In China, among 100 government officials, 101 of them are corrupt17 April, 2012, 1:27. Posted by Zarathustra
While I usually refrain myself from making comments on the political aspects of China, I can’t help but to reflect on the recent dramatic purging of Bo Xilai. While I am not going to make any economic point regarding the short-term impact of the purging (because there is none, and there are probably better things to be worried about), I do want to talk a little bit about some deeper issues that is very widespread, yet hardly ever mentioned within any economic discussions (and indeed, even I have had this in mind for quite a long time, I have never ever discussed here).
Whenever I got a chance to talk to people in China, I am always amazed by the degree of dissatisfaction people had on the Communist Party (or rather, the understanding that the Communist Party are full of bad guys, but they can do nothing about it). Inflation and high real estate prices are what people are talking about, and corruption is another. Being a corrupt official is a norm for those running the government at all levels. In fact, it has almost be expected that as long as you are a government official, you are automatically corrupt. The only difference is the how corrupt they are. One told me amusingly that:
Among 100 government officials, 101 of them are corrupt.
These people are all corrupt, businessmen are all making fake and/or inferior products and bribing government officials (otherwise they can’t make money), and those underdogs resort to stealing.
Many Chinese people are probably accepting that as a reality, and would even joke that “my son works for the government, and he’s corrupt”, “my son-in-law is a judge, and he is definitely very corrupt, and he drives a BMW”, etc. It might be far-fetched to say that these people are proud to have a corrupt son or daughter, at least they are not ashamed. And as long as the behaviours of those corrupt officials aren’t making any huge negative impact on their own lives, most people actually don’t care a great deal beyond having a few rants when having a tea with friends.
China watchers are all familiar with all these corruption and collusion with richest businessmen of all: real estate developers (that is when the time was good of course). I (and I am sure many analysts) have heard many times from real estate developers bragging how well their relationships are with government officials (read: they have bribed those officials well), so good that they can get land at cheaper prices than they otherwise would be paying for the same spot. Of course, in order to get cheap price on the land, you would have to bribe the officials. And because they have good relationship with government and officials, perhaps it is also much easier to get loans from banks to finance their ambitious Dubai-ish artificial island real estate crap.
The “help” these real estate developers got by bribing government officials goes beyond buying land cheaply and/or getting loans. The other day, one friend told me that one real estate developer has bought a piece of huge land somewhere from the government (of course, they were friends), where some villagers were living there. To cut the long story really short, those villagers were not happy about the compensation they’ve got from the government and the real estate developers, so they were not leaving the place as expected, so the construction workers could not start their work. The government helped the real estate developer to clear the land by calling in some police and beat up the villagers, with a few beaten up to death. The local friend knew about this because the government called in extra security people from a hotel he runs to help with the situation, so that he was present on the ground witnessing the whole thing. Of course, this was all covered up in the media.
This is, of course, part of the reasons that while the central government was really keen to curb home prices, most local governments officials weren’t so enthusiastic on that as illustrated by their half-hearted approach in making up the so-called home prices targets last year (the fact that real estate market did cool is a completely different matter), because it is in their interest to have a booming real estate market, as that means they can get rich, albeit in a rather unethical way. So now that the real estate bubble is burst, left with huge inventories and potential supply in the pipeline (i.e. if developers are still able to build). Developers are all highly leveraged, their financials look awful now as they all borrowed. And what about the people running the government has changed (for whatever reasons) from someone whom developers have bribed to some new blokes that they have no idea who they are?
One of such company is Dalian Shide, which is allegedly going bust (and denied it) after the Chairman, Xu Ming, a friend of Bo Xilai, disappeared. Dalian Shide is said to have set up some real estate investment subsidiaries and a joint venture with Renhe (1387.HK), and aggressively investing in the market. According to the allegation by Caixin, the liabilities outstanding amounted to RMB8 billion, while Ennweekly reported that the company borrowed RMB1.5 billion from a bank using a piece of land that the company did not own as collateral (how do you do that?). But now that the real estate market is cooling quick, the progress of their sales and constructions are all going slow, so they find itself in financial trouble (that’s what the rumour say anything, even though it might be true after all). On the other side, before the purging, Bo Xilai had an apparently thriving political career and, not surprisingly, incredibly rich. The question is only how rich he is (or was). Some reports said that he has allegedly got more than RMB8 billion worth of assets outside of the country. How did he do that? You surely know.
We have been talking about over-investment in China and the economic reasons behind all these. I would speculate, among other reasons, that the over-investment in overly ambitious and extravagant projects are partly due to corruption. Quite simply, the more extravagant things are, the more opportunities to profit.