Xi Jinping’s crusade on corruption in China has dual goals of promoting good governance and reducing the widening income gap.

In 2014, China was ranked 100 out of 178 countries in Transparency International’s Corruption Perceptions Index. Since taking office in 2013, President Xi Jinping has led a renewed campaign to eradicate corruption, as shown by the July 2014 investigation into allegations against Zhou Yongkang, who was officially charged in April 2015.

Zhou was a member of the 17^th Politburo Standing Committee (PSC), China’s highest decision-making body. In his capacity as a member of the PSC, Zhou also wielded a lot of clout and control over the nation’s military forces and the national oil sector. Xi’s campaign to eliminate corruption, however, has its roots in the Lai Changxing corruption scandal in the late 1990s, which involved the largest case of smuggling in Chinese history.

Lai Changxing founded the Yuanhua Group in Xiamen in 1994, where he began smuggling products like cars, oil and cigarettes into Mainland China. Between 1996-99, the total value of goods Lai smuggled through Xiamen reached $7.9 billion, and he avoided paying nearly $5 billion in taxes.

To make this happen, Lai paid off more than 64 officials with millions of dollars and developed financial ties with top Chinese officials, including Deputy Minister for Public Security Li Jizhou; Major General of Military Intelligence for the People’s Liberation Army Ji Shengde; and Customers Director of Amoy Yang Qianxian, among many others.

Turning a Blind Eye

There are several explanations as to why those 64 top officials turned a blind eye toward Lai’s smuggling activities. In theory, effective ideological control of the party in power would mean there should be a lower degree of corruption. Due to economic liberalization in China at that time, the attractiveness of economic progress made Maoist morality become increasingly irrelevant. Unlike the Mao years when getting rich was seen as bourgeois behavior, the economic reforms in 1978 under Deng Xiaoping prioritized national success in the economic realm.

As a result, it can be seen that officials were willing to help Lai and turn a blind eye to his activities, since his investments and businesses promoted economic growth. These top officials also put their faith in luck, thinking they would not be caught since there were also other senior government officials involved. Indeed, one could say that corruption among politicians was the rule rather than the exception at that time.

Another explanation can be derived from personal connections, known as guanxi, which have long been important social practice in Chinese society. China has a long history of hierarchical systems with Confucian ethics, where roles are established as relationships and are not individualistic.

To some extent, the creation of guanxi through personal connections and cooperation can be regarded as a substitute for the market and the legal-institutional environment that supports it. Guanxi served as a coordinating mechanism that provided more efficient allocation of scarce goods and services. For example, between 1959-61, referred to as three years of great Chinese famine, scarce resources and goods such as housing and schooling were selectively distributed by bureaucrats. This is a possible cultural explanation on the roots of corruption of Lai’s case, where his close guanxi networks with government officials enabled him to easily access resources and later commit crimes.

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Effects on Foreign Direct Investment

The corruption scandal of had a tremendous effect on Xiamen’s foreign direct investment (FDI). Two years after the exposure of his smuggling ring, the total foreign trade volume of Xiamen in 2000 exceeded $10 billion and the total container throughput increased by 26%, reaching 10 million containers. Xiamen’s GDP in 2000 also achieved $83 billion and its urban per capita disposable income was more than $1,500, increasing by over 12%. However, GDP increased at a lower rate for several years since then and foreign investors were not optimistic about the change.

There are several reasons explaining the downward investment situation in Xiamen. First, many local firms were knowingly or unknowingly connected with the Yuanhua Group, and these firms were adversely affected after the scandal. Many of them had negative earnings or even went bankrupt, therefore, destabilizing the local business environment and making foreign investment unattractive at that time.

After the Yuanhua Group went bankrupt, employees at state-owned companies received far less revenue since no further “gray” or questionable income was available. These changes led to a decrease in confidence and consumption.

Moreover, the service sector in Xiamen also witnessed a localized great depression after the corruption scandal — for example, a taxi driver’s income was reduced by 50%. Other places in China such as Zhejiang and Guangdong eventually became substitutes for doing business in Xiamen and attracted plenty of foreign direct investment. The overall effect, however, was still negative.

The Timing of Lai’s Downfall and Xi’s Rise

The corruption of the Yuanhua Group, a seemingly independent case in Chinese history, has profound effects on today’s strict anti-corruption reforms under President Xi. According to a 2012 Forbes report, corruption practices across the country were rampant between 1996-99 — coincidentally the period of time when Lai carried out his smuggling activities.

During this period of time, Jiang Zemin was president and Zhou Yongkang gained rapid career advancement. More interestingly, Xi Jinping was made governor of Fujian in 2001, the year in which the scandal of Lai was exposed. It is hard to say to what extent Xi had contributed to expose Lai’s corruption when he was governor in Fujian. However, it can be seen that Xi was the perfect crusader against corruption, because he was reportedly not involved in any corruption during his tenure as governor. Lai’s extradition from Canada to China in July 2011 was seen as a joint effort between then-President Hu Jintao and Xi Jinping. Many within China view Lai’s extradition as a message for many high government officials, who later reported Zhou Yongkang in 2013 for allegedly making billions of dollars through his high position of power within the national oil industry. It can hence be seen that Lai’s sentence may have laid the foundations for Xi’s future efforts to eradicate corruption once he took office.

While truly eradicating corruption might be impossible — given China’s history and nature of governance — an effective legal and institutional environment can reduce such practices by regulating and protecting business activities from government corruption. Moreover, such anticorruption actions must protect the authority of the central government and receive support from the top.

Xi’s campaign to promote good governance can be further supported by his government’s efforts to decrease the widening inequality gap in China. According to a survey conducted by the Center for Global, International and Regional Studies, 10% of China’s richest people enjoyed 45% of the county’s wealth, while the poorest 10% only accounted for 1.4%. As corruption and guanxi networks are usually regarded as the sources of huge concentrations of wealth for China’s richest families, such unfair practices and widening inequality will eventually threaten the stability of society as a whole.

Although Xi’s overarching goal has been to eliminate corruption, empirical questions remain as to when and where corruption rates in the public sector will start declining and whether the new approach to minimize corruption will eventually stimulate changes in China’s political structure so the country’s judicial system will gain independence. As the world awaits more news on Zhou Yongkang’s case, attention will be paid to the future of governance in China.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

Photo credit: Kaliva / Mangsaab / Shutterstock.com

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