against honesty, as the astounding numbers of Chinese communists convicted of corruption will attest to (196).
The truth is that when in China, few bad deeds go punished.
“Nearly all Chinese government officials fired for corruption or poor public service are able to find ways to take up new positions often similar to their original posts. (197)”
Once again, we find that this pattern of corruption and abuse of power is nothing new in China. One study of corruption in ancient times in China concluded:
“In practice, penalties, though heavy-handed, were usually handed out arbitrarily, and the probability that a corrupt official would be punished was quite small. During the 60-year reign of Qianlong, there were only 400 reported cases of impeachment, and most of these cases were never prosecuted (Ma (1974) (198)”
It appears that the China of centuries past was the same as China today, as you can see from this quote about punishment of legal officials from over 100 years ago:
“The law against corruption was enforced in an arbitrary fashion because if it had been enforced according to the letter nearly all officials would deserve capital punishment.”
Another interesting point, although not indicative of corruption, the astounding number of family members that sit atop China’s most powerful business entities (199) provide a hint as to the depths of ‘guanxi’ that these powerful positions offer.
Aside from this, it is well known that 90% of all Chinese billionaires and millionaires are members of the communist party, as are their children.
Did you ever wonder how China rose from having 0 billionaires in 1999 to now having at least 115,200?
The figure is an estimation and hard to verify, for affluent Chinese are loathe to admit this fact. Why? Well, let’s just say that 72 of them have met an untimely death since 2003 (201).
It is amazing that people who earn salaries of $20,000 per year could amass billions in a ten-year span. But they have done it. Those wealthy Chinese communists are now part of the second largest number of billionaires in the world.
Perhaps these people did not benefit from corruption, but who really knows (202)?
So, how do all those American companies do it? How do they stay clean in a country where 86% of bankers surveyed say that corruption is ‘pervasive’ or ‘quite pervasive’ (203)?
After all, how do US companies follow the FCPA in a country like China, where the political infrastructure is based upon a culture of corruption (204)? In a country where commercial corruption is “deeply penetrated both horizontally and vertically”, how do upstanding US companies stay clean (206)?
The reality is that they may not need to worry about it. Do you think the Chinese are going to aggressively pursue acts of corruption by foreign companies, when the beneficiaries of these acts are those responsible for policing them?
While high profile cases of anti-corruption measures may be seen, they typically are caused by a political vendetta, or a case like the tainted milk scandal, where due to publicity, damage control was all but impossible.
No, the Chinese government is probably not rigorously scrutinizing internal activities as we would hope (207).
Am I Saying that American Companies in China are Corrupt?
While I would not be so bold as to say that every U.S. company doing business in China takes part in corruption, but I would merely offer up the saying “If you are going to play with the pigs, then you will get dirty.”
In order to bolster this claim, I would highlight the case of my friend Lilly, a Chinese business owner who recently had to relocate her offices.
The reason? The local police had raised the amount they were demanding for allowing her to illegally operate her business in a residential area. She complained to me that after all of the time she had spent wining and dining local officials, she had to move for the forth time in seven years.
“Each year the officials want more and more money. They are too greedy nowadays,” she said.
Another good friend of mine recently resigned from her post within the government. The reason was that although her boss could make ten to twenty times his annual salary in bribes, he was not sharing them with her. She said that her weekly take home pay was only 100-200 RMB, barely enough to buy a good cell phone.
Interestingly enough, her boss was in charge of investigating ‘irregular’ governmental behaviors in southern China.
For their part, the Chinese blame it on us.
“According to a report by local consulting company Anbound, of the 500,000 bribery cases investigated in China over the last 10 years, 64 percent involved foreign companies. (208)”
Perhaps they are right. The sad fact is that companies may prefer to do business in China, a lawless land where the abuse of rights for profit is a common practice.
The conclusion is that conducting business in the land of an oppressive one-party state is compelling indeed. What is the cost premium associated with compliance of so many laws? How much can companies like Microsoft and MetLife trim from their bottom lines by cutting legal corners every now and again?
