CHINA Country Profile

General Information

The Political Climate


The People's Republic of China is a socialist country governed by the Chinese Communist Party (CCP), which is currently headed by President Hu Jintao. Corruption is perceived to be a considerable problem in China. This is substantiated by the World Economic Forum Global Competitiveness Report 2009-2010 in which corruption features as the sixth largest constraint for doing business in China. Despite the obstacles posed by corruption, foreign investors are not being scared off. In fact, China is considered to be the most attractive investment destination by investors by several sources, including the United Nations Conference on Trade and Development World Investment Prospects Survey 2008-2010. According to the US Department of State 2009, the FDI growth rate reached 23% in 2008, equal to USD 92.3 billion. FDI inflows dropped significantly in 2009 due to the global economic crisis, and it remains to be seen when they will increase again. The Chinese government, acknowledging that corruption is a major threat to both the country's economic development and political stability, has been pursuing a vigorous anti-corruption campaign. In 2006, 97,260 CCP members and civil servants were prosecuted for graft, bribery, misappropriation of public funds and dereliction of duties. While these numbers are striking, they reflect the Chinese government's largely punitive rather than preventative focus of the anti-corruption campaign and highlight the need for reforms to counter the political-economic leaders' illegal amassing of wealth. The CCP announced that China's anti-corruption work should combine punishment with education and better supervision of public officials.

Corruption is all-pervasive in China, and the amounts of embezzled and stolen money have risen in correlation with the growing economy. Many cases are exposed and, according to the National Audit Office National Audit Report 2008, 1,401 cases were referred to the judicial and disciplinary system in 2008, and more than CNY 12 billion were retrieved. Accountability audits were conducted on more than 34,000 people, resulting in 112 audited cadres and 387 other civil servants being referred to the judiciary for prosecution. According to the National Audit Office National Audit Report 2007, budgetary irregularities were found in the amount of USD 2.6 billion in central government departments, and fraud had been uncovered in several government institutions, including the Ministry of Education, Ministry of Health, and State Administration of Taxation. One type of corrupt activity which has appeared since the 1990s is power trading, i.e. the buying and selling of official posts. The government has tried to eliminate such practices through issuing new regulations regarding selection and promotion of government and party officials. However, power trading still occurs on a large scale. In one case, the party secretary in a city in Heilongjiang Province sold 260 official positions. This type of collusion has, in certain instances, led to entire areas functioning as local 'mafia states'. Chinese media reports about abuse of power among officials on an almost daily basis. There are even examples of anti-corruption officials having accepted CNY millions in bribes. The media has covered high-profile corruption cases where corrupt officials received very severe penalties, sometimes even capital punishment. These punishments, in combination with the intensity of the anti-corruption campaign, have led to approximately 10,000 corrupt officials having fled China over the past ten years, taking an estimate of USD 100 billion of public funds with them. However, generally speaking, corrupt activities in China are considered to be low-risk activities that can yield high returns. According to the Carnegie Endowment 2007, a corrupt civil servant in China has a 3% chance of going to jail for corruption. Since 1982, 80% of the CCP members disciplined and punished by the party got off with a warning, while the remaining 20% were fired and less than 6% were prosecuted.

China embarked on a reform process in late 1978 to combine socialism with a market economy. The implemented economic reforms have gradually created economic development with unprecedented growth rates averaging 9.5% annually. The transition process, involving both decentralisation and privatisation, has not been followed by a multiparty democratic political process. Rather, it has given rise to widespread corruption as the opportunities for public officials to engage in corruption and enrich themselves have multiplied. According to the Carnegie Endowment 2007, the yearly direct economic losses due to corruption are estimated to be at least 3% of the annual GDP. China's economic development has led to increasing economic disparities, and today China is experiencing a developmental divide between the wealthy, economically prosperous coastal areas and the less developed and much poorer inland regions. This inequality, in conjunction with people's perception of an upper class amassing enormous wealth at the expense of the poor, fuels societal tensions. This poses a serious challenge to the Chinese political leadership, who is aware that its legitimacy is tied to curbing corruption and maintaining economic progress.

Business and Corruption

Corruption in China is endemic within both the public and the private 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 Mingxin Pei 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. 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 2009-2010 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. The National Audit Office National Audit Report 2007 found that CNY 7.1 billion of China's CNY 2 trillion social security funds was being transferred as overseas investments, used as commercial loans to companies, or spent on unauthorised construction projects. Kickbacks in the pharmaceutical industry alone, according to Transparency International 2009, amount to USD 110 million every year.

According to Trace International 2008, more than 54% of the demands for bribes in business transactions reported by individuals were related to facilitation payments, indicating that companies continue to use such payments to get things done. According to Far Eastern Economic Review 2008, hidden costs and unofficial payments continue to inhibit Chinese business. The US Department of State 2009 reports that the sectors most affected by corruption are banking, financial services, public procurement and the construction sector. In general, penalties for passive bribery have been higher than for active bribery. However, this has been changing of late as China has adopted a more balanced approach to curbing bribery and has been tackling both the supply and demand side of bribery. 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. According to Trace International 2008, 85% of bribes made during business transactions was demanded by public officials: 38% by government officials, 14% by other government employees, 11% by members of the judiciary, 11% by the police, and 11% by CCP party officials.

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.

The target of China's anti-corruption campaign also includes 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 2009, China completed more than 31,000 cases of business bribery in 2007, representing more than USD 7 billion in bribes. 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. Companies are strongly recommended to develop, implement and strengthen integrity systems when planning to do and when already doing business in China.

