Tag Archives: anti-corruption

China’s Corporate Disappearing Acts

WHEN TOP EXECUTIVES and financiers of any stripe go awol, it rarely ends well. When it is Fosun’s Guo Guangchang, one of China’s richest and highest-profile chief executives, that drops from sight, the conclusions quickly jumped to are inevitably nefarious ones.

Trading in the shares of Guo’s fast-expanding media-to-asset-management-to-Club Med conglomerate was suspended in Hong Kong ahead of a company announcement confirming that Guo was assisting authorities with their enquiries. Beyond that, the company did not say why police in Shanghai, where the group is based, had detained its chief executive. Guo was reportedly picked up at an airport. Local media reports suggest he has been held in connection with an investigation into Ai Baojun, director of the Shanghai free trade zone and a former deputy mayor of the city.

Earlier this year, Guo was found by a Shanghai court to have had ‘inappropriate connections’ with Wang Zongnan, a businessman who had once headed a number of state-owned enterprises, most notably the Shanghai Friendship department store chain. In August, the court sentenced Wang to 18 years in jail for misusing 195 million yuan ($30.2 million) in corporate funds. (Fosun has denied any impropriety in its relationship with the Friendship group.)

Guo is not the first senior company officer in recent months to disappear for a few days before being revealed to have been either under investigation or asked to assist authorities with their investigations.

Two investment bankers at Citic Securities, China’s largest securities brokerage and which overstated its over-the-counter derivatives business by 1 trillion yuan earlier this year causing its chairman to resign, went missing earlier this month. Something similar happened to Guotai Securities’ Yim Fung last month and in September, Li Yife, head of the China unit of Man Group, dropped out of sight for a few days, too.

It is clear that the anti-corruption operation — it has continued for too long to be labelled a campaign anymore — is now reaching deep into financial services.

This has been true since at least the beginning of the year, when Mao Xiaofeng, president of China Minsheng Bank, was detained to assist with the investigation into former President Hu Jintao’s aid, Ling Jihua.

That, at least, smacked of old-fashioned factional politics. But the anti-corruption operations have intensified in the wake of the summer’s stock-market crash, which reawakened concerns in some high levels of the Party about the lack of discipline that could be exerted on markets and their participants.

However, what makes the Guo case so unsettling for business and investment is not that there are unwritten political rules to doing business in China; those exist in many countries. It is that the rules have suddenly become more unpredictable.

Update: Guo has reemerged, chairing Fosun’s annual meeting in Shanghai on Monday, and without giving any explanation for his reported absence over the past few days. Trading in the company’s shares has resumed.

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Zhou Anti-Graft Probe Tests Limits of Xi’s Power

IT COMES AS little surprise to this Bystander – or to most others – that former security chief Zhou Yongkang is under investigation. The announcement that Zhou is suspected of serious Party disciplinary violations – for which read, serious corruption – only formally confirms rumours that have been circulating for months – rumours that were informally confirmed by Zhou’s disappearance from public view since last October and investigations of his family and dozens of associates in the oil industry and security circles.

As tigers go, Zhou is the biggest to be brought down by an anti-corruption campaign since the time of the Gang of Four; he headed the Ministry of Public Security until his retirement in 2012, oversaw the state oil sector, and was a member of the Politburo standing committee.

By disgracing such a senior powerbroker, albeit one past the zenith of his political power, President Xi Jinping is sending a clear signal to both his political adversaries and to the public: his anti-corruption campaign will be wide-ranging and no mere exercise in frightening off political rivals, though it is certainly that, too. Zhou was a supporter of Bo Xilai, the former mayor of Chongqing who was given a life sentence last year for corruption and abuse of power after challenging Xi for the leadership. He also remained a powerful figure in the state oil industry, and thus an obstacle to Xi’s economic reforms.

Zhou’s investigation will also be seen as Xi signaling that he believes he has consolidated his power sufficiently that no official or politician is beyond the reach of his anti-corruption campaign. That is a message that will play well with most Chinese, who are at the sharp end of petty official corruption day-in, day-out. Yet popularity is one thing and political power another. Whether a Party investigation of Zhou turns into court proceedings will indicate how absolute Xi’s political control over the Party has become.

