China’s ruling families riches exposed

Posted on November 8, 2012

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PATROLS are hunting for “reactionary” slogans appearing on the streets, internet censors work overtime, police are stepping up the surveillance of dissidents, and officials scour bookshelves for samizdat works. As the Communist Party prepares for a once-a-decade turnover of its leadership this month, officials are battling to stem rumours about what the leaders are up to, and to sweep away evidence of public discontent. Revelations that the family of the prime minister, Wen Jiabao, has acquired a colossal fortune during his decade in office have come at a bad time. So too has violent unrest in a large port-city.

Since the late 1980s the party has never faced so many scandals and crises this close to a leadership transition. As The Economist went to press the party’s 370-strong central committee began a meeting in Beijing to make final preparations for the handover extravaganza that will begin on November 8th. This will involve a party congress attended by more than 2,200 delegates, followed a few days later by the crowning of a new Politburo. Mr Wen is among those retiring from it (he formally steps down as prime minister in March).

An investigative report by the New York Times on October 25th has blown a hole in Mr Wen’s self-cultivated reputation as a thrifty man of the people from a modest background. The newspaper furnished evidence that close family members had acquired wealth of some $2.7 billion. This came hard on the heels of one of the party’s biggest scandals in decades that resulted in the purge of a Politburo member, Bo Xilai, for allegedly covering up a murder and for his family’s involvement in massive corruption. In June Bloomberg, an American news service, published the results of its own investigation into the business dealings of the family of Xi Jinping, who will take over from Hu Jintao as party chief this month and as president in March. It showed that Mr Xi’s relatives had also amassed considerable wealth.

The investigations confirm what has long been widely rumoured about the country’s ruling families (though the reported scale of their wealth stuns even hardened cynics). Combined with the party’s own allegations against Mr Bo, who until early this year was considered a likely candidate for one of the party’s highest positions in the upcoming shuffle, they confirm a nexus between wealth and power at the very top of the system. Though the conflicts of interest are evident, neither theNew York Times nor Bloomberg accuses the leaders themselves of wrongdoing in connection with their families’ business affairs. But in a country rife with discontent over a growing gap between rich and poor, their findings compound public cynicism. China’s censors have blocked Bloomberg’s website since June, and now have now done the same to the sites in English and Chinese of the New York Times. A foreign-ministry spokesman accused the paper of that old fall-back, “ulterior motives”, suggesting it was out to smear China and foment unrest.

Certainly, the internet is frustrating the party’s efforts to control public opinion and stifle dissent during November’s meetings in the capital. This is China’s first leadership shuffle to be conducted in the social-media era. Twitter is blocked in China, but similar home-grown services are immensely popular and hard to crack down on—though China’s internet police have been frantically trying. Consider one measure of their concern: searches for even the prime minister’s family name (which also means “warm”) in combination with other words such as “assets” are now blocked on Chinese microblogs. So too are searches for “prime minister” together with “clan”. In a similar vein, China Digital Times, a media-monitoring website, says censors have been trying for at least a month to stop the media from saying any more about the political career of Liang Wen’gen, one of China’s richest businessmen who is a delegate to the party congress. The Chinese press had earlier reported that Mr Liang might become the first private entrepreneur to be appointed to the party’s central committee. Private-business owners had come to be cautiously welcomed into the party. Now any hint of a link between the party and wealth appears to be taboo.

Censors have been equally strenuous in their efforts to block news of protests involving thousands of people in October in the port city of Ningbo, about 150 kilometres (90 miles) south of Shanghai. The demonstrations were over plans to expand a chemical plant which residents feared could poison the environment. After several days of unrest, including violent clashes between police and demonstrators, the government announced on October 28th that the project had been halted.

