China should dangle some economic carrots for long-term success of war on corruption

Howard Chao says Beijing should perhaps look to Singapore, where paying top salaries keeps government clean

PUBLISHED : Monday, 27 April, 2015, 12:29am
UPDATED : Monday, 27 April, 2015, 12:29am

Even before President Xi Jinping took over, there was vigorous domestic and international agreement that something drastic needed to be done about China's corruption problem. His predecessor Hu Jintao warned in 2012 that it "could prove fatal to the party". Outside of China, pessimists pointed to corruption as a harbinger of the system's ultimate doom.

So the anti-corruption campaign is not surprising, and is receiving widespread support. Xi views it as a life and death struggle for the party and the nation - the most significant political rectification campaign since the Cultural Revolution.

The general buzz seems to be that Xi and his top graft-buster Wang Qishan have clean hands, and thus have the standing to lead the effort. There are many anecdotes about how both go to great lengths to avoid even the appearance of impropriety. Based on the stature and numbers of political leaders they are taking on, it also appears they are willing to run significant personal risk to achieve their goals.

Cynics say the campaign is just a huge political power play cloaked in righteousness. While there is no question that many political opponents will be swept away, there are too many indications that it is about more than power. This regime did not need to antagonise so many high level "tigers" and such a broad swathe of "flies" merely to consolidate its grip.

While necessary, the campaign has raised serious concerns in the mainstream business community. Business has slowed because bureaucrats have become fearful about making mistakes and are thus reluctant to make important decisions. Business leaders are worried about instability within government as a result of internal struggles and the potential consequences for the economy. They wonder how long the campaign will last; all indications are it will last a long, long time.

The economic impact of the campaign has been significant. Business in Macau casinos, luxury goods, high-end restaurants and hotels, and fancy cars have all been hurt. Government and state-owned enterprise officials have become very discreet in their public profiles, and there have been many restrictions placed on their spending, perks and travel, making access difficult. Many officials are quietly trying to leave government and join the private sector. Capital flight has accelerated as those who have reason to be afraid, or are just afraid, have moved significant assets abroad, conveniently at a time when outbound investments are encouraged.

At the same time, there have been real benefits to business. In the past, extortion and other overt demands by government officials have been particularly egregious at the small business and local levels, and now suddenly the pressure has been lifted. Shopkeepers reported that they enjoyed a more leisurely week before the Lunar New Year without the need to make rounds of offerings to their local patrons. The anti-corruption drive comes as the government is reducing the number of approvals required for many things, thus reducing opportunities for rent seekers. Could this be the path towards a China where the market drives more decision-making?

The campaign has also shaken loose many business opportunities. Many companies or assets have been confiscated and sold at fire-sale prices. Some companies have essentially become leaderless, and thus in need of new ownership and direction. A whole new category of "special situations" opportunities in China has emerged.

In the short run, this may all generally be a good thing. The real question in the long run is how sustainable is such an inquisitorial approach to controlling corruption? The current drive may hold the problem in check for a few years, but then what? The root of the problem is that government officials are gatekeepers over too many decisions that the market should regulate, they (understandably) feel their salaries are too small compared with their stature in society, and at the same time they are not sufficiently accountable for their actions - all of which have led to where we are today.

The government says the campaign needs to rely on both penalties and incentives, with an emphasis on the latter, but the incentive programme has yet to be fleshed out. The renewed emphasis on ideological purity may be necessary, but it needs to be coupled with economic carrots to be successful. Cutting salaries of SOE executives and perks of civil servants will create retention problems for the best people. Why not take a fresh look at the Singapore model, where hiring the best of the best for government and paying them top salaries has meant a very low level of corruption?

To be fair, the anti-corruption campaign is still a work in progress. The business community understands that, given the magnitude of the problem, it will require time and a steady hand to untangle it all. Less corruption is definitely good for business and the stability of China. We await the next chapter to unfold in this important story.

Howard Chao is an investor and international lawyer