Without An Independent Judiciary, China Cannot Win Its War On Corruption

The alleged abduction of Chinese billionaire Xiao Jianhua on Jan. 27 by Chinese security agents from Hong Kong has raised many questions. One of them is the status of President Xi Jinping’s 4-year old anti-corruption drive.

Based on media reports and Mr. Xiao’s previous business dealings with senior Chinese officials and their families, the most likely reason for the kidnapping of China’s 46-year-old tycoon (ranked as the 32nd wealthiest individual in the country, according to the Hurun Report) is his potential usefulness in helping Chinese authorities investigate wrongdoing in high places. Even though it is impossible to predict which “tigers” (senior government officials) will fall as a result of the information Chinese anti-corruption investigators are certain to extract from Mr. Xiao, it is a safe bet that the fallout from his detention will be serious and far-reaching.

An even more disquieting question concerns the future of Xi’s anti-corruption campaign. Shortly before Xiao’s disappearance, the Chinese Communist Party’s Central Commission for Discipline Inspection reported that 11,000 corrupted officials and party members were prosecuted in 2016 – a drop of more than 20 percent from 2015. Such a substantial decline of the number of officials prosecuted for wrongdoing was read as a sign that Xi’s campaign might be winding down. To be sure, for Chinese officials who have lived in constant fear of falling into the dragnet of the campaign, this would have been good news.

But the abduction of Xiao on the eve of the Chinese New Year, may have dashed such hopes, at least for the short term. Politically, grabbing one of China’s most well-connected tycoons sends a powerful message to the “tigers” who have so far survived Xi’s anti-corruption drive. We should expect some of them to fall in the coming months. The timing of Xiao’s abduction is also exquisite. The Communist Party will convene an important national congress this fall. Needless to say, Xi will strengthen his position immensely if he can send a few more “tigers” to jail in this period.

After the 19th congress is concluded this fall, Xi will come under renewed pressure to moderate, if not call off, his anti-corruption drive. This campaign has alienated many members of the Chinese bureaucracy. In the coming years, Xi will need to rely on them to carry out his policies. It is thus tempting to strike a grand bargain with this group.

That, unfortunately, would be a huge mistake. However ferocious and sustained Xi’s war on corruption may appear, it has merely scratched the surface of a corrupt governance system that has evolved in the post-Tiananmen era. By all accounts, this is a highly developed and sophisticated system that has spawned an underground market for corruption. To Xi’s credit, his campaign has suspended trading in this market because the intense pressure of the anti-corruption drive in the last four years has temporarily deterred most officials from doling out favors to their business cronies in exchange of bribes.

If Beijing relents its pressure, there is little doubt that trading in this corruption market will resume because the anti-corruption efforts in the last four years have not destroyed the foundations of this market.

Among other things, the most important cause of corruption is the vast wealth controlled by the Chinese state that can be misappropriated by businessmen or family members of senior officials. The latest estimate by the Chinese Academy of Social Sciences shows that, as of 2014, the net worth of relatively liquid assets (such as SOEs and cash generated by land sales) of the Chinese state was 28.5 trillion yuan (about $4 trillion). If less liquid assets (such as land and assets in state-affiliated nonprofits are included), the amount would be 103.3 trillion yuan (more than $14 trillion).

While impressive in quantity, this pool of state-owned wealth can be looted with relative ease when private businessmen collude with corrupt government officials. State ownership has no real owners and property with no real owners is the most vulnerable to theft. In the Chinese case, looting state-owned assets has been further facilitated by the dramatic decentralization of administrative authority in the post-Tiananmen era. Consequently, even those modest county-level party secretaries and magistrates have the power to hand over state-owned property to their favored business cronies. As long as the Chinese state continues to control these valuable assets (land, mineral resources and SOEs), it is impossible to eradicate corruption.

An additional impediment to sustaining an effective anti-corruption campaign is the absence of a credible and independent judicial system. So far Xi has relied exclusively on the party’s discipline inspection system to investigate and prosecute corrupt officials. While this extrajudicial system has fearsome power, it has many serious flaws. It can be easily politicized since crucial decisions are made by party leaders, who unavoidably are influenced by their political considerations. As a result, anti-corruption campaigns are seen as political purges in disguise. Such campaigns, however effective in destroying political rivals, only go after individual wrongdoers but leave the foundations of the corruption market intact.

Another well-known flaw is the opaqueness of the current discipline inspection system. Officials accused of corruption have no legal representation and are often subject to questionable interrogation methods, even torture , during investigation. The findings by the party’s discipline inspection committees cannot be challenged or independently verified, thus raising questions about their credibility.

Ironically, despite its power, the party’s discipline inspection system is not very good at catching corrupt officials. In my own study of how long a local official can engage in corruption before getting caught, the findings are telling  and troubling. On average, the duration of corruption of a county-level official is more than six years. For a city-level official, it is more than eight years. For a provincial official, it is more than a decade. Most astonishingly, 84 percent of them kept getting promotions while corrupt.

To destroy the corruption market requires more than the arrest and incarceration of the participants in this market. International experience shows that three radical reforms are needed in the Chinese case.

First, China needs to privatize its valuable state-owned assets in an orderly and transparent manner quickly. Of course, this process will unavoidably benefit the wealthy and the powerful disproportionately. But the alternative is far worse. The longer state-owned assets remain under nominal state control, the more easily they will be stolen. Eventually, when the state has no choice but to privatize, there would be little left. Second, a more independent legal system, not an extrajudicial body, must lead the charge against corruption in order to preserve the procedural integrity and protect the constitutional rights of the accused. Finally, effective policing of corrupt officials is impossible without a genuinely free press. The watchful eyes of tens of thousands of reporters will deter traders in a corruption market far more effectively than the thinly-staffed discipline inspection agencies of the Communist Party.

Judging by the progress of Xi’s anti-corruption campaign since late 2012, it is obvious Beijing has yet to embrace these difficult reforms. It must do so now. Otherwise, the party’s war on corruption cannot be won.