Regulatory Environment

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 Government Procurement Agreement (GPA), which should boost transparency within government procurement and tendering. China is constantly enacting new laws and regulations and revising existing ones and, according to the World Economic Forum Global Competitiveness Report 2009-2010, the regulatory framework represents a relative competitive advantage for China. However, in terms of doing business in China, the administration and the enforcement of these laws and regulations are of such a quality that, according to the same report, the second and fourth most problematic factors for doing business in China are inefficient government bureaucracy and policy instability respectively. In general, the inefficient bureaucracy is of concern for companies that start up or operate in China. According to the World Bank & IFC Doing Business 2010, it takes 37 days, 14 procedures and a cost of 4.9% of GNI per capita to start a company, and the minimum capital required is 121% of GNI per capita. Companies must spend a significant amount of time face-to-face with public officials from different departments, while developing and maintaining good relationships with these officials is a major task for companies. Nonetheless, it is a task that can determine the success of a company in China. Consequently, it is common for companies to give gifts in meetings with public officials. Although much progress can be witnessed, according to the US Department of State 2009, China is still trying to protect its pillar industries by restricting foreign investments in strategic sectors dominated by state-owned companies, which include equipment manufacturing, automotive parts, electronic information, construction, iron and steel, non-ferrous metals, chemicals, survey and design, and science and technology. The EU Chamber of Commerce in China goes so far as to say that China's business environment discriminates against foreign companies and offers Chinese companies a clear advantage. For instance, foreign companies are frequently excluded from bidding on government contracts. Business executives surveyed by the World Economic Forum Global Competitiveness Report 2009-2010 give the level of favouritism in government officials' decisions concerning policies and contracts a score of 3.8 on a 7-point scale (1 being 'usually favour well-connected companies and individuals' and 7 'are neutral').

Private ownership of land is not permitted in China. All land is owned collectively or by the state. However, land use rights can be purchased at a price set by the state. A company which seeks to utilise land for residential, commercial or industrial purposes must approach the authorities in order to obtain a contract for use of a particular piece of land for a specific period of time. The maximum lease for commercial usage is 40 years, while it is 50 years for industrial usage, and 70 years for residential usage with the possibility of prolonging the lease for another term. The transfer of property and land use rights is relatively simple. According to the World Bank & IFC Doing Business 2010, the transfer involves only 4 procedures and takes an average of 29 days at a cost of little more than 3% of the property value.

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 2009, 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. 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.

Corruption Levels

Sectors (Judicial System, Police, etc.) describe which kind of corruption can be encountered in different areas. This section covers various forms of corruption, including bribes and facilitation payments. All information is based on publicly available information and should be viewed as general guidelines on the types of corruption existing in the country.

Levels of corruption in the different sectors indicate where corruption can be encountered. The levels are defined as follows:

  • Individual Corruption: Corruption that takes place primarily in relations between individual citizens and public officials and authorities.
  • Business Corruption: Corruption that takes place primarily in relations between enterprises/companies and public officials and authorities.
  • Political Corruption: Corruption that takes place in the higher echelons of public administration and on a political level.

Frequency refers to quantitative surveys on corruption in the respective sectors.

Judicial System

Individual Corruption

Chinese citizens have demonstrated increasingly greater faith in China's legal system, despite the fact that it is generally recognised that it does not function well. There are many examples of Chinese citizens bringing lawsuits against local governments and authorities. Many of the cases concern land use rights, housing relocation, social security, or layoffs from state-owned companies. The Sichuan earthquake of the spring of 2008 has led to many citizens suing the authorities for turning a blind eye towards the substandard construction of school buildings, which resulted in the deaths of many children. According to reports, local governments lose between 30-40% of these cases. This indicates that the local government authorities often govern contrary to laws and regulations. It is noteworthy that so many rulings go against local government authorities, considering that the local judge is subordinate to and thus often loyal to the top local government official.

Chinese citizens are gradually, albeit slowly, gaining more legal rights. In 2008, indicted persons won the right to meet with their defence lawyers without having to get permission from the authorities, and the police are no longer legally permitted to monitor conversations between lawyers and their clients.

Business Corruption

According to the US Department of State 2009, companies have experienced irregularities in dispute settlement in China, both in the form of corruption and in the form of government interference. Corruption is also reported to sometimes influence local court decisions and local officials may disregard the judgments of domestic courts. According to the same report, well-connected local businesspeople are often favoured by the courts over foreign investors and can use their connections to evade prosecution for illegal acts committed against their former foreign partners. Global Integrity 2008 reports that corruption is more common in criminal trials than civil trials. According to the World Economic Forum Global Competitiveness Report 2009-2010, business executives confirm that Chinese courts are sometimes influenced by members of government, as well as well-connected individuals and companies. There are many examples of court officials taking bribes in order to expedite judicial processes or decisions. Chinese officials frequently encourage dispute settlement through informal conciliation rather than through formal mediation.

Political Corruption

Observers question judicial independence, pointing to a judicial system that provides ample room for political influence. Judges' decisions are subject to approval by the courts' CCP committee. Also, since judges are appointed and paid by local people's congresses and local governments, both the state and CCP have the possibility to interfere.

So long as the judiciary is susceptible to corruption and the political influences of government and well-connected individuals and companies, China's many anti-corruption laws and regulations will never be able to realise their full potential. The Chinese Bar Association is subordinate to the Ministry of Justice; hence, there is concern that Chinese lawyers lack independence. Since 2002, provincial bar associations, as an experiment, have been separated from the judicial administrative organs and have been headed by practising lawyers. If this becomes permanent, it could be the first step towards independence for practising lawyers.

An illustration of the omnipresence of corrupt behaviour can be seen in the case of Cheng Kejie, the former Vice-Chairman of the Standing Committee of the National People's Congress (NPC). Cheng Kejie is an example of the fact that, even within the NPC (the body that formulates and passes China's legislation), one can find corrupt individuals in high-level government positions. In 2000, Cheng was charged with corruption and sentenced to death.

Frequency

The World Bank & IFC: Doing Business 2010:
- To enforce a commercial contract by filing a lawsuit, companies need to go through 34 procedures, while the process takes 406 days at a cost of 11% of the claim's value.

