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Business, Politics & Corruption: China's Volatile Mix

Shortly after Huang Guangyu was named the second richest man in China by Forbes last October, the 39-year-old entrepreneur disappeared.

Nearly a week later, Beijing’s Public Security Bureau issued a brief notice saying he had been detained on corruption charges, the first indication of his whereabouts.

Soon, other prominent individuals were arrested or charged with corruption or bribery: Rixin Kang, the former head of China’s nuclear power agency; Chen Tonghai, the former chairman of Sinopec, the state-owned oil company; the head of Beijing’s Capital Airport (who was executed last month); and the former mayor of Shenzhen, one of the country’s biggest manufacturing centers.

Chinese authorities say the arrests are part of the Communist Party’s latest anticorruption campaign — and they include the arrest last month of four employees of the British-Australian mining giant, Rio Tinto, on bribery charges.

But analysts say that prominent corruption cases in China are often the outgrowth of power struggles within the Communist Party, with competing factions using the “war on corruption” as a tool to eliminate or weaken rivals and their corporate supporters.

In the case of Mr. Huang, the electronics billionaire, for example, state-run media say a number of other high-ranking officials with longstanding ties to him have also been dismissed and arrested in what looks to be a Communist Party power shuffle.

China does not have an independent police or judicial system; party leaders order investigations. “It’s a very politicized process,” says Minxin Pei, a professor at Claremont McKenna College in California and author of numerous studies on corruption in China. “If your patrons do not protect you, you’re toast.” This may help explain one of the enduring contradictions of China’s political and economic system: the government regularly publicizes an astounding number of corruption cases, yet little progress seems to be made in uprooting corruption.

But as China prepares to celebrate the 60th anniversary of the Communist victory here, Beijing is growing increasingly worried that rampant corruption is eroding public trust in the party, hurting the economy and threatening social stability.

In a recent government poll, 75 percent of those surveyed listed corruption as their No. 1 concern. And this year, public outrage over corruption has caused mass demonstrations — like one in June, when thousands of people in the eastern city of Shishou rioted after a cook died mysteriously in a hotel believed to be controlled by corrupt officials. “The public is fed up with corruption,” says Gao Quanxin, a senior fellow at the Chinese Academy of Social Sciences in Beijing.

China’s top leaders, including President Hu Jintao, have called on the Communist Party to strengthen its fight against graft.

Experts say one of Beijing’s objectives in the current crackdown is to send a message to officials who overstep some unknown acceptable level of graft or who too ostentatiously flaunt its rewards and, second, to reassure an increasingly angry public.

The problem is apparently so large that even selective enforcement results in about 150,000 officials being punished every year for bribery, corruption and other offenses.

China is paying a hefty price for corruption, analysts say, through the misallocation of resources, and the health and safety threats that can arise when regulators, for instance, are paid to look the other way.

A 2007 study by the Carnegie Endowment of International Peace estimated that in 2003, corruption cost China about $86 billion, or about 3 percent of gross domestic product at the time. “Corruption has not derailed China’s economic rise,” says Professor Gao at the Chinese Academy. “But it’s rotting the establishment of a rule of law. The Chinese government has more than 1,200 laws, rules and directives against corruption, but implementation is ineffective.”

Experts say corruption is thriving here because relatively low-paid government officials wield enormous power over business and resources. “The key variable is the extent to which the government gets involved in business in China,” says Professor Pei at Claremont McKenna.

Many officials come up with ever more imaginative ways to gain wealth, like setting up private foundations to accept bribes or encouraging entrepreneurs and companies to bankroll the education overseas of family members.

Weeks after Huang Guangyu was named the second richest man in China by Forbes last October, the Chinese government said he had been detained on corruption charges. “It’s no longer bags of cash,” says Violet Ho, an investigator working for Kroll, the risk consulting firm. “There are sophisticated games going on.”

Chinese lawmakers are considering a law that would give investigators larger powers, including criminal penalties on the “bribe-taking relatives and spouses” of corrupt officials.

No one knows how many Western companies participate in corruption here or how often, but many multinational corporations are worried, particularly American companies that must comply with the Foreign Corrupt Practices Act, which forbids bribing foreign officials.

This year, Morgan Stanley dismissed a real estate executive in Shanghai after discovering he might have violated the bribery law. And in 2007, Lucent Technologies agreed to pay a $2.5 million fine after the United States government accused the company of violating the act.

In a filing, the Justice Department said Lucent spent more than $10 million from 2000 to 2003 to bring 1,000 officials to the United States. The officials were supposed to visit Lucent operations, but instead Lucent often paid for them to travel to Las Vegas, Disneyland and the Grand Canyon.

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Still, when major corruption cases occur, the origins and nature of the cases are often shrouded in mystery.

In 2006, when Chen Liangyu, Shanghai’s party secretary and a Politburo member, was ousted, many experts said there was evidence that he — a major regional figure — had lost a power struggle with leaders in Beijing.

Many China experts believe the Rio Tinto case was politically motivated because Rio Tinto battled with the government steel industry over iron ore prices.

Those caught in the party’s campaigns are usually humiliated and denounced for taking bribes, leading “decadent lifestyles” and, sometimes, for taking multiple mistresses.

But so many officials are engaging in the same practices that in Hong Kong there is a cottage industry in books that detail the private lives of corrupt officials, with titles like, “The Sexy Record of High-Ranking Communist Party Officials,” “Power and Money: How They Steal,” and “Shared Mistresses: Lust and Caution Among Chinese Officials.”

Whatever the public outrage, many experts say they doubt corruption will go away anytime soon, largely because China does not have an independent police force or judicial system.

There are limits to where the party is willing to go. When President Hu’s son became embroiled in a corruption investigation in the southern African nation Namibia involving a Chinese company he once controlled, Beijing asked Chinese Internet portals and state-run outlets not to make any mention of the case.

Analysts say there is another reason change will come slowly: because officials seek power precisely so that they can form alliances and make the decisions that will eventually make them rich. “It’s now a recruiting tool,” Professor Pei says of the promise of future graft. “Corruption is the glue that keeps the party stuck together. Getting rid of it is not possible as long as they keep this system.”

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