Tag Archives: Corruption

Broad Regulatory Corruption Revealed Behind Baoshang Bank Failure

THE SCALE OF the corruption among bank regulators in Inner Mongolia that was instrumental in the collapse of Baoshang Bank is breathtaking, according to the Central Commission for Discipline Inspection (CCDI).

Five former officials of the regional branch of the now-disbanded China Banking Regulatory Commission (CBRC), including its former head, Xue Jining, pocketed 700 million yuan ($109 million) between them, according to a report released by the CCDI on May 27. The five are said to have taken bribes including, cash, gifts, apartments and sex for approving new businesses and loans, project construction authorisations and personnel appointments between 2002 and 2015.

Four-fifths of the corrupt dealings involved Baoshang Bank, a local lender that failed and was taken over by the state in 2019 after been deemed a systemic risk. The CCDI report lays out in some detail how the CBRC officials in Inner Mongolia overlooked warning signals about the bank’s financial condition in their inspections and also misrepresented the health of its loan book in their reports.

Baoshang was the first Chinese lender to be taken over by the state in two decades. The founder of the bank’s parent company, Tomorrow Holding, the billionaire Xiao Jianhua, was placed under investigation by anti-corruption authorities in 2017. The newly released findings were compiled by a special task force at the CCDI looking into the bank’s failure.

More than half the bribes were allegedly taken by Xue. He as expelled from the Party in January and is on trial on corruption charges to which he has pleaded guilty. The CBRC was replaced by the China Banking and Insurance Regulatory Commission (CBIRC) in 2018, for which the report will be used as a salutary tale.

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Zhou To Face Trial Shows Xi’s Firming Grip

ZHOU YONGKANG, THE former and much feared head of China’s security apparatus who has not been seen in public since October last year, is under arrest while he is investigated by state prosecutors on charges of corruption, adultery and leaking the country and Party’s secrets, state media has said. He has also been expelled from the Party.

Zhou, a member of the Politburo before he retired two years ago and an ally of the disgraced former Chongqing party chief Bo Xilai, is the most senior official brought down by President Xi Jinping’s anti-corruption drive, and the biggest loser in the power struggle around Xi’s ascent as China’s paramount leader. Zhou’s fate has been a matter of speculation for some time as he has been under Party investigation for more than a year, but the timing of the announcement of criminal proceedings suggests authorities believe they now have sufficient evidence for a trial, and that Xi feels confident enough with his grip on power to proceed with such a sensitive case in public.

However, the inclusion of leaking state secrets among the charges may provide the excuse to keep any trial itself closed. Bo’s open trial did not go as well as a propaganda exercise as authorities would have liked: Bo’s public image, though diminished, survived.

As well as his control over the vast domestic security sector, Zhou held sway over the oil industry and Sichuan province. Many of his loyalists and recipients of his patronage are also under investigation as his clique is dismantled. The question now for its head is the likely sentence he faces. This Bystander believes Zhou’s would be more severe than Bo’s life imprisonment, so likely a suspended death sentence. Senior officials may no longer be untouchable but they remain unexecutable.

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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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China’s Illegal Football Gaming Rings

WORD ARRIVES FROM our man in London of a curious incident at a recent English football match. A Chinese national was questioned by anti-fraud authorities after being seen to be behaving suspiciously at a Football League One match between Coventry and Crawley on January 12. It was believed he was feeding details of the game to bettors in China faster than they would arrive through official channels thus letting the gamblers place instant bets that were a sure thing. The man, who was traveling on a tourist visa, was released without charges being pressed.

China is a big player in the global black market for football gaming, and has only just emerged from an endemic corruption scandal in its domestic game. Chris Eaton, a former policeman who was a security advisor to FIFA at the most recent World Cup in South Africa, where a Chinese gang running a sophisticated online betting network was uncovered, recently told the South China Morning Post that “China either needs to legalize and regulate sport betting or aggressively police and disrupt the illegal market.” He also called for Chinese police to join with regional and international forces to share intelligence on match-fixers and betting fraudsters.

Hong Kong, too, has had recent problems with match-fixing and illegal gambling on the game. At least two First Division clubs, Happy Valley and Tuen Mun, deregistered players suspected to be involved. In South Korea, 41 players from from the K-League were given lifetime bans last year following a match-fixing scandal after the  government threatened to shut down the league if action was not taken.


Cai Zhenhua

That may have caught the eye of President Xi Jinping, who follows the sport. It would fit with his broader crackdown on corruption.

