By Ian Armstrong for Global Risk Insights
The Chinese economy has not had a smooth summer. Between the general slowing of economic growth, the recent plummet of the stock market, and the subsequent devaluation of the renminbi, the “Chinese dream” is now appearing more elusive than initially anticipated.
In light of this, there is now more reason than ever to re-evaluate the existing policies out of Beijing — including those that only indirectly influence the economy. President Xi Jinping’s recent and highly publicized anti-corruption campaign poses one of the more complex decisions for Beijing’s policymakers in the coming 12 months.
Corruption in China
The corruption that has persisted in China – and actually increased in tandem with its economic rise – has been traditionally focused in facets of the economy where the state has been extensively involved, including real estate, financial services, infrastructure, and land-user rights. The forms of corruption have also been numerous and include graft, patronage, embezzlement, and statistical falsifications.
While corruption has often been cited as a driver for China’s unprecedented rates of growth, corruption is in fact a hindrance to stable economic growth – the kind of growth that, if established, would circumvent many of China’s current economic woes.
Indeed, a report from the Carnegie Endowment asserts that direct economic losses due to corruption represents “a large transfer of wealth…to a tiny group of elites” – roughly 3% of GDP each year. Moreover, corruption in China is an underlying cause of economic inefficiency and instability that, if left unsolved, could help turn the current crisis into a future collapse.
A Campaign of contradictions
When he came to power in 2012, President Xi sought to address corruption in what has since become a highly publicized, highly popular anti-graft campaign. The government has since sought to expunge China of corruption at all levels of the 90 million strong Communist Party of China (CPC), with the president vowing to take down both the high-level “tigers” and low-level “flies” engaging in corrupt behavior.
Statistically speaking, the campaign has been a success. Since Xi took office, the campaign has resulted in 414,000 CPC officials being disciplined for corruption – with roughly half (201,600) of those officials actually being prosecuted for corruption in court. In 2014 alone, China officially carried out anti-corruption cases against 68 high-level officials, with more than 70,000 officials also punished for violating anti-graft rules.
Yet, while it initially appears that China has begun to make serious gains in reducing the corruption within, the Transparency International 2014 Corruption Perceptions Index concluded that China actually became more corrupt in 2014 than in 2013. This puzzling development can be attributed to the fact that Xi has focused on instilling fear and purging the existing corruption rather than addressing its institutional causes via more legal and structural reform.
China has since sought to address this, with Xi asserting that the CPC now needs to intensify legal and institutional efforts to strike against corruption at its root. However, in light of China’s recent economic downturn, the so-far popular president will likely reassess the strengths and weaknesses of the campaign to date, as well as the potential impacts of future plans, with the more significant and ambitious structural reforms hanging in the balance.
Anti-Corruption as Anti-Growth
Since China’s anti-corruption campaign was launched, some have asserted that the effort has in fact hurt China, contributing to its slowing economy, due to significant drops in luxury industries, such as five-star hotels. Indeed, the declines in said industries, as well as the negative correlation between the campaign and China’s slowed growth, suggest that corruption mildly enhanced China’s short-term economic gains. This revelation in turn acts as evidence in favor of halting the initiative for the duration of the prevailing economic slowdown.
However, it is Xi’s suggested institutional reforms that will impose a more significant burden on China’s already slowing economy. Reforms of any kind are costly, and a reformation of China’s established and complicated legal system and governance structure would certainly entail serious economic growing pains as the Chinese government finances the transition.
In an already unstable economic environment, Beijing might seriously consider holding off on these costly reforms.
The Economic benefits of Anti-corruption campaigns
Though corruption might have contributed to short-term economic gains, a historical overview of developing economies demonstrates that corruption ultimately stimulates socioeconomic inequality, distorts true economic indicators, undermines economic institutions, reduces efficiency, and increases the risk of a “full-blown crisis” – quite similar to the prevailing economic realities in China today.
The continued prosecution and removal of corrupt officials has actually lowered the cost of living for the average Chinese citizen, freeing up money for increased consumption by average citizens that would otherwise be sacrificed as extra “fees,” or bribes.
Though legal and structural reforms are costly and require potentially painful transitioning periods, the inherent inequality that comes with corruption makes it in fact harmful for long-term growth and largely incompatible with the kind of consumer-led economic growth China is seeking to achieve. Under Xi’s proposed investigation into the legal aspects of corruption, China may endure short-term pains, but would ultimately emerge a more dynamic economic force.
Forecast for the next 12 months
Given the emerging economic problems facing China’s economy, President Xi will continue to hold steady on the low-level “flies,” while also mounting a greater effort at publicly taking down high-level “tigers.” The publicity that naturally comes with high-level scandals will further consolidate the power of the Xi Administration, and help maintain confidence in the government’s ability to amend the recent economic downturn.
At the same time, Xi will largely avoid the kinds of policies and legal reforms he has previously mentioned and continue to ignore the institutionalization of corruption in the Chinese government. A quiet hold on these reforms will allow Beijing to postpone their innate financial burden and instead direct those funds towards other more immediate stimulus measures.