Party discipline means expulsion and house arrest without public prosecution. Zhou’s case indicates that Xi isn’t yet in a position to antagonize all the high-level power brokers and elders in the Party, notably former President Jiang Zemin, by initiating court proceedings that could lead to lengthy jail terms or the death penalty – and the lid being publicly pulled back on the multimillion dollar business enterprises of many of the ruling elite and their families. For now, suffice it to say that the long-standing understanding that serving or former Politburo standing committee members will not be incriminated in anti-graft probes clearly no longer holds.

That is a more startling message for the political elite than the one to lower level officials have had to swallow, that the days of flaunting their perks and privileges and expecting expensive gifts as a right of office are over. So far, according to statement’s by various judicial officials, 51,306 officials were investigated for corruption and related economic crimes in 2013, a twelfth more than in the previous year. That number included 20 ministerial- and vice ministerial-level officials, about half of whom can be considered associates of Zhou.

Xi advocates that corruption threatens the Party’s long-term viability. One common facet of industrializing countries that successfully move up the economic development ladder is that they reform and strengthen their institutions. In China, the Party remains the paramount institution, so reforming that is Xi’s priority. For now though he is emphasizing clean governance over the rule of law, by using top-down political power to set the Party on what he believes is the correct course. The fine line he has to walk is between cleaning up the Party and tearing it down in the process of tearing down his political opponents.

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Xi Jinping’s High-Stakes Tiger Hunt

GEN. XU CAIHOU, one of the PLA’s most senior officers, is not the first “tiger” to be trapped by President Xi Jinping’s anti-corruption drive. He joins Wang Yongchun, deputy head of state energy giant China National Petroleum Company (CNPC), and Jiang Jiemin, former head of the state asset regulator, in being newly expelled from the Communist Party for corruption and abuse of power — a fate also expected to befall former Politburo Standing Committee-member Zhou Yongkang, who once presided over the state’s security apparatus. Were Zhou to be put on trial for corruption he would be most senior leader to face such charges since the Communists took power in 1949, and a significant escalation from last year’s prosecution of former Chongqing Party chief Bo Xilai who was merely a Politburo member.

Nor is Xi’s anti-corruption drive the first to be undertaken by a new leader. His appears to have more legs to it it than those of his predecessors. There have by this Bystander’s best count been some 180,000 cases of actions against officials, military officers and state-sector corporate executives big (“tigers”) and small (“flies”).

Not only has Xi to consolidate his power and make his mark in the  faction-riddled internecine warfare of China’s internal politics, but he also is determined to clean up the image of the Party and to push ahead with economic reform. He believes the first is necessary if the Party is to retain the fast-evaporating trust of ordinary Chinese, on which the Party’s claim to monopoly rule hinges, and the second is necessary to deliver the continuing rise in living standards that are also an essential part of the bargain that allows no political competition to the Party.

There are lots of powerful people in the three most important and tightly interlocked strands of Chinese political life, the Party and the government, the military and the state-owned enterprises whose wealth is far from clean and who have a vested interest in retaining the economic status quo that has provided the opportunities for them to gather that wealth. Xi is both taking out highly symbolic kingpins as well as their underlings who are fast losing the political patronage that has hitherto protected them.

Xi needs to do this if he is to be serious about regenerating trust in the Party and pushing through economic reform. He has to create large breaches in the old guard through which he can drive the forces of change. But he faces three risks. First, he has broken the taboo against going after the families and wealth of the inner circle of China’s leadership; that may provoke a backlash against him. Second, there is a question of how much damage the Party’s reputation can sustain; how many bad apples can be thrown out before the whole crop is considered rotten? Third, he fails to put in place in the Party, government, the military and the state corporate sector systemic mechanisms to regularly detect and prevent corruption in the first place, backed up by an independent judiciary and a free press.

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Carmakers Get A Taste Of China’s Changing Business Climate

Another foreign industry pining its hopes of future growth on the Chinese market has fallen under the beady eye of the National Development and Reform Commission (NDRC), the country’s top economic planner. This Bystander reads reports that the NDRC has put the China Automobile Dealers Association (CADA) to work researching the price of foreign cars sold in China, both those imported and those locally produced. This is not attention carmakers will relish.