World Economic Forum: The Global Competitiveness Report 2009-2010:
- Business executives give the Chinese judiciary's level of independence from influences of government, citizens and companies a score of 3.9 on a 7-point scale (1 being 'heavily influenced' and 7 'entirely independent').

- Business executives give the efficiency of the legal framework for private companies to settle disputes and to challenge the legality of government actions and/or regulations a score of 4.1 and 3.9 respectively on a 7-point scale (1 being 'extremely inefficient' and 7 'highly efficient').

Police

Individual Corruption

It is commonly known that Chinese traffic police extort fines and impose illegal registration fees. Worldwide attention was drawn to these abuses in 2005 when a reporter was beaten by about 50 traffic police officers because he had reported the illegal fees charged by the police for the registration of his electric bicycle. The reporter later died from his injuries amidst continuing reports of reporters being physically harmed and coerced. Senior traffic police officer Li Xiaoguo was fired for his role in the affair.

Business Corruption

According to several news reports, the Chinese police are heavily involved in corruption and various criminal activities. There is frequent mention in the media of extortion and illegal fees demanded by police. Furthermore, there are many examples of police and border guards offering protection to elements of organised crime.

According to Global Integrity 2008, although formal processes exist for citizens and companies to complain about police activities, none of them can be considered truly independent mechanisms.

Political Corruption

Widespread corruption is prevalent from top to bottom in public security departments. When police and public security bodies who are at the forefront of curbing corruption are themselves corrupt, there is a danger that anti-corruption initiatives will be ineffective. A major case involved a former Vice Minister of Public Security who was convicted of protecting a large smuggling operation (see the Xiamen Smuggling case).

In an experiment to combat police corruption, Jiangsu Province provided a pension scheme for police. This reduced corruption cases involving police in the province by half.

Frequency

World Economic Forum: The Global Competitiveness Report 2009-2010:
- Business executives give the reliability of Chinese police services to enforce law and order a score of 4.7 on a 7-point scale (1 being 'cannot be relied upon at all' and 7 'can always be relied upon').

Licences, Infrastructure and Public Utilities

Individual Corruption

The Sichuan earthquake in spring 2008, which killed more than 80,000 people, laid bare the devastating results that corruption has on local citizens, especially when disaster hits. Many homes, schools, and hospitals were levelled by the earthquake due to shoddy construction work with substandard material that was a direct consequence of corruption and ignoring building codes.

Business Corruption

Corruption in connection with obtaining business licences and permits is common throughout China. It is comparatively more widespread in poorer areas where levying various licence fees is a major source of revenue for some bureaus and departments. According to Global Integrity 2008, despite there being generally clear government standards and procedures related to basic health, environmental, and safety standards that every company should follow, these are not always enforced in practice, as corruption leads to enforcement exceptions and inconsistencies.

Corruption in construction projects has been institutionalised in certain areas. Hence, companies working in these areas must reportedly pay a bribe equivalent to a set percentage (3-5%) of the total construction budget.

In construction, large amounts of funds are lost due to corruption. In an audit of 26 highway construction projects, the National Audit Office found that more than CNY 2 billion had been misappropriated from the projects.

There are numerous examples of corruption in construction projects that lead to low quality and unsafe construction. The lower levels of government are fully aware of the unlawful activities occurring higher up, but nevertheless remain passive. For example, a bridge in Sichuan Province collapsed and killed 40 people only a year after it was built. The subsequent investigation revealed that the deputy magistrate of the county had taken large bribes from the contractors. In addition, it was also found that the mid-level officials in charge of project supervision and quality control had turned a blind eye to the problems of the project because they knew that the top official had given the project his blessing.

Political Corruption

Corruption in the infrastructure construction sector is pervasive among high-level officials, many of which get rich by demanding bribes for using their authority to approve business projects. In October 2008, former Beijing Vice-Mayor Liu Zhihua was found guilty of taking CNY 7 million in bribes while heading Olympic-related construction projects. He was also found guilty of helping his mistress profit from construction projects. He received a two-year suspended death sentence.

The pervasiveness of corruption in the infrastructure sector can be witnessed by the sheer number of officials in charge of transportation and urban planning who have been convicted for corruption; about half of the provincial transportation chiefs have been convicted.

The State Food and Drug Administration (SFDA), which administers and approves medicine and health care supplies in China, has been under investigation in connection with bribes by pharmaceutical companies that tried to avoid having their products properly tested. Incidents occurred in which people died due to fraudulently approved drugs. The former head of the SFDA was sentenced to death for accepting bribes and for dereliction of public duties. Other scandals within the SFDA have involved tainted food, with thousands of people dying of food poisoning.

Frequency

The World Bank & IFC: Doing Business 2010:
- To construct a warehouse, a company must go through 37 procedures and spend 336 days to obtain the required licences and permits, incurring an average cost of 579% of per capita income.

World Economic Forum: The Global Competitiveness Report 2009-2010:
- Business executives give government administrative requirements (permits, regulations, reporting) in China a score of 3.9 on a 7-point scale (1 being 'extremely burdensome' and 7 'not burdensome at all'), representing a competitive business advantage for the country.

Minxin Pei: Corruption Threatens China's Future 2007:
- A 2006 review of 3,067 corruption cases revealed that approximately half were related to infrastructure projects or land transactions.

Land Administration

Individual Corruption

China is rife with cases of land misappropriation. It is not uncommon for local land users to be removed from their land, sometimes violently, with little to no compensation, while officials sell off the land at below market value to land developers and receive kickbacks.

According to Transparency International 2008, widespread corruption in connection with the resettlement funds of Three Gorges Dam Project has led to resettlement compensation for the 1.4 million displaced people being significantly reduced. Residents of Hubei Province staged a protest because they only received CNY 5,000 out of the CNY 38,000 they were each promised in compensation.

