Financial corruption in China, US are two sides of the same coin

PUBLISHED : Sunday, 17 September, 2017, 5:25pm
UPDATED : Sunday, 17 September, 2017, 10:53pm

A leader fights corruption with the legal system he has, not the one he wishes he has. The ongoing fight against the extent of financial corruption in both China and the US poses particular challenges that are unique to both systems.

In late 2012, China’s President Xi Jinping launched a “war on corruption.” The campaign promised to purge the country and the Communist Party of chronic corruption problems by targeting both “tigers and flies”. The campaign reportedly has punished at least 140 “tigers” – senior government and Party leaders – and many thousands of lower-level “flies”.

China’s version of “capitalism with Chinese characteristics” is actually capitalism in its purest form – every person out for themselves. It requires Godfather-style authoritarianism, judgment and policies that override laws to reduce the excesses and corruption.

The challenge with “regulation with Chinese characteristics” is that the crackdown on corruption has delivered extensive powers to the Party’s secretive and much feared Central Commission for Discipline Inspection, (CCDI) which largely operates without transparency.

The CCDI has been conducting a detailed inquisition of corruption in China’s banking sector for more than two years, which so far has led to dismissals and also to senior figures at both local and national level being detained without trial. The CCDI is empowered to summon at any time, any of the Communist Party’s 88 million members to account for alleged acts of corruption.

Purges of high profile businessmen and bankers based on social networks may work when China’s relatively closed and controlled capital accounts make it easy to trace who are the country’s big offshore investors. However, as China must move to a more open economy and global capital flows, it must evolve institutionalised banking and investment regulation and enforcement.

Russia’s Stalin learned the hard way that purges without an end only breed personal vendettas, distrust and desperate behaviour. Guo Wengui, one of China’s most wanted exiles, has copied Julian Assange’s “tell all” tactics to escape China’s authorities and embarrass officials before the October party congress. Guo has uploaded enough videos on YouTube from his US$67 million Manhattan flat that he should be given his own channel or show like House of Cards.

By failing to institutionalise foreign investment regulations, no one really knows what is considered to be an orthodox and allowable overseas deal. Even if a Chinese company has offshore capital, their transaction can be reversed or halted.

Institutionalising ethics, anti-corruption, risk management and compliance in Chinese banks is difficult even in an international environment like Hong Kong. Hong Kong Chinese executives at Bank of China International’s Hong Kong office tell me that mainland Chinese management hierarchy is rigid. Seating plans and an order for speaking are enforced for meetings and dinners with senior officials from Beijing. Lack of tolerance for constructive criticism and truthful inquiry inevitably sows the seeds for corruption.

Before you think I am extolling the virtues of American regulation, the corruption issues posed by Chinese and American bankers and financiers are only two sides of the same coin. In China, bank salaries are controlled and capped. So bankers make money the old fashioned way – they simply steal it and transfer it offshore.

Bank executives in the US can afford to behave with piety and probity while endangering the western financial system with high risks because they legally pay each other huge salaries and even bigger bonuses. Why steal when you are paid like an equity partner without having to assume equity risk?

And that largely explains why no financial executive at a systemic, American or global bank has faced criminal charges for the global financial crisis. Merrill Lynch bankers received their full bonuses for 2009 despite building a fatally toxic subprime mortgage portfolio that forced them into a merger with Bank of America. Even violating internal trading limits may be a violation of internal regulations, but not necessarily considered to be a crime.

Being able to hide behind legal constructs and “too big to fail” and “deferred prosecution” policies that diminish individual responsibility only perpetuate the underlying, legalised corruption of America’s financial system.

Peter Guy is a financial writer and former international banker