China Snapshot - The Risk & Corruption Threat To Foreign Companies
Since the implementation of the 1978 economic reform process initiated by the Communist state combining socialism with a market economy, China has emerged and developed in the ensuing years into an economic and financial global powerhouse. However, this transition has not been without major problems and a risk to business. Expansion, growth, success and enrichment have come at a price.
Decentralisation and privatisation has not resulted in any new form of democratic process, rather it has spawned a rise in corruption levels as the opportunities for self-enrichment by public officials and private individuals has gathered momentum. Today, this has led to an enormous gulf between the “haves” and “have nots” a developmental and economic divide between the wealthy and prosperous major cities and coastal regions and the much less developed and economically deprived inland regions.
Within China there has arisen a very distinctive class system which the Communist regime has failed to address and runs counter to one of the basic and fundamental edicts laid down by Chairman Mao in 1949 on the creation of the People’s Republic of China that “the wealth of the nation is the wealth of the people” I wonder how Mao would feel now if he was still alive to discover, as revealed by the UK Daily Mail and also in the China Daily, “that his granddaughter Kong Dongmel has now amassed a personal fortune of some £525 million making her the 242nd richest person in China”.
But the Communist party of 2018 is not the Communist Party of 1949 or even 1978. In the past, membership of the party and subsequent filling of high level political and state roles was normally given to tried and trusted loyal communists mainly workers, activists, academics and the military. Not today. Today’s Communist Party has seen more and more the inclusion of tycoons, multi-millionaires and billionaires enter into its ranks and assume senior political, business and economic roles and portfolios. Their inclusion and standing within the Party was reinforced in 2002 by a constitutional amendment which stated the party “would consider valid the contributions of private enterprise” thus giving official sanction for the inclusion of rich businessmen and entrepreneurs into the Party system.
With power inevitably comes corruption. Corruption has flourished and is prevalent and widespread within both public and private sectors, despite the fact that both passive and active bribery are considered a serious crime, which can lead to imprisonment and in the most serious cases,the death penalty. Despite these penalties, hidden costs and unofficial payments continue to inhibit Chinese business. Corrupt officials appropriate public funds for their own benefit and many companies engage in corruption and pay bribes in order to maintain their place in the market. Just to give one example, a Trace International report estimated that kickbacks and facilitation payments were demanded by Chinese officials and businessmen in 54% of projected new business transactions just to get things started or moved along. To highlight the problem, a US Department of State report stated that the sectors most affected by corruption were banking, financial services, public procurement and the construction sector.
The Chinese government knows that corruption is endangering political stability and economic growth and has therefore been pursuing an anti-corruption campaign targeted at both the public and private sector to try and curb the persistent problem. To be seen to be combating corruption, the Party has in recent years and with great fanfare staged high-profile trials of a number of businessmen and Party functionaries for alleged corruption, where the death penalty and life sentences have been imposed. To a degree these can be seen as cosmetic and for domestic consumption only. In a large number of these cases, the accused had either reneged on a deal or not paid enough in kickbacks further up the power ladder. Thus to the “have nots” the Party appears to be seen as tough on those high-level functionaries who have abused their power and corrupted the system.
In the past, anti-corruption measures were mainly aimed at the internal Chinese market. However today, measures are more comprehensive and you find an increasing number of foreign and multinational companies under the spotlight being accused or suspected of corrupt practices. This puts paid to the notion that the authorities were only targeting the interaction between Chinese companies and government entities and ignoring the involvement of foreign companies. Indeed according to an article in Peoples Daily, “of the more than 500,000 corruption cases investigated by the authorities over a 10 year period, 64% have involved commercial bribery in relation to international and foreign companies”.
However, despite the concerns and issues surrounding corruption, doing business in China for many foreign companies and multinationals with a market so vast and seemingly limitless and lucrative is still viewed as a major priority for investment and development in today’s global markets with the rewards high and the risks acknowledged.
A full detailed China business profile is available upon request