Business Corruption

Land administration departments in China are involved in several different types of corruption. One type is bribe-taking in the awarding of land use rights. Companies should note that this is the most common type of corruption involving land. However, there are also examples of land departments being much more entrepreneurial in grooming areas for rent extraction. For example, authorities urge entrepreneurs to illegally build on land originally intended for agricultural use, whereupon they extort money from these same entrepreneurs to protect them from being charged with improper land use.

According to observers, officials in poorer areas tend to be more corrupt, and this is also true for land administration authorities.

Political Corruption

The Chinese state is deeply involved in the land market, as it controls land prices and regulates real estate development. This system (state control over land prices) opens up for the practice of expropriating land in order to sell it below the set price in exchange for bribes.

The great number of corruption cases connected to land use rights has inspired the Chinese leadership to reform the private property law adopted in March 2007. There are countless cases of bribery in the process of securing land use rights over particular plots of land. If the new law is properly formulated and finally implemented, China will have a better chance of curbing corruption in this area. In 2007, there were 2,700 arrests of local officials who illegally developed land or illegally sold land for development.

Former Shanghai CCP Secretary Chen Liangyu used his position to ensure that his brother could engage in illegal land dealings that resulted in the loss of CNY 344 million of state funds. Another major case was the downfall of Chen Xitong, the former Mayor of Beijing (1995), who took bribes from companies in order to secure land deals.

The Three Gorges Dam Project suffered from widespread corruption with the resettlement funds set aside to compensate the displaced people. In 2005, the authorities announced that 349 people, including 166 officials, had been convicted of embezzlement of the resettlement funds. According to Transparency International 2008, close to CNY 59 million had been embezzled, misappropriated or illegally used. However, the authorities reportedly managed to recover CNY 43 million.

Frequency

The World Bank & IFC: Doing Business 2010:
- It takes 4 procedures, 29 days and a cost of a little over 3% of the property value on average to register property in China.

World Economic Forum: The Global Competitiveness Report 2009-2010:
- Business executives give the protection of property rights in China, including financial assets, a score of 5.2 on a 7-point scale (1 being 'very weak' and 7 'very strong').

Minxin Pei: Corruption Threatens China's Future 2007:
- A 2006 survey of 3,067 corruption cases revealed that approximately half were related to land transactions or infrastructure projects.

- A 2005 survey of 16 cities by the Ministry of Land Resources showed that about half of the land used for development was obtained illegally.

- According to the Ministry of Land Resources, more than one million cases of illegal acquisition of land were discovered between 1999 and 2005.

Tax Administration

Business Corruption

The tax system in China, due to its brief history, is still not well-developed. According to Global Integrity 2008, tax laws are not always enforced uniformly or without discrimination. Corruption is common in tax administration. There are examples of bribes being paid to secure tax exemptions or reductions, to make tax officials ignore tax evasions, and to secure the cooperation of tax officials in tax scams.

Companies should note that tax regulations may vary from one locality to the next. Localities interpret and implement taxation regulations differently, which means that companies need to investigate what taxation regulations apply for the particular locality(ies) in which they operate. The general rule is that the further away from the coastal areas in which FDI is highest one goes the less routine the tax system will be. Hence, tax administration in the poorer areas of China is more prone to corruption.

Frequency

The World Bank & IFC: Doing Business 2010:
- A medium-sized company can expect to pay an average of 7 different taxes, and spend 504 hours a year managing the tax burden.

- The total tax rate is estimated to be 78.5% of the profit.

World Economic Forum: The Global Competitiveness Report 2009-2010:
- Companies identify tax regulations as the third most problematic factor for doing business in China.

Customs Administration

Business Corruption

Global Integrity 2008 reports that customs and excise laws are not always enforced uniformly or without discrimination. Companies should know that corruption is widespread in the Chinese customs department. There have been cases where customs departments have been directly implicated in smuggling activities.

Read about a 2008 corruption case related to customs in China here (in Chinese).

Frequency

The World Bank & IFC: Doing Business 2010:
- For a standardised export shipment, 7 documents are needed, and the process takes an average of 21 days at an average cost of USD 500 per container.

- For a standardised import shipment, 5 documents are needed, and it the process takes an average of 24 days at an average cost of USD 545 per container.

World Economic Forum: The Global Competitiveness Report 2009-2010:
- Business executives in China give the customs procedures a score of 4.6 on a 7-point scale (1 being 'extremely inefficient' and 7 being 'extremely efficient').

Public Procurement and Contracting

Individual Corruption

Citizens, particularly in the interior provinces, hold local officials in low esteem. In the wake of Sichuan earthquake in spring 2008, several press reports portrayed an angry population that blamed the corrupt behaviour of the local officials for the collapse of many public buildings. Chinese builders with a public contract often subcontract the work, which has led to substandard material and, consequently, unsafe buildings. This kind of subcontracting is illegal, but common, and all the while each contractor takes a cut of the deal.

See more on public procurement under 'Public Anti-Corruption Initiatives' in the Initiatives section.

Business Corruption

The majority of companies in China expect to encounter corruption in connection with public procurement, and bribery in order to win a contract is not uncommon. Furthermore, there are many cases of excessive 'wining and dining' of government officials in order to obtain a government contract, and that can be construed as corruption.

The Government Procurement Law gives preference to domestic goods and services, making it very difficult for foreign suppliers to obtain contracts. Companies are recommended to use a specialised public procurement due diligence tool in order to help mitigate the corruption risks associated with public procurement in China.

The transportation administrations in local governments are considered to be most affected by corruption. Transportation administrations deal with investment in interprovincial roads and other transportation infrastructure projects. The official bidding procedures have often not been respected, and a long line of transportation bureau chiefs and deputies have been accused of corruption and abuse of office (e.g. in Guangdong, Sichuan, Henan, Anhui, Hebei, Hunan and Zhejiang provinces).

