China in Transition

The Bureaucratic-Capitalist Class in Formation - China must turn away from the path to crony capitalism

Chi Hung KWAN
Consulting Fellow, RIETI

In China, which is in the midst of its transition from a planned economy to a market economy, excessive government involvement in the allocation of economic resources and business activities is creating a hotbed for corruption. Needless to say, considerable resources were controlled by the state even during the planned economy era. Back then, however, the market was almost nonexistent in China, acts of corruption hardly went beyond small sums of money for some sort of favor. As marketization proceeds, the opportunities for high-ranking government officials to abuse public power for private gain have sharply increased.

In particular, the "gradual reform" that accommodates a two-tier structure (so-called dual-track system), with the coexistence of planned and market economy, state- and non-state-owned enterprises over a long period, has created an environment prone to corruption. For instance, in the 1980s, state-owned enterprises flocked to make quick and easy money by procuring materials at a cheap "planned prices" and reselling them for more in the free market. Even today, such "arbitrage activities" are frequently carried out under the initiative of local governments as far as land transactions are concerned. Likewise, in the privatization process of small and medium-sized state-owned enterprises from the 1990s onward, managers have taken advantage of their positions to acquire ownership of these enterprises at an extremely low cost through management buyout or other means.

The state of corruption in China has been revealed primarily in the form of media coverage of specific incidents uncovered. However, it is widely recognized that reported incidents are but the "tip of an iceberg." Cheng Ming, a Hong Kong-based monthly magazine, reported in its August issue that the whole picture of the iceberg, which may be described as "crony capitalism," has been revealed in a joint investigation by various Chinese authorities, including the research office of the State Council, research office of the Central Communist School of China, research office of the Chinese Communist Party's central public relations department, and the Chinese Academy of Social Sciences. According to the report, China has a total of 3,220 multimillionaires with personal assets (excluding those held outside China) exceeding 100 million yuan (about ¥1.5 billion), of which some 90%, or 2,932, are family members of high-ranking Communist Party or government officials. It also says that in the highly regulated business fields such as finance, external trade, land development, major projects, and securities, most key corporate positions are occupied by such family members.

As such, the most faithful followers of Deng Xiaoping's "getting rich first" policy are certainly high-ranking Communist Party officials, (who are supposed to be at the vanguard of the working class), and their family members who, by taking full advantage of the power held by these officials, devote themselves to business and moneymaking activities. Such a kinship alliance is cynically referred to as "one family, two systems" derived from the "one country, two systems" formula applied to Hong Kong, under which the former British colony is allowed to maintain capitalism after its return to China. With corruption serving as the primary means of "primitive capital accumulation" in China, the "bureaucratic-capitalist class" has taken shape, rapidly increasing the concentration of income and wealth in the hands of those colluded with the ruling class.

Against this background, the Chinese Communist Party and government have been advocating for the elimination of corruption, as well as for integrity in politics, since as early as the 1980s. In recent years, they have enhanced both promotion and education to disseminate such ideas, and increased efforts to crack down on corrupt activities. However, these measures, whether education or crackdown, are no more than treating the symptoms and corruption cannot be contained without eradicating the root of the problem. Under the rule of law and democracy, countervailing forces operate against the concentration of power. Such an environment has yet to be established in China which is very much governed by the rule of men under the one-party regime.

In order to turn away from the path to crony capitalism, China must embark on reform of its regime. First, needless to say, all who have committed illicit acts must be strictly punished, regardless of their social status, in accordance with relevant laws. Second, opportunities for corruption must be reduced by limiting the scope of business subject to government regulation. Third, the process of ownership reform, including the privatization of state-owned enterprises, must be made more transparent so as to prevent the loss of state assets. Finally, in order to free itself from the curse that "absolute power corrupts absolutely," China must change the ongoing single-party regime and shift to a more democratic form of government, thereby introducing a mechanism to check and balance those in power.

September 22, 2006

September 22, 2006