Corruption in China is endemic within both the public and the private sector, despite the fact that both passive and active bribery are considered a serious crime, which can lead to life imprisonment and, in the most serious cases, the death penalty. According to a 2008 article from Far Eastern Economic Review, hidden costs and unofficial payments continue to inhibit Chinese business. Corrupt officials appropriate public funds for their own benefit and many companies engage in corruption and pay bribes in order to maintain their place in the market. Business executives surveyed by the World Economic Forum Global Competitiveness Report 2011-2012 report that public funds are sometimes diverted to companies, individuals or groups due to corruption and that the lack of ethical behaviour of companies in their interactions with public officials, politicians and other companies, represents a competitive business disadvantage for China. Kickbacks in the pharmaceutical industry alone, according to Transparency International's Global Corruption Report 2009, amount to USD 110 million every year. The practise of making facilitation payments to get things done is also common as, according to Trace International 2008, more than 54% of the demands for bribes in business transactions reported by individuals were related to such payments. The US Department of State 2011 reports that the sectors most affected by corruption are banking, financial services and the construction sector.

Public sector corruption is found in economic sectors where the state is deeply entrenched. According to a China Information journal article, Management Corruption in China's Industrial Restructuring 2009, and to Carnegie Endowment 2007, the ongoing reorganisation of government at various levels has paved the way toward new opportunities for corruption, for example, in connection with the reorganisation and appraisal of state assets. Other new areas of public power have also become sources for corruption. These include decisions on and allocation of public investment funds, assignment and pricing of land resources, regulations of levies and taxes, selection and financing of infrastructure projects, business regulation, labour, trade and commercial disputes, and provision of social welfare in an expanding market economy. According to a February 2010 article by China Daily, the National Audit Office announced in January 2010, that nearly USD 40 million of reconstruction funds have been misused. China's anti-corruption campaign targets bribe receivers, but also bribe payers, in particular private sector corruption, i.e. companies bribing public officials as well as other companies. Business-to-business corruption is a common occurrence in China, but, according to China's Unfair Competition Law 1993, acts that give companies an undue advantage are illegal. According to Transparency International Global Corruption Report 2009, China completed investigating more than 31,000 cases of business bribery in 2007, representing more than USD 7 billion in bribes. Foreign companies should be aware that when conducting business in China, the state and CCP are frequently key stakeholders, and companies will invariably be in contact with the authorities, either central or local, at every phase of the business process. Companies are strongly recommended to develop, implement and strengthen integrity systems when planning to do and when already doing business in China.

Third parties, such as agents and distributors, are commonly used in China as a way of lowering transaction costs and thus generating higher profits. However, companies should consider that corruption prevention controls are difficult to enforce when dealing with Chinese agents and distributors. Some companies have been known to use these kinds of intermediaries as a useful channel for outsourcing corruption, so as to avoid direct involvement with corrupt activities. These agent companies are often one-man companies that are extremely difficult to control and that need to be checked thoroughly, as companies can be held legally responsible for bribes paid by their agents. Companies should also pay close attention to people's credentials, as there is a widespread use of false degrees and titles. Thus, it is highly recommended that a thorough screening of agents and potential partners is conducted. For further information, see this portal's due diligence tools.

China's anti-corruption activities were in the past largely targeted towards all-Chinese settings. Today, the campaign is more comprehensive and an increasing number of foreign and multinational companies have come under scrutiny and have been accused of corrupt practices by the authorities. This trend signals an end to the common belief that corrupt activities are found mostly in the interaction between Chinese companies and government offices and do not involve foreign investors. This is also supported by an August 2009 article by People's Daily, which reports that of the more than 500,000 corruption cases China has investigated over the past 10 years, 64% have involved commercial bribery in relation to international and foreign companies. Chinese companies' ethical track record when operating abroad is questionable, which is evidenced in the Transparency International Bribe Payers Index 2011, in which Chinese companies are perceived by the surveyed business executives to be the second most likely to engage in bribery abroad, after Russia.

With China's entrance into the WTO, many laws and regulations are being harmonised to meet WTO requirements. By the end of 2007, China had applied to join the Agreement on Government Procurement (GPA), which should boost transparency within government procurement and tendering. However, according to the US-China Business Council PRC Government Procurement Policy 2009, China's proposal was considered very limited and insufficient by the current signatories, and negotiations continue. Although much progress can be witnessed, according to the US Department of State 2011, China is still trying to protect its ‘vital industries and key fields’, which is defined as ‘industries concerning national security, major infrastructure and important mineral resources, industries that provide essential public goods and services, and key enterprises in pillar industries and high-tech industries’. According to a July 2011 article by Reuters, China may cut down investment spending, which was originally planned to be up to USD 1.5 trillion over the next 5 years, in the seven new strategic industries suffering from problems such as corruption and overcapacity.

China is constantly enacting new laws and regulations and revising existing ones and, according to the World Economic Forum Global Competitiveness Report 2011-2012, the surveyed business executives give a score of 3.9 on a 7-point scale to the burden of government regulation, (1 being 'extremely burdensome' and 7 'not burdensome'), representing a competitive advantage for doing business in China (see also this country profile's special page on Regulatory Environment in Hong Kong). However, the 2011 Business Confidence Survey conducted by the European Union Chamber of Commerce in China, reveals that 43% of the surveyed European businesses perceived Chinese government policies to have become less fair to them over the past two years, and 46% of respondents expect this trend to continue for the next two years. The same survey also shows that the most significant regulatory obstacle perceived by the business respondents is discretionary enforcement of broadly drafted laws and regulations. According to the Heritage Foundation 2011, foreign investors continue to face non-transparent, complex laws and regulations, which are not always enforced uniformly and without discrimination. Figures from the World Bank & IFC Doing Business 2012 show that to start a business in China, companies need to spend an average of 38 days and go through 14 administrative procedures at a cost of 3.5% of the GNI per capita, which is more complicated and time-consuming than the OECD average. According to the US Department of State 2011, the government owns all land in the country; however, individuals and companies can own and transfer long-term leases, as well as structures and personal property. Under the China’s Property Law, residential property rights will be renewed automatically, while commercial and industrial grants shall be renewed if it is not conflicting with the public interest. To register a property is relatively simple, since it only takes 4 procedures and takes an average of 29 days at a cost of 3.6% of the property value, according to the World Bank & IFC Doing Business 2012.

Commercial disputes are heard in the economic courts that, like other Chinese courts, are not considered independent of the government. Corruption is also found within the judicial system and may influence court decisions. There are examples of local officials ignoring court rulings, making enforcement of court decisions an area requiring improvement. Although there has been an increase in the use of litigation to settle disputes, according to the US Department of State 2011, Chinese authorities usually encourage companies to resolve disputes through informal conciliation. Otherwise, arbitration is encouraged when mediation is called for, typically through the China International Economic and Trade Arbitration Commission (CIETAC). Many foreign companies hesitate to settle through arbitration because it is a very time-consuming and unreliable process in China. The US Department of State 2011 further reports that although a few foreign companies have received a favourable ruling from CIETAC, many still question its reliability. Companies should note that foreign arbitration is a possibility and provisions for it can be included in their contracts; China is a member of the International Centre for the Settlement of Investment Disputes (ICSID) and has ratified the New York Convention 1958. However, companies should not expect foreign court decisions to be enforced in China, as this rarely occurs. Companies can also access the Lexadin World Law Guide for a collection of legislation in China.