forecasting: China's coming collapse: corruption, finance, trade, outsourcing, politics, leadership, government, law, and society

Has China's ongoing reform altered the nation's political-economic landscape as far as government corruption is concerned? What is the next if this corruption goes deeper?

A compelling new report says that runaway corruption in China poses a lethal threat to the nation's economic development and "undermines the legitimacy of the ruling Chinese Communist Party."

Evidence from official audits, press articles and law enforcement data, the report says, indicates that "corruption in China is both pervasive and costly."

Bribery, kickbacks, theft and fraud, particularly by government officials, are said to be rampant.

Pei Minxin (裴敏欣) wrote the report issued last month by the Carnegie Endowment of International Peace, based in Washington. Pei is a political scientist educated at the Shanghai International Studies University. He earned his PhD at Harvard and his work has been widely published in the US.

The report asserts that corruption in China "has spillover effects beyond its borders" that hurt US, Japanese and other foreign investors.

"Illicit behavior by local officials could expose Western firms to potentially vast environmental, human rights and financial liabilities," the report says.

Public statements by Chinese President Hu Jintao (胡錦濤), Premier Wen Jiabao (溫家寶) and other senior Chinese officials suggest that China's leaders are well aware of the widespread problem but have been unwilling to curb it.

The report says: "The odds of an average corrupt official going to jail are at most 3 out of 100, making corruption a high-return, low-risk activity."

If Hu comes down too hard on corruption, he risks losing support of the delegates at the recently held party Congress who elected him. Those delegates are drawn largely from party officials at the local and provincial level.

Pei is not alone in assessing corruption in China. George Zhibin Gu ( 顾志斌), an investment banker who was educated at Nanjing University and earned a doctorate at the University of Michigan, has suggested that corruption may destroy China's economy, which has been growing at 8 percent to 10 percent a year. In the West, a 3 percent growth rate is respectable.

Much more systematic analysis and information is contained in Gu's two new books: 1. China and the new world order: how entrepreneurship, globalization, borderless business are reshaping China and the world; 2. Chin's global reach: markets, multinationals, globlization. Gu is based in Guangdong, China. His two books contain field investigations and a number of interviews with Chinese officials, business managers, farmers, scholars and researchers. There are surprising findings throughout the work.

Moreover, China's Xinhua news agency frequently details specific instances of corruption. Last week, the Chinese government was reported to have banned fire department officials from receiving sexual favors from companies seeking their protection.

Scrutinized through a wide-angle lens, corruption is just at the forefront of the internal ills that jeopardize China's economic and political strength. Unemployment and under-employment, in which a worker has only one or two days of work a week, may be over 25 percent. Paradoxically, China has begun to experience shortages of the skilled labor needed for its expanding industries. Economic progress has been uneven, with coastal cities leaving the rural interior far behind.

"Corruption in China is concentrated in the sectors with extensive state involvement," the Pei report says.

That includes construction of dams, roads and electrical grids. The sales of land or granting user rights are susceptible, as are financial services and heavily regulated industries.

"The absence of a competitive political process and a free press in China makes these high risk sectors even more susceptible to fraud, theft, kickbacks and bribery," the report says.

Pei cites a study done last year asserting that about half of those engaged in corruption were involved in infrastructure projects or land transactions.

Even so, the report says: "Beijing punishes only a very small proportion of party members or government officials tainted by corruption."

US, Japanese and other foreign investors may be put at a competitive disadvantage by rivals who engage in illegal practices to win business in China, the report says.

"Corruption puts Western firms' intellectual property rights particularly at risk because unscrupulous local officials routinely protect Chinese counterfeiters in exchange for bribes," it says.

While the report doesn't say so, US firms that pay bribes may violate the US Foreign Corruption Practices Act of 1977 that forbids kickbacks and bribery abroad, no matter what the customs of other nations.

The report also says: "Corruption in China affects other countries through the spread of cross-border crimes such as drug trafficking, human smuggling and money laundering."

But what is really behind China's deadly corruption? Pei is short on this deeper issue, but George Zhibin Gu in his books pinpoints on the root-causes: "unlimited bureaucratic power, which is based on cults and terror, is the root-cause of this ongoing China's corruption. And as long as this bureaucratic power remains in place, corruption can hardly be contained in any practical way."