tax havens

How Corruption and Oligarchy Work in China

Although China has been touting its “meritocracy” in recent years, corruption is rampant in China. While low-level corruption has gone down in the last couple of decades, there is significant amount of corruption among the top echelons of cities, provinces, and the central government. The cabal of crony capitalism includes presidents, premiers, and Politburo members in China.

Thousands of “communist” party officials and their family members each have millions or even billions of dollars hidden in capitalist offshore tax havens. That’s “common prosperity” for the elites.

Most of the corruption occurs at the nexus of private and public sectors. No private company in China can succeed without sharing its profits with the party-state officials. Similarly, politicians also depend on successful and talented private companies to create jobs, implement infrastructure projects, and boost growth. While, in theory, the public-private cooperation can work without bribes and kickbacks, the reality is much different.

Success in China is all about “guanxin” or connections. The key phrase is “win-win,” which means gifts, bribes, kickbacks, exemptions, preferential treatments, cronyism, nepotism, shortcuts, monopoly rights, and profits.

Corruption is the oil that greases the wheels of China’s economic engine.

Because China’s political elites are not required to disclose their wealth (or the wealth of their families), they have managed to accumulate hundreds of billions of dollars through corruption. And a lot of that are stashed in offshore tax havens around the world.

According to the International Consortium of Investigative Journalists (ICIJ), the total amount transferred or smuggled from China to offshore accounts between 2000 and 2014 was between $1 trillion to $4 trillion. That’s truly staggering, considering that China’s GDP-per-capita was only $1000 in 2000 and less than $8000 in 2014.

The communist party leaders and the state bureaucrats have tremendous power because of the innate political and economic systems. The government owns all the land, resources, and banks. The government regulators also have extraordinary and unchecked power. Because of lack of free speech, free media, rule of law, and an independent judiciary, the government can do whatever it wants.

The government can crush private firms or catapult them into stratospheric success.

Thus, businessmen are incentivized and forced to bribe party-state officials to get lucrative deals and circumvent regulations. The bribes also act as protection money, although it’s not always guaranteed since political infighting in the CCP ranks can put businessmen in the crosshairs.

For example, real estate behemoth Evergrande had Chinese Premier Wen Jiabao’s son as the second largest shareholder and a member of the board of directors. Evergrande’s founder later became China’s wealthiest guy. And even though the company is now teetering on the edge of bankruptcy, the founder seems to be safe so far. On the other hand, the tycoon chairman of Anbang Insurance was sent to jail, even though he was married to the granddaughter of Deng Xiaoping and had a princeling (Chen Xiaolu) on the board of directors.

Kleptocracy and “Corrupt Meritocracy”

According to Transparency International, China scores 42, ranking it as more corrupt than 77 other countries, including Cuba and South Africa.

Even Chinese officials have started acknowledging the obvious corruption in the system. “Chinese private firms succeed, in part, by obtaining a special deal from a local political leader, which enables them to either break the formal rules or obtain favorable access to resources,” wrote scholars in a May 2019 National Bureau of Economic Research paper.

In his book, China’s Crony Capitalism,” Minxin Pei analyzed 260 corruption scandals reported in the media and concluded that China is a kleptocracy with a predatory autocratic regime and is marked by utter lawlessness.

However, there is a more nuanced view from Professor Yuen Yuen Ang, who uses the phrase “corrupt meritocracy.” She points out that unlike many other developing nations, the corrupt officials in China often get the job done. This explains China’s impressive growth in the last four decades. For example, she points out that 40% of the disgraced officials had stellar performance and promotions before they got arrested.

Another person who has detailed the corruption in China is Desmond Shum, a multimillionaire who was married to a billionaire woman, Weihong “Whitney” Duan. Whitney was a powerbroker, whose job was simply to connect business and political elites. Her close relationship with the wife of former Chinese Premier, Wen Jiabao, opened many doors. BTW, the Chinese government kidnapped and disappeared Whitney Duan for many years. She was finally allowed to make a phone call to convince her husband to not publish his book, Red Roulette, that revealed corruption in China.

Mr. Shum talks about how he would take out people for $1000 lunches where expensive gifts like jewelry and watches will be given as small tokens of friendship.

Bloomberg and The NY Times have done investigative reports that revealed how top CCP officials and their families had acquired billions of dollars of wealth through shares in large Chinese corporations. That’s the more sophisticated form of corruption.

Sending the bribes to the politician’s spouse, kids, in-laws, cousins etc. is a much safer way to get things done. JP Morgan mastered this and had an official program called “Sons and Daughters,” which gave six-figure salaries to totally unqualified kids of CCP officials.

Why and How Corruption Thrives in China

Here’s the secret behind corruption: It is how the CCP maintains its power. The reward from corruption is how the system creates loyalty. After all, in a country with a GDP-per-capita of $5,000 or $12,000, if a system offers the opportunity to make hundreds of thousands or millions of dollars, those who benefit will be very loyal.

There are 95 million CCP members and 50 million bureaucrats (with a lot of overlap between these two groups). And they all understand the benefits of the system.

The elites at the top of the pyramid enjoy another advantage from this corrupt system: The ability to get rid of political rivals.

Thus, whenever Xi Jinping wants to get rid of his political rivals, the charges of corruption are used – to be fair, his predecessors used the same trick as well. After all, everyone in the system is a crook and thus anyone can be arrested.

Moreover, the judiciary system is just a rubber stamp and the sham trials are often conducted behind closed doors. Thus, anyone can be found guilty of anything in China. Sometimes, people are just held in “dark cells” – euphemistically called residential surveillance at designated location (RSDL) – for months or years without charges. Under torture, people will admit to whatever the government wants.