See more on public procurement under 'Public Anti-Corruption Initiatives' in the Initiatives section.

Political Corruption

Even though there is a Government Procurement Law and a Bidding Law intended to ensure fair and transparent procedures, it appears that local government offices are able to circumvent these laws either to further their own interests or because of local protectionism. Furthermore, there is evidence that local government officials are unaware of the regulations and requirements concerning procurement and tendering.

There are numerous cases of high-level officials enriching themselves through access to government resources and taking bribes in order to help approve project and contracts. One example is of Liu Zhihua, a former Vice Mayor of Beijing, who was supervising Olympic Construction projects and in charge of urban development in Beijing. He was found guilty of accepting bribes in the amount of USD 1 million, and he was sentenced to death. However, his death sentence will be suspended for 2 years, which in reality means that it might be converted to a life in imprisonment.

See more on public procurement under 'Public Anti-Corruption Initiatives' in the Initiatives section.

Frequency

World Economic Forum: The Global Competitiveness Report 2009-2010:
- Business executives give the diversion of public funds to companies, individuals, or groups due to corruption a score of 3.7 on a 7-point scale (1 being 'very common' and 7 'never occurs').

- Business executives give the favouritism of government officials towards well-connected companies and individuals when deciding upon policies and contracts a score of 3.8 on a 7-point scale (1 being 'always show favouritism' and 7 'never show favouritism').

Environment, Natural Resources and Extractive Industry

Business Corruption

According to Global Integrity 2008, environmental regulations are not enforced uniformly or without discrimination, as corruption leads to enforcement exceptions and inconsistencies.

There are numerous examples of corrupt behaviour within the mining industry. There are several cases of corrupt local officials colluding with owners to grant hazardous mining rights and neglecting safety measures for workers. These practices have resulted in the deaths of several thousand miners.

One particular case obtained worldwide attention when a reporter was beaten to death while investigating a mine that disregarded safety rules. The culprits had intended to prevent the reporter from publishing the story.

The rainforests of southwest China are threatened because of the clearing of forest lands by rubber companies. Farmers accuse local officials of corruption and collusion with rubber companies in destroying protected forests.

Political Corruption

In July 2009, the media reported that Chen Tonghai, former head of Sinopec, the state-owned oil refining company and one of China's ten biggest companies, was sentenced to death for accepting bribes in the amount of more than CNY 185 million. However, his death sentence was changed to a life sentence. The fact that one of the most powerful and well-connected leaders of a state-owned company was convicted sends a strong signal to other leaders of large state-owned companies about how serious the Chinese state takes corruption.

It also sent a signal to the British-Australian mining company, Rio Tinto, which on 5 July 2009 had its China-based executive, Stern Hu, and three other Chinese nationals working for Rio Tinto arrested in China for suspected industrial espionage and stealing of state secrets.

The media reported that Rio Tinto had colluded with Chinese executives from China's major steel mills in getting direct long-term contracts with Chinese domestic companies. The China Iron and Steel Association (CISA), forbid these contracts as they would influence the ongoing iron ore price negotiation. The controversial point in this case was whether it should be defined as a case of commercial corruption or of state secret and espionage, as this both involved state-owned companies and a key strategic industry in China's development.

The Rio Tinto affair shocked the steel market as well as foreign companies, and set off a diplomatic crisis between China and Australia. After six weeks of detention, it was announced that the Rio Tinto employees in question would be charged with commercial bribery. For more details of the case, please see the EAI Backgound Brief 468.

In the National Audit Office National Audit Report No. 7 2008, China's Auditor General identified the State Environment Protection Administration and the Water Diversion Office as among the many major departments and agencies that had embezzled government funds. Generally, the cost of corruption in China can be directly seen in the degradation of the environment. Corrupt officials, the inefficiencies of public institutions, and a low morale in the public system have resulted in flawed and short-sighted waste management and environmental protection.

Mines are often located in the more impoverished regions of China, and mining operations are a major source of revenues for local governments. Because of this, local governments often disregard central government orders to close mines.

Banking

Individual Corruption

According to Mixin Pei 2007, it is not uncommon to pay bribes to obtain a loan approval in China. According to some estimates, borrowers pay bribes that equal 9% of the loan amount.

Business Corruption

According to the World Economic Forum Global Competitiveness Report 2009-2010, access to financing is stated by business executives to be the most problematic factor for doing business in China, and the Chinese financial sector is generally viewed as an obstacle for China's competitiveness. According to reports, such as Minxin Pei 2007, the banking sector is rife with corruption and fraud. According to the National Audit Office National Audit Report 2008 on the banking sector, banks lend out big quantities of falsified private mortgage loans. This manifests itself in bank officials accepting bribes in order to give loans that are larger and at a lower interest rate than regulations permit. The industry also suffers from a lack of due diligence in verifying commercial paper transactions and inadequate oversight of financial accounts.

The banking sector is fighting an uphill battle against corrupt behaviour among bank officials. Within the last few years, around 7,000 people working in the banking sector have been dismissed and prosecuted for illegal activities, of which more than 300 were senior officials. The National Audit Office National Audit Report 2008 on banks revealed and referred to the judiciary illegalities and crimes amounting to CNY 5.672 billion in state losses. For instance, from 2004 to 2006, Zheng Fenglai, Vice Governor of a branch of the Agricultural Bank of China (ABC), and Liu Fude, chief of another ABC sub-branch, through means of loans and false discounting, misappropriated a total CNY 3.1 billion of bank funds and lent the funds to some private companies and individuals for their use. In July 2006, they, without authorisation, granted the same companies and individuals CNY 218 million in loans to be used for paying back the misappropriated funds. At the time of the audit and after the repayment deadline had passed, CNY 189 million of the above loans had still not been recovered and an additional CNY 6.54 million was still owed in interest.