Nor would Xi be pleased with the embarrassing world standing of the national team. China is 92nd on FIFA’s latest world rankings; 39 places below South Korea and 44 below Japan. That may help explain the appointment of Cai Zhenhua, vice-president of the State General Administration of Sports (SGAS), i.e., the country’s sports vice-minister, as head of the scandal-tainted China Football Association. Cai is a former table tennis world champion who is credited with making China a world power in that sport as a coach. His new task will be to rebuild the reputation of Chinese football both on and off the field. “The stern reality of Chinese soccer forces us to make complete changes. I am burdened with a colossal task,” he says. Quite.

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Tiger Hunting A Boost For China’s Economic Reformers

The corruption investigation into Jiang Jiemin, who has just been removed from his job in charge of the State-Owned Assets Supervision and Administration Commission (Sasac), the agency that controls China’s state-owned enterprises, could prove a big boost for the country’s economic reformers on two fronts.

First, state-owned enterprises have been notable obstacles to the pace of reform as any switch to a more market-oriented economy would diminish the easy access to capital, customers and connections that they have long enjoyed and which provide a large part of their competitive advantage. The corruption probe into the princely China National Petroleum Corp (CNPC), of which Jiang was formerly chairman and from which four senior executives have been removed, shows that President Xi Jinping’s administration considers no state-owned enterprise sacrosanct. If any executive or senior party official in any other SOE needs any convincing of the seriousness of Xi’s intent they should note that Jiang is the first ministerial level official to be taken down in this anti-corruption drive. Xi is making good on his promise to root out the corrupt “tigers” as well as the “flies.”

Second Jiang is close to Zhou Yongkang, who, until his retirement with the change of leadership earlier this year, was the Politburo member in charge of the China’s internal security and intelligence services. These have business tentacles that reach deep into the economy. There is already widespread speculation that Zhou is himself under investigation. Zhou, who rose up through CNPC before coming Party boss in Sichuan (see this illustration of the nexus of political power of “the petroleum faction“), was also close to disgraced politician Bo Xilai. So Xi would be getting a “twofer” here, cracking down on political opponents and opening the way for more economic reform.


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Corruption And Consolidation In China Pharma

This Bystander has been struggling to put the corruption investigation into GlaxoSmithKline in to a broader context. The U.K.’s largest drugsmaker stands charged with paying up to 3 billion yuan ($488 million) in bribes to prop up its sales and prices in China.

There is clearly more to all this than a simple matter of corruption — if indeed there has been that. For one, the number is relatively small on a global scale. The pharmaceuticals industry is well known for buttering up those who can prescribe its products. In the U.S., drugsmakers spent more than $24 billion in 2012 marketing drugs to doctors, according to a survey by Cegedim Strategic Data. Another, by Deloitte, found that more than one in three American doctors accepted food, entertainment or travel from the pharmaceutical industry, while one in seven accepted consulting or speaking fees. Chinese doctors, to whom payments is a common practice, would need the extra on the side more than their U.S. counterparts.

A sweeping tour of the horizon of China’s healthcare market shows the country facing a tripling of its annual healthcare costs to $1 trillion by 2020. (The forecast comes from the consultancy McKinsey.) Its citizens increasingly expect access to affordable health care as a right of passage into the ranks of middle-income countries — and they are increasingly getting the expensive-to-treat diseases of urban middle-class lifestyles. To reign in its present and future costs, Beijing, like India and Brazil, is imposing price controls on drug makers (particularly the western multinational pharmaceutical companies that are increasingly looking to emerging markets for the next phase of their growth), and encouraging the development of a domestic generics industry.

At the same time, it is toughening up on regulatory enforcement. In recent weeks, it has launched a crackdown on illegal medicines by the State Food and Drug Administration, and started its broadest investigation to date in to prices. Some 60 domestic and multinational drugs company have been asked to supply data. That the National Development and Reform Commission (NDRC) is conducting this audit suggest there is a high-level policy initiative behind it.

Then there is the widening corruption probe into the industry. Two non-Chinese nationals have been detained, including a well-respected consultant linked to GlaxoSmithKline. Four Chinese working for the company have also been detained. Two Chinese nationals working for AstraZeneca have been questioned by police, and 39 Chinese hospital staff in Guangdong are to be punished by the health ministry for taking bribes from drug companies.

GlaxoSmithKline first denied the charges against it. Then it said that some local executives may have broken some local laws and acted in contravention of company policies. (Wednesday’s scheduled announcement of the company’s quarterly financial results may provided a clearer picture.) At this point, we are in no position to make a judgement either way. This may be a case of one man’s marketing expenses being another’s bribes. It may simply be a case of a company being in the wrong place at the wrong time. Or there may indeed have been corporate malpractice and the company is guilty as charged.