Party leaders are obsessed with stability at this crucial political juncture. (Even Beijing’s taxis have been ordered to lock their rear windows, apparently to prevent passengers from throwing out dissident leaflets.) Ningbo’s turmoil must have been more than usually worrisome. In the build-up to the last leadership transition, a decade ago, the party’s biggest fear was of protests involving blue-collar workers whom state-owned companies were laying off by the millions. Today the party has long ceased to regard blue-collar support as critical to its grip on power. Instead, an emerging middle class is its most important bulwark. The protests in Ningbo were the latest in a series among middle-class urbanites that suggests this group cannot always be counted on. In July tens of thousands took to the streets in Shifang in the south-western province of Sichuan in opposition to a copper refinery. The same month similar numbers protested against a sewage pipeline in Qidong, not far from Shanghai. In both cases officials also gave in to the protesters’ demands.

These stresses, as well as external ones generated by a recently escalated feud with Japan over disputed islands in the East China Sea, are doubtless complicating the struggles among senior leaders over the soon-to-be-unveiled line-up. It remains uncertain whether Hu Jintao will retain the powerful position of chairman of the party’s Central Military Commission. If he wants to stay on for a couple of years, as his predecessors did, he might use the party’s concerns about stability at home and abroad to justify retaining control of the army. The continuing influence of Mr Hu’s immediate predecessor, Jiang Zemin, is another complicating factor. Mr Hu and Mr Jiang are assumed to have a less than cosy relationship. Recent appearances by Mr Jiang, who is 86, appear aimed at signalling that he is still a force to be reckoned with. Mr Xi is thought to be closer to Mr Jiang than to the 69-year-old Mr Hu. But even after he takes over, he will have to be careful of both men.

The party’s attempts at media control have failed to stem a spate of articles in official newspapers highlighting what many liberal intellectuals perceive as mounting social tensions. They are calling for faster political reforms. The calls appear designed to press Mr Xi to be more daring than the ultra-cautious Mr Hu. The writings of the 19th-century French historian, Alexis de Tocqueville, have been enjoying an unusual revival in bookshops and in the debates of intellectual bloggers. His argument that revolutions tend to occur not when conditions are harshest but when they are improving appears to have struck a chord among those fretting about where the country is heading.

The Economist

A River of Illicit Money Flows Out of China

New report says nearly US$4 trillion disappeared – 10 percent of GDP

An astonishing US$3.97 trillion in illicit funds left China between 2000 and 2011, according to a report released Friday by the Washington, DC-based Global Financial Integrity, a research and advocacy group.

As much as 10 percent of China’s annual gross domestic product may be disappearing out of the country in illicit funds flight, says the 15-page report, titled Illicit Financial Flows from China and the Role of Trade Misinvoicing.

The capital flight is hidden in opaque stratagems on the part of businessmen and corrupt officials to attempt to make sure governments don’t catch them. Consequently the report relies on what amount to the best guesses of government regulatory agencies, private corporations, and others.

“Such survey results indicate that globally, tax evasion by high-net-worth-individuals and corporations comprise by far the largest component (around 65 percent) of cross-border illicit flows from developing countries, followed by the proceeds of crime (30 percent) and corruption (5 percent),” the report notes.

Trade misinvoicing – described as the illegal trade of legal goods – is held responsible for outflows amounting to US$172 billion in 2000, rising to US$602.9 billion in 2011, an increase of about 7.2 percent annually, according to the report, written by Dev Kar, a former senior economist at the International Monetary Fund, and Sarah Freitas, a Global Financial Integrity group economist.

“One of the adverse effects of illicit flows from China has been a worsening of the country’s income inequality as the rich get richer through tax evasion (which comprises by far the major portion of such outflows) and through using the world’s shadow financial system to shelter and multiply their illicit wealth,” the report adds.

Nearly US$600 billion of the illicit flows ended up as cash deposits or financial assets such as stocks, bonds, mutual funds and derivatives in the British Virgin Islands, the Caymans and other tax havens. An uncertain amount of that is then “roundtripped” back in what the report describes as a “complex money-laundering scheme used in order to take advantage of favorable regulations for FDI and to allow high net worth individuals to secretly accumulate wealth in contravention of government regulations and oversight.

Most of the money is routed through Hong Kong, making the territory, with about 7 million people, the world’s third-largest recipient of foreign direct investment, at more than US$80 billion in 2011, a leap from US$52 billion in 2009. Such round-tripped FDI is given preferential treatment vis-à-vis domestic capital such as tax concessions, government guarantee of loans extended by foreign corporations to domestic firms, land and other facilities at concessional rates, etc, the report notes.

