According to a new Transparency International’s Bribe Payers Index, Chinese companies came in second in the index of firms most likely to pay bribes to get deals around the world.  China is not only exporting corruption to other countries, it is also struggling to control it at home.  According to some reports, more than $220 million of social security funds were recently stolen through an insurance company called Ping An of China.  Protestors were met by hundreds of police officers.  And this is not an isolated incident.

To a casual observer of China, corruption is part of cultural heritage.  We sometimes hear that ridding the country of corruption is pointless because ‘it has always been there’ and because so much is based on relationships rather than rule of law.  From the business perspective, references are sometimes made to corruption in the context of greasing the wheels of commerce and getting things moving when they are stagnant.  Critics of China’s economic transformation view corruption as an inherent problem of capitalism and blame economic reforms for widespread graft.

Such arguments are not limited to China.  People often talk in these terms about other emerging markets where bribery and extortion are widespread. 

While there are disagreements on the root sources, few will argue with the fact that corruption has emerged as the defining element of what is sometimes referred to as the ‘tale of two Chinas.’  There is one China with modern buildings, fancy cars, restaurants, and the latest technology, where people are enjoying the benefits of unprecedented economic growth.  Yet, there is also another China for the less privileged, where people are left on the sidelines watching the train of prosperity pass them by and figuring out how to get by. 

The growing social injustice is putting pressure on government officials and the elites.  There were more than 87,000 public protests last year in China, which certainly makes the problem hard to ignore.

The government has publicly recognized corruption as one of the key issues that needs urgent attention.  It has tried to curb it.  But thousands of executions of public officials have not accomplished much.  Officials still extort bribes, misuse public funds, and engage in questionable deals with companies.  It is indicative of the larger problem that benefits of engaging in corruption outweigh the consequences. 

Widespread corruption is undermining the legitimacy of government and threatening further economic growth.  It is injecting uncertainty into the business climate. 

Foreign investors often find themselves pulled in different directions.  They have to adhere to high governance and transparency standards back home and at the same time navigate the difficult Chinese environment where rule of law remains an idealistic concept, not a reality.

Corruption is a problem for domestic companies.  It is a problem for foreign investors.  It is a problem for Chinese citizens.  And it is certainly a growing problem for the government.

What can be done?

One approach that we’ve seen work in controlling corruption is changing the incentive structure through accountability and transparency measures. 

In China, individual government officials may be caught for engaging in corrupt behavior, but few people are really surprised by corruption cases.  They are often perceived as political battles, an internal punishment of those who refuse to play by the rules. 

Corporate governance, certainly, is one tool that can help to clean up the murky economic environment China.  By making bribes and kickbacks harder to conceal and by injecting ethical standards into the decision-making processes, corporate governance helps to reduce opportunities for corruption.

Public governance is also important.  It involves changing the current political and economic structures.  Today, local government officials have virtually unchecked control over what takes place within their jurisdictions, and they only answer to their superiors in political chain of command.  Getting citizens involved in the governance process and creating checks and balances outside of the political system can help reduce bribery in China.

This also underscores just how important freedom of the media is.  Independent media plays an important role in exposing corruption and channeling feedback from society back to government.  As such, recent moves by the Chinese government to control distribution of information, for example by making New China News Agency a virtual gatekeeper of foreign information, are puzzling.  If corruption is to be reduced, there needs to be less, not more, control over information.

This week, the media reported a planned initial public offering of the Industrial and Commercial Bank of China (ICBC).  However, it is not the IPO that is making the news, but rather the real state of the Chinese banking system.  The banking system is slowly becoming a drag on the economy, supplying inefficient state-owned enterprises with much needed funds and redistributing billions of dollars based on murky reasoning rather than economic efficiency. 

China is certainly moving in the direction of a market economy.  Nonetheless, much remains to be done in building transparency, public and private governance, and the rule of law.  Will the country succeed in doing it gradually or will it come as the result of a crisis?