As we say, we have no idea at this point. We do, though, take note of a Reuters analysis that eight of the world’s top 10 drugmakers have warned of potential costs related to charges of corruption in overseas markets. At least two companies to our knowledge have made settlements under the U.S.’s Foreign Corrupt Practices Act involving payments in foreign markets including China. We understand more cases are pending.

Beijing may well be using GlaxoSmithKline as a stick to beat other western pharma multinationals, who are seen as giving a new — and expensive — lease on life in developing economies to their blockbuster drugs that are coming off patent in the U.S. and Europe. China has had some success in beating down prices in the food industry. Nestle, Danone and most recently Fonterra announced price cuts after Beijing launched an investigation into the dairy industry. GlaxoSmithKline is already hinting it will be passing some cost savings along in lower prices.

As Dan Harris noted on his China Law Blog, China cracks down on foreigners for political reasons whenever the economy slows. This time, the stars may have aligned to give it a motherlode of benefits: championing lower drugs prices for its citizens by standing up to foreign multinationals, and advancing its policy agenda for developing the domestic industry.

Biomedical  is identified as one of China’s strategic industries under the current five-year plan. This covers a broad range of healthcare businesses from medicines and vaccines to medical devices, diagnostics, and even traditional Chinese medicine. Collectively, these are expected to account for 8% of China’s GDP by 2015 and for 15% by 2020, up from 5% in 2010.

The government also is encouraging rapid consolidation of the some 7,000 small Chinese pharmaceuticals producers  that exist today; it hopes that the top 100 pharmaceutical companies will account for 50% of total pharma sales in the country by 2015, and the top ten wholesalers for 95% of drug distribution.

Consolidation  has been used in a variety of other industries from coal mining to solar power as a way of  improving the productivity of an industry, developing technological capabilities to move it up the value chain, and tackling industrial safety and product quality concerns, a persistent issue across a range of industries. Product safety is a particularly pressing concern for the pharmaceuticals industry, which, like the food industry, has had problems with tainted and counterfeit products.

Beijing is also fostering the emergence of large generic-drug companies, which as India has shown it, is key to holding down drugs costs in the long-term. It is pushing local generics makers to partner with multinationals, to invest more in R&D, and to develop specialities in generics and biosimilars.

That is also a way of tying the multinational drugmakers more closely to the Chinese industry, and to bring their pricing practices  more under the authorities’s sway. No multinational wants to be blacklisted in China, still the global industry’s great hope for its future. Most are deepening or expanding their presence in the country through such partnerships. Beijing is taking every opportunity to see that that is being done on its terms, not theirs.

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Ex-Railways Minister Liu Given Suspended Death Sentence

The corruption trial of Liu Zhijun, the disgraced former railways minister who dipped his hand deep into the honeypot of China’s rapid expansion of its high-speed rail network, has been overshadowed by the Bo Xilai affair. Yet it is arguably a purer test of President Xi Jinping’s stated intention to crack down on corrupt officials as it doesn’t carry any of the political theatre of the Bo case.

Liu becomes the most senior official to be sentenced since Xi came to power, though the investigation and arrest of the 60-year old former railways minister predates that. A Beijing court convicted Liu of accepting 64.6 million yuan ($10.5 million) in bribes between 1986 and 2011, though this Bystander suspects that isn’t even the half of it. By some estimates 3% was skimmed off China’s 2 trillion yuan buildout of its high-speed rail system.

Liu’s sentence of death with a two-year reprieve is effectively a life sentence. Sufficient deterrent, not just for what Xi called the powerful “tigers” but also for the low-ranking “flies” that the anti-corruption drive is targeting? More cases of both kinds being brought to court would help, but institutional reform is needed to break the systemic grip of graft.

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A $2.7 Trillion Plunder of China

More money flowed out of China illicitly over the decade to 2010 than out of the next nine countries together on Global Financial Integrity’s (GFI) newly published list of countries whose wealth is being syphoned off abroad by crime, corruption and tax evasion.

We are talking serious money that is finding its way into offshore tax havens and developed countries’ banks, even allowing for GFI’s conservative tallying of the sums. Total outflows from China in 2001-2010 were $2.7 trillion; the next nine countries collectively, $1.7 trillion, with Mexico the largest individual country with illicit outflows of $476 billion. Over the decade, China’s illicit outflows have accounted for just under half the world total.