Another prominent example comes from China Construction Bank, one of the larger state-owned banks, whose chairman, Zhang Enzhao, was sentenced to 15 years in prison for taking bribes. His predecessor, Wang Xuebing, received a 12-year prison sentence in 2003.

Banks tend to prefer to extend loans to state companies. Hence, it is often difficult for private companies to obtain loans.

Political Corruption

The banks in China are not independent. Rather, they operate as an extension of the state and the CCP. The banks have had difficulties with corrupt practices as they have been subject to economic reforms and a transition from a socialist 'quota-based' system to a capitalist one. They have not yet fully realised the methods by which they can operate profitably and simultaneously meet China's WTO commitments.

According to Mixin Pei 2007, corruption in the financial sector has led to an estimated loss of USD 500 billion.

Frequency

World Economic Forum: Global Competitiveness Report 2009-2010:
- Business executives in China give the banks the score 5.2 on a 7-point scale (1 being 'insolvent and require government bailout' and 7 'generally healthy with sound balance sheets').

Minxin Pei: Corruption Threatens China's Future 2007:
- In 2004, CNY 584 billion in misused bank funds were discovered.

- In 2005, the amount of misused bank funds had increased to CNY 767 billion.

- A 2003 survey of 3,561 individuals showed that 82% believed that corruption was pervasive or quite pervasive in financial institutions.

Public Anti-Corruption Initiatives

  • Legislation: According to Chapter 8 of the Criminal Law (last amended in 2006), both active and passive corruption in the public sector are criminalised, as well as extortion and money laundering. Furthermore it is illegal for a civil servant to in anyway abuse his/her position or public property and money for private gains. As highlighted by the US Department of State 2009, China's domestic legislation does not explicitly state that it is illegal to bribe a foreign official overseas. However, the principle of extraterritoriality is applied in Chinese criminal law, meaning that a Chinese citizen that commits a crime punishable by Chinese law outside Chinese territory, such as bribing a foreign official overseas, is guilty of an offence (the Criminal Law, Chapter 1). Furthermore, China has signed and ratified the United Nations Convention against Corruption (UNCAC), including the article about bribing of foreign officials. China ratified the UNCAC in January 2006 with a reservation about not being bound by the convention's second paragraph of Article 66. Therefore, China is exempt from this article which states that if two state parties disagree on the application of the UNCAC, the dispute may be referred to the International Court. Chinese authorities have also been very firm in opposing any interference in China's domestic affairs. However, China seems committed to the UNCAC and, as symbol of the Chinese leadership's commitment to combating corruption, the country hosts the International Association of Anti-Corruption Authorities (IAACA) headquarters in Beijing. The IAACA's main purpose is to support the implementation of the UNCAC. China, having made the transition to a market economy, found a need to regulate the private sector and introduced the Unfair Competition Law 1993 to this avail. This law covers private sector corruption and clearly stipulates that bribery by private companies and managers to obtain undue advantages is illegal. The Regulations on Combating Money Laundering by Financial Institutions 2003 are intended to promote financial accountability. In 2007, China adopted the Regulations on Open Government Information, which is equivalent to a freedom of information act. These regulations, if properly enforced, would provide much more transparency in governance, as they obligate government bodies to disseminate information to the public. However, the regulations also contain articles that give the government the right to decide which information is fit to be disseminated. For example, Article 8 specifically excludes any information that may threaten national security, public order, economic security and social stability. Access the Lexadin World Law Guide for a collection of legislation in China.

  • Government Strategies: Since China ratified the United Nations Convention against Corruption in 2006, the country has strengthened its anti-corruption policies. Furthermore, the authorities have intensified international cooperation and have been successful in recovering money that corrupt government officials have embezzled abroad. The Politbureau of the ruling CCP passed a five-year plan in April 2008 for the prevention and punishment of corruption, which signifies a change from solely focusing on punitive actions to combining prevention (education and supervision) with punishment. The Criminal Law is being amended to include provisions for the immediate family members of government officials to be imprisoned up to 7 years if they abuse the official's position to get bribes or other illegal financial benefits.

  • Anti-Corruption Agency: China does not have any independent anti-corruption agencies. However, the Central Committee of Discipline Inspection (CCDI) of the CCP is responsible for combating corruption and ensuring integrity among CCP cadres. In this capacity, the CCDI operates as the central control body against corruption within the government, as most government officials (and all those in the highest posts) are CCP members. In 2005, the CCDI made public guidelines for establishing a national anti-corruption system. The system consists of three dimensions: ethics education, institutional accountability and civil monitoring. However, a major paradox of internal investigation in China's highly stratified and hierarchical government structures is that internal investigators must investigate top party officials who are either responsible for having appointed the members of the CCDI or who are simply higher-ranking than the investigators themselves, thereby preventing access.

  • National Bureau of Corruption Prevention (NBCP): The NBCP was established in September 2007 as a government anti-corruption bureau under the Ministry of Supervision. This came about after the Chinese government set up an interministerial working group in June 2006 to come up with a plan to make China's legal system comply with the United Nations Convention against Corruption. The NBCP is supposed to analyse the roots of corruption in order to develop measures to prevent it. Another purpose of the NBCP is to ensure efficient corruption prevention by assessing new policies in order to find loopholes that could give rise to corruption. The NBCP is also supposed to guide anti-corruption work in both the public and private sector. However, it is not authorised to make investigations into individual cases. The NBCP seems to be focused on international cooperation with regard to anti-corruption work. A great deal of resources appear to be spent on awareness-raising and public information about cases. One should note that the NBCP is by no means an independent organisation.

  • Office of the Ombudsman: The Ministry of Supervision functions like an Ombudsman, among its other mandates. According to the Global Integrity 2008, the Administrative Supervision Law 2007 stipulates that supervisory bodies are established at or above the county level. Supervisory bodies are units that exercise the function of supervision on behalf of the people's governments, supervising administrative units and public officials of the state and other persons working in a state unit. The supervisory organ under the State Council is in charge of supervision throughout China and local supervisory organs at or above the county level exercise the equivalent supervision at local levels. Citizens can complain to these supervisory bodies when their rights have been violated or ignored. Civil servants can appeal to the supervisory organ at the same level in which they work or to a higher level supervisory organ.