The occasional purges also help boost the popularity of the leader as the masses cheer the crackdowns. Two birds in one stone for the Chinese President – Concentrate your power and enjoy higher approval ratings!

Examples of Corrupt Party-State Officials

Here are some examples of corrupt CCP officials, government leaders, and bankers who have been caught and punished.

  • Zhou Yongkang who was convicted of getting $160 million in bribes! This communist party leader belonged to the Politburo Standing Committee (the topmost group in CCP hierarchy) and also headed the domestic security. Eventually, the government seized whopping $14 billion of assets from Zhou and his extended family.
  • Chang Xiaobing, the chairman of giant state-owned China Unicom (like AT&T in the U.S.). He had a mini warehouse of all the gifts he had received, including expensive cigarettes, liquor, tea and also hundreds of works of art. Strangely, he was convicted of only getting $500,000 of bribes in 16 years. Why? Probably because if the government exposed all his bribes, many other top officials would have been exposed as well.
  • Another banker received whopping $278 million in bribes! The chairman of China Huarong Asset Management, Lai Xiaomin, was executed in 2021 after he was convicted of corruption. This bank specialized in acquiring “bad loans” and eventually went bankrupt. This guy was a character. He had over 100 mistresses and stored 40 tons of cash in home (the cash stacks were worth $40 million).
  • Hu Huaibang was sentenced to life in 2021 for accepting $13 million in bribes. He was the chairman of state-owned China Development Bank, a very important institution that’s also involved in China’s Belt and Road Initiative.
  • The Chairman of Baoshang bank in Inner Mongolia, took $60 million of bribes in 7 years.
  • When China’s railway minister, Liu Zhijun, was arrested, he was found to have whopping 350 apartments and $150 million worth of cash! Interestingly, he believed in diversification and thus had bills of Yuan, US dollars and Euros. To be fair, he was also talented and oversaw the construction of the first 10,000 km of high-speed rail.
  • Shanghai mayor, Chen Liangyu, turned the city’s pension fund into his ATM. He was convicted of misappropriation and embezzlement of ¥10 billion.
  • Sun Zhengcai, who was once the youngest member of Politburo, took over the job of Party Secretary in Chongqing in 2012 after the downfall of Bo Xilai, a princeling and a rival of Xi Jinping. However, in 2018, Sun was convicted of taking $12 million of bribes and sentenced to life in prison.
  • The “Bulldozer Mayor” — This corrupt but successful mayor of Nanjing was found guilty of taking $1.9 million in bribes. He turned around the city of Yangzhou and was praised widely for his creativity and leadership. But he couldn’t do great things without kickbacks.
  • Sex tapes used for blackmail! Eleven officials were caught on secret tapes, partying with prostitutes, who were provided by a real estate developer. Apparently, the developer used these tapes for extortion to procure more infrastructure projects.

More Sophisticated Corruption

The smart politicians in China use their families to hide their wealth. At least three members of the nine-man Politburo Standing Committee that ruled China from 2007 to 2012 to have family members with documented wealth exceeding $150 million.

Former Premier Wen Jiabao’s mom was a retired school teacher with a pension of $300 a month. However, she managed to get $120 million of stocks of fintech giant Ping An.

Here is a chart from the NY Times that shows how Wen Jiabao’s family owned 135 million shares of Ping An around 2012.

Conclusion – Red Nobility and the Wealthy Rule China

Altogether, four reports from ICIJ – Panama Papers, Paradise Papers, Pandora Papers, and China Leaks – have exposed more than 38,000 Chinese elites with offshore banks.

The Panama Papers, which were documents leaked/hacked from one firm in Panama, revealed how individual Chinese officials had funneled whopping $120 billion into offshore tax havens such as Panama, Switzerland, and Caribbean Islands. And that was done in just a decade, from the mid-1990s to 2008. The amount would be far bigger now.

Similarly, Pandora Papers – released in 2021 – had more than 1800 offshore companies that are controlled by rich people from China. Since most of these offshore companies use opaque shell companies, fake names, and “white gloves” (intermediaries who pretend to be owners of assets in order to hide the powerful), it’s hard to know exactly who really owns these billions of dollars of assets. But it’s not hard to guess.

In 2014, there was the infamous “China Leaks.” In that, ICIJ estimated that Chinese elites have siphoned between $1 trillion to $4 trillion out of China between the years 2000 and 2014. Astonishing!

The list of people in the China Leaks included

  • Xi Jinping‘s sister and brother-in-law
  • Relatives of five members of Politburo Standing Committee, the all-powerful CCP leadership
  • Former Premier Wen Jiaboa‘s son and son-in-law
  • Cousin of former President Hu Jintao
  • Son-in-law of Deng Xiaoping
  • Daughter of former Premier Li Peng
  • Sons and granddaughter of a former vice president
  • Princelings (children of revolutionaries who fought alongside of Mao)
  • Executives of state-owned enterprises and their family members
  • Families of a PLA commander
  • Members of National People’s Congress

Of course, this is just the tip of the iceberg. These are partial reports from a handful of law firms and companies that specialize in tax havens.

All these figures about the wealth of Chinese elites are truly shocking, especially when compared with the life of an average person in China. The median monthly wage of working-class people in China is $350. As for Tier-1 cities like Beijing and Shanghai, the median income of residents (not including migrants) is just $1000 per month. You can read the other blog post on the ruthless exploitation of internal migrants in China.

So, whatever Xi Jinping and CPC propaganda teams may say about “common prosperity,” “Marxism,” “socialism”, “communism”, blah blah blah … the fact is that communist China is an oligarchy and a plutocracy like the U.S. or most capitalist countries.