To give some idea of the magnitude of these cash flows, the report notes, “For example, in 2010, if we go clockwise starting from China, US$366.5 billion flowed out to Hong Kong which invested US$356.7 billion in the BVI which in turn invested US$213.7 billion back into China, accounting for US$936.9 billion circulating as FDI among the troika. In that same year, if we go counter-clockwise, BVI invested US$324.3 billion in Hong Kong which invested US$710.9 billion in China. Even if reported data does not show that the latter invested back in BVI, the amount in circulation among the troika total slightly more than US$1 trillion.”

Hong Kong’s position as recipient of direct foreign investment is the largest in Asia after China itself and far ahead of its Asian rival, Singapore, at just over US$60 billion according to the United Nations Commission on Trade and Development’s World Development Report 2012. It is the region’s biggest source of capital outflows as the money is reinvested back in to China after having been legitimized via its voyage through the territory.

Some of that money does move out of those BVI and Caymans accounts into businesses overseas, raising hope that Asia might play a role in pulling the Eurozone out of its continuing economic crisis. But probably the preponderance is rolled into the property markets of Canada, the United States, Singapore and to some extent Europe. With the US slowly emerging from its five-year-old real property meltdown, some realtors in New York are studying Mandarin, according to a recent New York Times article, to be more receptive to Chinese buyers.

The real property consultants Colliers International estimate that Chinese mainlanders constitute 20 to 40 percent of foreign investors in London, Toronto, Vancouver and Singapore. One enterprising developer in Spain built a new project with Chinese-style buildings including a courtyard, pavilion, ponds and supposedly checked out by a feng-shui expert to make sure the wind and water aspects were in line.

Mis-invoiced trade between Chinese companies and the United States increased from US$48.8 billion in 2000 to US$59.0 billion in 2011, the report says. The commodity groupings most susceptible to trade misinvoicing include UN Commodity Trade Statistics Database group 84 – nuclear reactors, boilers, machinery, etc. – and group 85, consisting of electrical and electronic equipment, with the sub-group for electronic circuits showing the largest cumulative illicit outflows (US$84.1 billion). Trade misinvoicing related to the sub-group for mobile phones increased at the fastest pace from 2007-2011.

Mainland China and Hong Kong are the largest foreign direct investors in each other’s economy, with the BVI serving as the second-biggest foreign direct investor in both mainland China and Hong Kong. The BVI also serves as the largest recipient of FDI from Hong Kong.

“Indeed, the report continues, “it appears that while the BVI invested a massive US$213.7 billion in mainland China in 2010, nearly all reciprocal investment in the BVI from the Chinese mainland was routed through Hong Kong. The BVI has a population of about 28,000 and a GDP of only around US$1.1 billion, so it is hard to see how it can undertake such massive FDI outflows unless funds were routed back in via Hong Kong, and/or subsidized by illicit funds.”

On average, roughly 52.4 percent of investments that flowed into tax havens were illicit financial flows or illegal capital flight involving money that is illegally earned, transferred, or utilized. While the funds could be earned through bribery, kickbacks, or other illicit activities, they may well be earned through legitimate means. It is the transfer in contravention of capital controls or the nonpayment of applicable taxes that renders the funds illicit.

Outflows of illicit capital from developing countries overall have been a growing problem over the past decade. According to the latest annual report, developing countries lost between US$775 billion and US$903 billion in 2009, down from the previous report’s estimate of US$1.26 to US$1.44 trillion in 2008. The main reason for the 2009 falloff was due to the economic downturn, which reduced foreign direct investments, new loans, and trading volumes.

Global Financial Integrity studies show that cross-border transfers of illicit capital are propelled by three main types of drivers—macroeconomic, structural, and governance-related. In China’s case, large and growing current account surpluses lead to capital outflows, some of which may well be licit capital flight (such as private sector hot money outflows). High and rising inflation could also contribute to illegal capital flight, assuming owners do not wish to see the real value of their holdings decline over time.