  • National Audit Office (NAO): The NAO has been active in investigating and exposing cases of corruption, using methods such as open auditing. The NAO publishes reports, but withholds large quantities of information (out of all together 115,600 audit reports only 3,140 were made available to the public). Although still insufficient, the practice of open auditing should be taken as a sign that the Chinese authorities aim for increasing transparency in their procedures.

  • E-Governance: Although e-governance is still a very recent measure in the anti-corruption drive, the Chinese leadership considers e-governance to be an important element of government reform and a way to increase efficiency and accountability. On 1 January 2006, China launched the central government website. The website contains links to all provincial and city-level governments. China has approximately 100,000 government web portals. The content on most government websites is only written in simplified Chinese characters, but some websites, including those of major cities, are also provided in English. Most websites are not interactive, but function instead as one-way, top-down communication channels.

  • Public Procurement: China's Government Procurement Law 2002 took effect in January 2003. The law seeks to secure greater transparency in the government procurement process. It is modelled on the United Nations Model Law on Procurement of Goods, Construction and Services. However, the Government Procurement Law states that priority should be given to the purchasing of local goods, services, and construction (Art. 10), and thus essentially excludes foreign suppliers. The US-China Business Council 2009 published a list of where in China 'buy local' policies are in effect. China has not joined the World Trade Organisation's Government Procurement Agreement, and therefore does not violate the WTO rules when it includes clauses about the preference for procuring domestic products. China's Government Procurement Law covers conflict of interest for procurement officials. However, according to Global Integrity 2008, there is no mechanism in place to monitor that the conflict of interest regulations are upheld, except for the Tangible Construction Markets (TCMs). In major Chinese cities, TCMs are established as high-tech one-stop shops in the attempt to free construction tenders of corruption in the bidding process. According to law, major projects must be awarded via competitive bidding. Unsuccessful bidding companies have the possibility to challenge procurement decisions through judicial recourse. Companies that have violated the procurement law by, for instance, engaging in bribery, risk being excluded from future bidding. The enforcement of the law seems to be somewhat weak, as companies maintain that government procurement is still rife with corruption. It is suspected that many tenders are either not publicly announced or that open bidding takes place only on a pro forma basis, with the decision of who will be awarded the contract having been decided beforehand. Other laws that apply to public procurement are the Contract Law, the Public Bidding Law and the Law Against Unfair Competition. Several regulations also exist regarding the financing of government procurement, supervision of government procurement agents, and registration of suppliers.

  • Whistle-Blowing: Article 41 of the Chinese Constitution ensures whistleblower protection. The constitution ensures the right of all citizens to report unlawful conduct and forbids retaliation. The national Chinese leadership has publicly encouraged citizens to report misconduct by CCP members. Nevertheless, this is no guarantee for whistleblowers' safety. 'Blowing the whistle' on corruption and other unlawful activities is done at considerable personal risk, because there is weak enforcement of whistleblower protections in China. This is especially true in rural China, where much corruption involves powerful, far-reaching local officials who also control the channels for reporting injustices. In an attempt to get the public to report cases of corrupt behaviour and other crimes, the Central Committee of Discipline Inspection and the Ministry of Public Security have opened telephone hotlines as well as special websites (in Chinese).

  • General Comments on Public Anti-Corruption Initiatives: China seems to be making sincere attempts at and also some progress in enhancing transparency in governance. One of the most important steps in this process is to make the decision to allow the public to access information concerning government decisions and decision-making. However, China has just initiated the transparency process, and the question remains whether or not the Chinese leadership is genuinely committed and will implement lasting anti-corruption measures that will apply to all levels of Chinese society. Despite the many flaws in the legal system, Chinese citizens are increasingly using it, and Chinese lawyers are also filing suits that are testing the system. For example, the law that allows greater access to government information is being used against the police in an attempt to reveal how they detain people without due process by sending them to 'reeducation through labour' camps. One of the main challenges for the central government is to overcome the resistance to reforms and attempts to increase transparency that are found among local civil servants and other interest groups that stand to gain from an opaque system and unequal access to resources and influence.

Private Anti-Corruption Initiatives

  • Media: The belief that China's media environment is still very restricted was again confirmed during the 2008 Olympic Games, over which the media suffered from tight government control. Already by December 2006, because of the Olympics, new regulations were announced permitting foreign journalists to conduct interviews anywhere in the country without prior permission from local officials. The rules were set to expire on 17 October 2008; however, they were never completely implemented. There is presently no privately owned media in China. The media is controlled by the CCP's propaganda departments. The media functions as an important tool in the campaign to curb corruption, and critical exposés of economic corruption and crime are publicised with the consent of the ruling party, the CCP. The media is allowed some freedom to expose bureaucratic mismanagement or abuse so long as it refrains from criticising CCP ideology and sovereignty. Two cases of journalists investigating corruption serve as an illustration of the danger attached to investigating officials who have the opportunity to illegally enrich themselves, and control police and courts. On two separate occasions in December 2008, journalists investigating corruption cases were seized and detained by the police and accused of taking bribes. According to numerous reports on the subject, China's media is also corrupt. Journalists and people posing as journalists demand 'hush money' in order to not go public with damaging stories or information. The Internet is tightly controlled. Chinese authorities censor webpages, web logs, online discussion forums, university bulletin board systems and e-mail messages. The media situation in China has been exacerbated further by international Internet companies' cooperation with the Chinese authorities in revealing the identities of Chinese Internet bloggers. One example of this is Yahoo, whose act of sharing the names and identities of bloggers with the authorities led to the arrest and possible torture of several political dissidents, the journalist Shi Tao and others in China. China is near the bottom of the Reporters Without Borders Worldwide Press Freedom Index 2009, ranking 168th out of 175 countries, while Freedom House 2009 ranks China 181st out of 195 countries in relation to press freedom and describes the country's press environment as 'not free'. According to several observers, the limitations on freedom of the press in China are a major cause behind the lack of effectiveness of anti-corruption measures.