Unfortunately we will never know, for aside from watching the lengthening of our unemployment lines, most of what we hear will remain heavily filtered.
The truth is not compelling enough to share with us, as those in the corporate world seek ‘harmful profits’ and outsource our happiness and our livelihoods.
The truths one learns about doing business while living in China often times seems at odds with what you read in American media. The horrific working conditions, the poor management practices and the prevalence of corruption make doing business in China like a step back in time.
While the rest of the world has philosophically progressed in terms of workers and shareholders rights, China remains old-school.
What puzzles me, as I see and meet all of those smiling business people who can’t wait to get a piece of the ‘Chinese pie’, is what is the true cost?
If one were to discount the ecological issues as well as the societal, they would still have to face the economical. It has been ten years and millions of lost jobs since China has joined the WTO, and what have we learned? From the comments of many business leaders and China apologists, it would appear not much.
I guess the reality of doing business in a country controlled by people who must disavow allegiance to a higher power and embrace atheism (209) would be a breeding ground for the “reverse Darwinism” of rights and responsibility.
But why should they change? With big business flocking to the shores of China, perhaps they are giving us what we truly deserve. Although I would like to think differently, I have my doubts.
Our silence about the reality of China says more about our true concerns than anything else that we do.
It is safe to say that the truth about China still remains hidden behind the great wall of deceit and dishonor.
Sites offering made-in-America goods:
References & Image Credits:
(176) – High Corruption Income in Ming and Qing China, Shawn X. Ni University of Missouri at Columbia – Department of Economics Van H. Pham
(177) – Eat, Drink, Firms and Government: An Investigation of Corruption from Entertainment Expenditures of Chinese Firms, Hongbin Cai, Hanming Fang, Lixin Colin Xu
(178) – Video at NanDu.net
(179) – Facts and Details
(180) – Wiki Answers
(181) – Downsizing Government
(182) – Wiki Answers
(184) – Mr. Hu’s son has been implicated in a bribery scandal in Africa and a company called Nuctec- blocked from China of course.
(185) – us China Councel
(186) – By law a bribe must be a “relatively large” amount of money, which has not been defined.
(187) – Matthias Schramm, Markus Taube The Institutional Economics of legal institutions, Guanxi, and Corruption in the PR China
(188) – Wall Street Journal
(189) – Want China Times
(190) – Want China Times
(191) – Want China Times
(192) – CHINA’S RECENT CLAMPDOWN ON HIGH-STAKES CORRUPTION – CHEN Gang & ZHU Jinjing EAI Background Brief No. 490
(193) – Carnegie Endowment
(194) – Carnegie Endowment
(195) – Wizard of Odds
(196) – CHINA’S RECENT CLAMPDOWN ON HIGH-STAKES CORRUPTION
(197) – Want China Times
(198) – Ni supra
(199) – http://www.eai.nus.edu.sg/BB490.pdf
(200) – Forbes
(201) – Wire Update
(202) – ICGG.org ‘
(203) – Carnegie Endowment
(204) – F. Joseph Warin, Michael S. Diamant, and Jill M. Pfenning- †FCPA COMPLIANCE IN CHINA
AND THE GIFTS AND HOSPITALITY CHALLENGE
(205) – Joseph Warin, Michael S. Diamant, and Jill M. Pfenning- †FCPA COMPLIANCE IN CHINA
AND THE GIFTS AND HOSPITALITY CHALLENGE
(206) – CHINA’S RECENT CLAMPDOWN ON HIGH-STAKES CORRUPTION
(207) – Joseph Warin, Michael S. Diamant, and Jill M. Pfenning- †FCPA COMPLIANCE IN CHINA
AND THE GIFTS AND HOSPITALITY CHALLENGE
(208) – FCPA Blog
(209) – Washington Post
(210) China Smack
(211) Car News China