“The widely held perception that the yuan is undervalued because of the trade surpluses may feed into expectations of exchange rate revaluation in the future which could lead to speculative inflows and round-tripped capital,” the report continues. “Structural factors for China include non-inclusive growth, as a result of which there are a larger number of tax havens from China during 2005-2011 were illicit while 47.6 percent were licit.’

Asia Sentinel

Communist Party Congress: corruption in China runs from top to bottom

As China’s Communist Party Congress got under way in earnest on Friday, question after question was raised among delegates about the rampant corruption that runs from the top to the bottom of the party. Malcolm Moore investigates.

He Guoqiang has named the practise as one of the 10 most popular forms of corruption Photo: Lintao Zhang/GETTY

Six months ago, Chen Xiadong’s uncle came to him with an idea. For £15,000 up front, the 28-year-old could leave his office job and become a policeman in Inner Mongolia.

He would only earn £170 a month for the first three years, rising to £330 with more experience. But his parents and his in-laws clubbed together to raise the money – they thought it was a good investment.

“The job is stable and there is profit in it,” explained Mr Chen – whose name has been changed to protect his identity. “The other cops in my bureau all have houses and possessions that do not match their salaries. Some of them have several houses in expensive areas and the deputy chief drives a Toyota Prado, which is worth £50,000”.

Two months into his new job, Mr Chen still has a desk job, but is hoping to get his share of the police station’s wealth shortly.

“The bureau manages a few areas which are full of entertainment joints like karaoke parlours and massage houses, so they get protection money,” he said.

The other policemen have also all coughed up in one way or another, he added. “What you pay depends on how good your connections are. There is another policeman under 30 whose parents run a major Party department in the province and he has already become a fully-fledged officer.”

He still has to pass an exam, but the bribes he paid for the job are all openly acknowledged. “I was promised if I did not end up working here the money would be returned. I have receipts for everything,” he said.

Nor is Mr Chen’s case unusual. The corruption in the Communist party runs from the billions allegedly amassed by the families of top leaders all the way down to the lowliest state employees.

One source who used to work at the Ministry of Railways now runs a recruitment company providing low-level employees, such as pillbox hatted train attendants.

Recently he charged eight new recruits £3,000 each for their jobs, dividing his kickbacks with his contacts in the ministry. The price for a train supervisor’s job is £10,000.

For the applicants, the jobs come with a salary of around £300 a month but plenty of benefits, including a three-day week and a pension.

But even here, China is increasingly becoming divided into those who have connections and those who do not.

“You need to know someone just to hear about these purchase opportunities,” said the source.

“It is impossible to get a proper office job at a state-owned company without solid connections,” said an investment banker whose parents work in two of China’s large state firms.

“One popular approach is for the parents of two families who both work in state firms to arrange jobs for each other’s kids,” he added.

The average income for government jobs in 2011 was more than four times what workers could earn in private firms, according to a survey by 163.com, one of China’s major internet portals.

And with thousands of applicants vying for every state job, the phrase “Mai Guan”, or “Buying a Job”, has even entered the official dictionary.

He Guoqiang, the current head of the Party’s internal investigations department, has also named the practise as one of the 10 most popular forms of corruption.

“We must crack down on cases where codes and regulations are violated in the recruitment of personnel for state-owned companies and government institutions,” he said, in a speech reprinted by Qiushi, one of the Party’s journals.

“As a major source of discontent, [corruption] has become one of the major factors undermining relations between Party and government cadres and the public,” he added.

In his speech on the opening day of the 18th Party Congress, Hu Jintao, China’s president, was even more blunt. Corruption, he said, “could prove fatal” to the Party.

For young Chinese graduates, the network of connections and payments required to advance in China can be daunting.

One professor at an elite university in Beijing said one of his ablest students had been quoted a £100,000 fee for a top job with the government company.

“He was determined to come back to China [after graduate studies abroad] to do good but simply could not afford it,” he said.

“The problem with the payments is that it forces you to be corrupt whether you want to be or not.

“He said it was possible to get jobs at state firms through the exams alone, but that those people would not get promoted. And he said it in a matter of fact way. He did not think I would be surprised,” he said.

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