  • Civil Society: The Chinese state and the CCP penetrate all organisations and movements, and also help shape them. China attempts to register and monitor all NGOs, interest groups and social organisations operating within its borders. In 2006, China had 346,000 registered NGOs, but, according to reports, less than 25% of the environmental organisations were formally registered. The government tolerates NGOs and activism in areas that it does not consider politically threatening, such as the opening and running of orphanages, and dealing with education for rural and poor children. NGOs dealing with causes that may attract foreign attention and support which Chinese authorities might find compromising meet many restrictions from the authorities. Groups dealing with transparency issues, human rights, environmental protection and migrant workers are closely monitored and have very limited room to operate.

  • China Business Leader Forum (CBLF): The CBLF was established in 2005. It came about as a result of a collaborative between the International Business Leader Forum and Renmin University. It is a forum where foreign and Chinese business leaders can discuss how to improve business standards, including combating corruption. Their focus is on how the private sector can positively contribute to this. See the related Business Fighting Corruption case.

Resources

The websites below provide useful facts on China as well as contacts and tools for companies operating in China:

 

Sources for further reading:

Conventions and Indices

UNCAC Status: Signed 10 December 2003. Ratified 13 January 2006.

Status on UNCAC Implementation
This field describes the country's status on the United Nations Convention against Corruption. Please note any declarations and reservations made upon ratification. The list of signatories can be found on the UNODC website. Read Transparency International's summary and assessment of the UNCAC.

 

Other Relevant Conventions or Treaties:

 

Transparency CPI: 2009: 79/180 (Score: 3.6)

Transparency CPI
This field consists of the score for the country in question on the Corruption Perceptions Index from Transparency International as well as its ranking.

 

World Bank CORR Index (-2.5 - +2.5): 2008: -0.44

World Bank Corruption Index
This field consists of the score for the country in question on the 'Control of Corruption' indicator in the World Bank Governance Research Indicator Country Snapshot (GRICS): 1996-2008.

 

OECD Country Risk Classification (0-7): 2009: 2

Country Risk Classification
The classification of countries by risk category has the aim of providing OECD countries with a basis for calculating the premium interest rate to be charged to cover the risk of non-repayment of export credits. Countries are placed in risk categories 0 - 7, with 0 being the lowest risk category and thus the least expensive. Conversely, premium group 7 is the highest risk category. Each classification is comprised of 2 components: 1) an assessment of the country's economic/financial situation, and 2) its overall political stability. Access the complete list of OECD Country Risk Classification figures.

 

Data Verification:

Latest update: November 2009

Data verified by: Global Advice Network

Information Network

 

Relevant Organisations

 

Transparency International China

School of Public Policy and Management
Tsinghua University
Beijing 100084

Tel/Fax: +86 10 6277 2999
E-mail:

NGO. Transparency International national chapter. Anti-Corruption and Governance Research Centre.

American Chamber of Commerce in the People's Republic of China (Amcham-China)

The Office Park, Tower AB, 6th Floor
No. 10 Jintongxi Road,
Beijing 100020

Tel: +86 10 8519 0800
Fax: +86 10 8519 0899
E-mail: amcham(at)amchamchina.org

An American Chamber of Commerce that represents more than 900 companies and individuals doing business in China.

ICC China (CCOIC)

1 Fu Xing Men Wai Street
Beijing 100860

Tel: +86 10 6804 1275
Fax: +86 10 6802 5737
E-mail: intlgj(at)ccpit.org

China national chapter of ICC.

 

Partner Embassies

 

Embassy of Denmark

1 Dong Wu Jie
San Li Tun
Beijing 100600

Tel: +86 10 8532 9900
Fax: +86 10 8532 9999
E-mail: bjsamb(at)um.dk

Embassy.

Embassy of the Netherlands

4 Liangmahe Nanlu 
Beijing 100600

Tel: +86 10 8532 0200 / 6532 1131
Fax: +86 10 8532 0300 / 6532 4689
E-mail: pek(at)minbuza.nl

Embassy.

Embassy of Norway

1 Dong Yi Jie
San Li Tun
Beijing 100600

Tel: +86 10 8531 9600
Fax: +86 10 6532 2392
Fax visa: +86 10 6532 2140
E-mail: emb.beijing(at)mfa.no

Embassy.

Embassy of Sweden

3 Dongzhimenwai Dajie
Sanlitun
Chaoyang District
Beijing 100600

Tel: +86 10 6532 9790
Fax: +86 10 6532 5008
E-mail: ambassaden.peking(at)foreign.ministry.se

Embassy.

British Embassy

11 Guang Hua Lu
Jian Guo Men Mai
Beijing 100600

Tel: +86 10 5192 4000
Fax: +86 10 6532 1938/1939
E-mail: info(at)britishcentre.org.cn / commercialmail.beijing(at)fco.gov.uk

Embassy.

Embassy of Austria

Jian Guo Men Wai
Xiu Shui Nan Jie 5
Beijing 100600

Tel: +86 10 6532 2061/2062
Fax: +86 10 6532 1505
E-mail: peking-ob(at)bmeia.gv.at

Embassy.

Country Profile Sources

General Information Sources

Corruption Levels Sources

Judicial System

Police

Licences, Infrastructure and Public Utilities

Land Administration

Tax Administration

Customs Administration

Public Procurement and Contracting

Environment, Natural Resources and Extractive Industry

Banking

Public Anti-Corruption Initiatives Sources

Private Anti-Corruption Initiatives Sources