China’s average illegal outflows amount to $274 billion a year. Easing of capital controls has, if anything, increased the flow of hot money. By virtue of its enormous economy, though, China has an outflow to GDP ratio that is lower than many developing countries. It is still an enormous theft.

The heavily preferred method of transferring illicit capital is through the corrupt misinvoicing of trade. GFI calculates that the trade misinvoicing is larger than 10% of exports in almost all years. China’s “social, political, and economic order…is not sustainable in the long-run given such massive illicit outflows,” says GFI Lead Economist Dev Kar, one of the authors of the report.  If the new Xi leadership needs reasons for cracking down on corruption, GFI has 2.7 trillion of them.


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Former Top Football Officials Convicted Of Corruption

Another raft of sentences has been handed down by courts in four cities in Liaoning  as authorities continue to clean up China’s corruption-plagued professional football. Those convicted include two former heads of the league, the most senior figures from the sport to have been put on trial.

Nan Yong and his predecessor Xie Yalong were both sentenced to 10-and-a-half years in jail for accepting bribes. Former national team manager, Wei Shaohui, received a similar sentence. All three will also pay fines via the confiscation of assets. Four former players on the national team were sentenced to up to six years’ jail and fined for taking bribes and match fixing. The total of eleven convictions in this round follow 39 sentences handed down previously (full list).

The anti-corruption drive in the sport started in 2009, leading to dozens of referees, players, officials and coaches being arrested for match-fixing, bribe-taking and illegal gaming. The structure of the sport is also being reorganized to break the monopoly grip of the Chinese Football Association as regulator and operator of all aspects of the game in China. For a country that is investing money and effort into reflecting its national pride in its emerging global power in the mirror of its sporting prowess–and claims to have invented football–the confluence in the game of corruption and low sporting standing is of too great importance to the Party leadership for it to be a mere spectator, even if 2026 or even 2030, the years in which China’s leaders dream of landing FIFA World Cup, seem a long way off.


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Anti-Corruption Drive Hits China’s Postal Savings Bank

China’s postal savings system is the sort of huge domestic financial institution that lurks for years in the shadows of a financial system. A self-contained fiefdom of vested interests overseen by a ministry whose concerns and connections are essentially domestic and local, it is accustomed  to being unperturbed by the sunlight of financial reform filtering through elsewhere. Yet with 40,000 branches in every corner of the country serving 500 million rural and small and family business customers that the big state-owned banks ignore, it is potentially a potent platform for opening up retail financial services to a broader range of Chinese to stimulate demand immediately and to aid the economy becoming more domestic-demand driven in the longer term.

With that in mind, the postal savings system was split off from the postal service as the Postal Savings Bank of China in 2007. Its parent, China Post Group Corp., moved under the regulation of the finance ministry. The bank started offering credit services to its traditional deposit taking. At the end of 2011, it had more than 4 trillion yuan ($630 billion) in assets, making it the country’s seven-largest bank by assets. It is prepping for a planned stock listing.

Loan making and outside shareholders represent a new world. Yet some old ways clearly linger. Tao Liming, the bank’s president since 2007, is subject of the latest corruption scandal to hit the country in this leadership transition year. Tao is under Party investigation for bribery, illegal fund-raising and illegal lending. He has reportedly been detained. The director of the bank’s financial institutions department, Chen Hongping, is also implicated. Press reports suggest others are, too. The investigation is thought to have followed an audit by the National Audit Office at the end of last year that brought to light what were then described as ‘corporate management problems’.

Bankers are no less likely to be involved in corruption than executives in any other industry. That, after all, is where the money is. It is rare, however, for corruption cases involving executives at China’s big banks to be made public. Yet two weeks ago a vice president at Agricultural Bank of China, the country’s third-largest bank by market value and the only one with a larger branch network than the Postal Savings Bank, was also reportedly put under investigation. He is alleged to have approved loans to a property developer in return for the developer helping him over gambling debts in Macau. In 2010, a former vice president of the China Development Bank was given a suspended death sentence for taking bribes in return for providing loans to businesses.

Each case will be particular to its circumstances. Nor are anti-corruption drives unusual in leadership transition years. They are factional politics by another name. Some cases are meant as this-far-but-no-further messages in a country where corruption is systemic. Yet so important is driving continued economic growth to the Party’s right to rule, and so central has financial reform come to that cause, that no financial institution nor its executives can expect to remain unscathed if their shadowy presence is seen as an impediment to the Party’s legitimacy.


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