Corruption is destabilizing China

By Sushil Seth  / 

Mon, Sep 30, 2013 - Page 8

During the trial of former Chongqing Chinese Communist Party (CCP) secretary Bo Xilai (薄熙來), the People’s Daily cryptically said: “Constant denials [of his crimes] will only bury you [Bo Xilai] deeper in a trap.”

How true! Bo was sentenced to spend the rest of his life in jail on corruption and related charges. However, his political legacy will persist, having challenged the established system from within.

By invoking former Chinese leader Mao Zedong’s (毛澤東) populism, he sought to rally the people who felt shortchanged by the system that favors the rich and powerful, building fortunes through corruption and personal connections. Bo’s populist message is likely to resonate as China’s economic growth falters. China’s economy is growing at an impressive 7 percent yearly, but no longer reaching the 10 percent growth rates it had previously. China needs a steadily high growth rate to lower unemployment and improve living standards.

There are two broad views about the country’s future economic prospects and its social and political stability. One view is that China has already set in motion a strategy to favor domestic consumption over an export-based economy. The exports and construction sectors will remain an important component of growth, but that growth will be constrained by slowing demand for Chinese goods in the US and European countries and investments in infrastructure.

Patrick Chovanec, one-time professor at Tsinghua University and now economic strategist with a US asset management company, reportedly said: “China has been growing for these last several years by adding to its capacity [like Japan did], but for growth to be real, that capacity has to be used ... [however] there’s a lot of empty ports, empty apartment buildings, empty offices [and] empty airports.”

Unless these assets are used and become profitable, they are a serious drag on the banking system.

China’s large economic stimulation package, which helped stave off recession during the global financial crisis, is now creating problems for the economy due to excessive growth in credit over the last few years. It has led local and regional administrations to push ahead with some dubious infrastructure projects. Easy credit led them to put money into shoddy financial transactions and investments, overextending the banking system. The debt-to-GDP ratio is now estimated to be above 200 percent, about the same as Japan’s.

A big chunk of the money went into real estate, creating the potential of a boom-bust cycle similar to Japan’s. Real estate prices are now beyond the means of many people. As a result, there are many empty apartment buildings.

In addition, the easy availability of credit and shoddy use of investment money has entrenched corruption even further. Corruption, especially at high levels, tends to erode the legitimacy of political systems.

Many people are becoming deeply cynical about campaigns to eradicate corruption because they rarely have show real results. When some high-level party officials are caught in these campaigns, it is generally because they have fallen out of favor with the CCP leadership, as was the case with Bo.

Bo lost his political battle with the CCP, lost his position as party secretary in Chongqing, and faced charges of abuse of power, bribery and other crimes. His wife had already been convicted of the murder of British businessman Neil Heywood and was given a suspended death sentence. It is possible that he and his family built up a vast fortune through their abuse of power. However, so have many others at the top party levels.

A New York Times investigation found that former Chinese premier Wen Jiabao’s (溫家寶) family had also built up a fortune in questionable ways. Another investigation by Bloomberg dug up evidence of corruption by Chinese President Xi Jinping’s (習近平) family. Whether or not it these claims are true is irrelevant. If a party leader falls out of favor, they will pay a terrible price. Yet, corruption is so entrenched in the system that most CCP officials participate.

Official corruption and extravagant living is common knowledge and the people’s cynicism is understandable. Even the mighty People’s Liberation Army is infected with it. Take the case of Lieutenant General Gu Junshan (谷俊山), till recently deputy chief of the general logistics department who left his post in February last year without any official explanation. He will likely be charged with corruption in the near future.

Senior Colonel Gong Fangbin (龔方濱) said in an interview with the official Global People: “When corruption has become a type of culture and has developed to a certain level [at the top], change becomes very difficult.”

The seriousness of corruption in the military was highlighted by General Liu Yuan (劉援), son of former Chinese president Liu Shaoqi (劉少奇), who reportedly said in December 2011: “No country can defeat China. Only our own corruption can destroy us, causing our armed forces to be defeated without fighting.”

In the midst of it all, the example of Western liberal democracy — even with its many faults — is terribly destabilizing for China’s political system. The CCP leaders seem quite worried about this. In this connection, the New York Times has quoted from a memo referred to as “Document Number 9,” apparently emanating from the top levels. It cautions CCP cadres against perils threatening the system. These reportedly are: “Western constitutional democracy,” “universal values” of human rights, Western-inspired notions of media independence and civil society, ardently pro-market “neoliberalism” and “nihilist” criticism of the CCP’s traumatic past.

The document goes on to say: “Western forces hostile to China and dissidents within the country are still constantly infiltrating the ideological sphere” as well as stirring up “trouble about disclosing officials’ assets, using the Internet to fight corruption, media controls and other sensitive topics.”

An important element in this hypersensitivity is that the country’s economy is at a critical point.

“The credit-driven growth model is clearly falling apart. This could feed into a massive overcapacity problem and potentially into a Japanese-style deflation,” said Fitch rating agency senior director in Beijing Charlene Chu (朱夏蓮).

The problem is compounded by the parallel shadow banking system.

“There is no transparency in the shadow banking system and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is,” Chu said.

Therefore, it is not surprising that the top party leadership is worried at the complex interplay between the country’s economy, social stability and the latent threat to the political system.

Sushil Seth is a commentator in Australia.