The nominal issue at hand is whether foreign carmakers are setting a minimum retail price for their vehicles, which could break the 2008 anti-monopoly law. Last month, state media accused foreign luxury carmaker carmakers of reaping what they said were exorbitant profits in China and should face an anti-trust investigation. It now seems that they knew of what they wrote.

The NDRC has already been successful in getting foreign milk-powder producers to pay fines and lower their prices. It recently fined five of them, including Mead Johnson Nutrition, Danone and Fonterra, and one local firm a total of $110 million for anti-competitive behaviour in effectively setting prices for retailers. Earlier this week, five Shanghai-based jewelry firms were fined $1.7 million for price fixing. Foreign drug makers are also feeling the pressure for making payments to doctors to use their drugs. Some three score of foreign and local pharma firms are under investigation for possible price manipulation.

That a mix of foreign and local companies are being punished is significant, even if foreign firms are bearing the brunt. Authorities have never been above targeting foreign companies for an abuse when they want to send a message to local firms that it is equally unacceptable from them. Tackling corruption within the Party and the government has become a core policy for the new leadership, but it also needs to break a similar culture in business that companies, if sufficiently well connected, can be above the law, too.

If China is to have the better corporate governance that it will need as it develops and rebalances its economy, the grey areas in which many firms now operate will shrink. Carmakers are only the latest to be given an indication of that.

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Little Change In How Corrupt Official China Is Seen

China ranks 78th in the latest index of the perception of corruption in the public sector published by Transparency International, with a score of 3.5. Denmark, New Zealand and Singapore top the list with scores of 9.3 out of a maximum of 10. Hong Kong ranks 13th with a score of 8.4, Taiwan 33rd with 5.8 and Macau 46th with 5.0.

Hong Kong’s score puts it in the company of countries like Canada, Switzerland and Australia; China’s puts it in the same band as Italy, Brazil, Thailand and India. TI’s regional ranking puts Hong Kong at 4th and China at 14th among 33 Asia Pacific countries.

TI, which advocates for the stricter implementation of the U.N. Convention against Corruption, says that nearly three quarters of the 178 countries in its list score below a 5, indicating a serious corruption problem around the globe.

With governments committing huge sums to tackle the world’s most pressing problems, from the instability of financial markets to climate change and poverty, corruption remains an obstacle to achieving much needed progress.

Last year, China ranked 79th out of 180 countries with a score of 3.6. The anti-corruption drive has kept China’s score stable but progress on reducing corruption remains slow at best and as we have noted before the country has an ambiguous relationship to corruption in business.

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China’s Ambivalent Relationship With Corruption In Business

In an emerging economy like China where who you know matters so greatly to business relationships, the line between connections and corruption is simultaneously a broad and a fine one. The latest annual report by the anti-corruption group Transparency International illustrates that well, and also China’s rather ambiguous relationship with corruption.

China is a signatory to the UN Convention Against Corruption, but has not enacted the consequent required domestic legislation prohibiting foreign bribery. Where Chinese companies and individuals have been charged and convicted of bribery and corruption, it has been under other countries’ law. Even multinationals operating in China such as Siemens, UTStarcom, Lucent Technologies and Daimler, to name five over the past five years, have been involved in China-related bribery cases brought under U.S. law.

However, China does have provisions in a range of domestic legislation relating from accountancy to taxation designed to reduce corruption at home, and it has generally been tightening the reins on domestic corruption, resulting in some high-profile cases such as the one in Chongqing as well as regulations aimed at preventing senior officials in  state-owned companies enriching themselves at their companies’ expense. And accepting bribes was one of the charges brought against the Rio 4, of course.

What is missing, Transparency International suggests, is a centralized legal framework and enforcement system that embraces corruption at home and abroad. For example, China does not require companies to show that they have effective anti-bribery compliance programs or to report on compensation for agents as a condition for export credit eligibility. Nor does China have mutual legal assistance treaties and other cooperation with OECD countries in anti-bribery matters. Beijing’s periodic anti-corruption drives shows it recognizes the corrosive effects of bribery and corruption in politics; dong the same for business is part of the necessary development of the economy.

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