What should businesses expect as China’s anti-corruption campaign continues?
Businesses with investments or trade interests in China are understandably alarmed by the scope of the expanding anti-corruption campaign. If they themselves have engaged in corruption, or if they are in the hospitality or luxury goods industry, they have reason to be concerned. The corrupt may be prosecuted, and luxury goods sales have already fallen off. The good news is that, if successful in its current course, China will be a more mature and predictable market in the medium to long term. Since we are now some two years into the Chinese Dream reforms, it is time to take stock, explain what is happening and recommend ways for businesses to respond to the evolving conditions.
It’s clear by now that the anti-corruption campaign is not simply a factional dispute within the Communist Party, nor is it just a short term “lesson” in punishing a few elites to demonstrate the costs of corruption. The goal is really not only to root out corruption, but also to make the emerging economy more transparent and efficient. They want to reform the economy to serve more of the population.
The anti-corruption campaign is part of a greater effort by President Xi Jinping to develop a new Chinese national identity while also restoring legitimacy to the Communist Party and its institutions. Prior to the consolidation of Deng Xiaoping’s Four Modernizations, the Communist Party was split between Chinese Communist traditionalists, and modernizers who favored an opening to Western capital and technology. The modernizers won the day and China became rich and powerful, but at a price.
The Communist ideals of equity and service to the common good gave way to legitimacy based on a rapid rise in income. With growth now diminishing, and distribution of wealth severely skewed against the millions of Chinese working in primary production, there is a crisis of legitimacy. China’s current gini coefficient, a measure of concentration of wealth in society, is .55; this signifies a severe gap between rich and poor. By comparison China’s score in 1980 was .30, and the current U.S. score is .45. U.N. officials hold that levels above .4 predict social unrest.
A central goal of the “Chinese Dream” is to double GNP/capita in China in the decade between 2010 and 2020 while moving more people to the cities. The anti-corruption and related antitrust campaigns are largely about increasing efficiency and assuring an equitable distribution of income. It is also about playing to the poor while efforts are made to increase opportunities.
Competition through anti-trust actions, particularly if new domestic firms or foreign firms provide competition, should help. Anti-corruption efforts can put diverted capital back into investments improving infrastructure, technology or production processes. Both should increase growth, contribute to lower prices and produce new job opportunities.
Scope of the campaign
The campaign has been comprehensive and ever expanding. China’s Central Commission for Discipline reported that over 182,000 party officials were investigated or punished in 2013 alone. We have seen the Chinese leadership fulfill its promise that anti-corruption investigations would pursue and punish powerful “tigers” as well as lower status “flies.” Some of those affected have included some of the highest and most well connected officials and former officials in China.
Chinese and international businesses have been warned or prosecuted as well. Even Jack Ma, CEO of Alibaba, China’s Amazon-like online store, was warned about selling counterfeit brand name merchandise online. On the other hand, the government has used Alibaba’s Taobao subsidiary to auction goods and even estates seized from corrupt officials.
In a recently concluded September 2014 prosecution of pharmaceutical company GlaxoSmithKline (GSK), a court found the company guilty of bribing hospitals and doctors and was fined $490 million. In addition, the British head of Chinese operations was given a three year suspended sentence and deported to Britain. Four Chinese GSK managers were found guilty and given suspended sentences. It was the largest fine imposed by a court in Chinese history. Antitrust activity has been particularly focused against foreign firms with investigators arriving unannounced to raid corporate offices. China’s National Development and Reform Commission targeted both Daimler and Audi for monopolistic price gouging in auto parts. The companies responded by announcing price cuts. The U.S. has even agreed to help China track down officials who absconded with millions and deposited them in the United States. China has asked many foreign governments to help locate and return over a billion dollars in purloined funds.
Communist era appeals return
The majority of Chinese who are facing hard times may believe that the Party and government have failed them. The government is therefore entertaining the poor with prosecutions and sordid tales of the improprieties of the rich and famous. More importantly, in its goal to make China a “moderately prosperous and modern state,” it is pulling out a deft blend of imperial and communist era moral appeals. Xi’s speeches are laced with references to Confucius, harmony and virtue. Old communist heroes like Lei Feng, a famous 1963 model worker, and Gao Yuan, a current woman cyber security legend, are being featured to represent selflessness, modesty and overcoming personal hardships for the common good. CCTV has been instructed by the Party to emphasize stories about morality, virtue and the “struggles of common Chinese.”
Broad advice to business
While China has not really returned to the past Puritanism of Maoists in gray suits, the basic appeal is from that era. Since the Xi Jinping and his “princeling” allies are the children of party immortals, they have a real commitment to equity. Fortunately they also have serious capital invested in China and around the world. They want to regain popular support, but not at the expense of what has already been accomplished. They are centrists.
To weather the storm businesses should:
1) Make marginal concessions if necessary. Daimler BMW and Audi were wise to lower parts prices in anti-trust negotiations. Be modest in all things. Give and receive only token gifts to cement business friendships. Leave luxury cars parked at home and take public transportation.
2) If you are in an industry where Chinese firms have recently recorded a large number of patents, expect to lose market share. GSK was likely targeted because Chinese pharmaceutical patents have risen sharply. The government would prefer local firms to have more market share. Do, however, make sure you record and defend your own patents in China.
3) Contact princeling investors or friends and invite them to your home for dinner. Make it social and do not push business agendas. Just remind them of your old friendship and commitment to China. Make public donations to charities they might suggest.