The Cipher Brief sat down with Rodney Faraon, a partner at Crumpton Group, to get his thoughts on China’s recent corruption crackdown. The former CIA analyst weighed in on President Xi Jinping’s efforts to rid the Community Party of corruption and discussed the implications for Western companies in China.
TCB: What is your take on Xi’s anti-corruption crackdown? At the end of the day, what do you think he is trying to achieve?
RF: I think the primary thing that he is trying to achieve, frankly, is to clean up the Party. There are some ancillary benefits to what he’s doing, but the main issue is that corruption has become endemic within the conduct of business, both private as well as public business, and its just something he needs to address. Now, you can debate the timing. For example, just before Xi Jinping came to power, there were numerous western news media reports about corruption in the system. In fact, Bloomberg noted Xi’s family had about $375 or so million dollars floating around. Is it a coincidence that they are Xi Jinping’s family? So to some extent, I think that his desire to crackdown from the get-go, as soon as he took office, reflects his intent to change the reputation of the Party, and also to deflect some criticism off himself. So those are probably the key issues. It wasn’t just the western media, either. The power of the Internet inside China is unpredictable, and in fact, there were stories of websites set up specifically to highlight the wealth of Communist Party and military officials. One showed the watches that officials were wearing, and they would post pictures of these Rolexes next to the person’s face to ‘name and shame.’ If these folks are truly Communist Party state officials, how is it that they are able to afford such extravagance? So I think primarily, that it is to clean up the Party’s reputation, it is to help the future advance of the business of the Party as well as the economy, and it was also to deflect a lot of the criticisms and the attention that were coming on Xi.
TCB: Personal relationships with the Chinese, referred to as guanxi, are part and parcel of doing business in China. Do you think eliminating corruption in China is even possible?
RF: No. It’s never going to be possible, but what you can do is establish ground rules. That’s the thing about China, things come in phases. They may not be formal government regulations, but there are regulations on the books that prohibit this sort of thing. Now, the degree of attention, the degree of enforcement depends on the current political wave. So at some points things are permitted to happen. At some points they are not, and you just have to monitor what happens here. There’s a key difference, though, between corruption in China and elsewhere. I was speaking with a very successful Russian businessman a few years ago, and I was talking to him about the problems of corruption in China and doing business there. He sat me down and said, ‘RF, there’s a difference between Chinese corruption and Russian corruption. In China, you know where the limits are. In Russia, there are no rules.’
TCB: Based on your knowledge and your conversations with business contacts in China, what impact is the crackdown having on short-term and long-term stability and on the domestic economy?
RF: Let’s look at it from a few different angles. One of the ancillary benefits of the anti-corruption crackdown is that it is increasingly being used as a tool to try to breakdown vested interests. And what I mean by vested interests are those interests that are in the way of economic reform and the other reforms that Xi Jinping wants to implement. That’s one aspect of it. Xi Jinping is also targeting some of his own political rivals, which is natural, or at least holding the anti-corruption campaign as a sword of Damocles. But I think that in terms of business, when you eliminate some of the vested interests and you eliminate some of the opposition to your goals, that should help in paving the way for the reforms and should enhance the stability of the country, because the growth of the economy is what the Party is depending on to maintain people’s livelihoods and therefore to maintain their satisfaction with the ruling status quo. I think that’s the bottom line. But the anti-corruption campaign itself is actually a brake on business. It’s slowed down consumption. One estimate from 2014 indicates that the anti-corruption campaign had basically slowed the economy down by between .01% and .02% of GDP, because people weren’t buying luxury goods anymore. So, there’s going to be a short term cost, but over the long term, if this campaign works, it could succeed in maintaining that stability and improving the economy.
TCB: What advice would you give to western businesses currently operating in China, how should they view the crackdown, and how does it change the way that they either approach China or the way that they do business on the ground?
RF: The FCPA (Foreign Corrupt Practices Act) has always been something that is at the forefront of every businessperson’s mind particularly when they come to China. But again, you have to understand what the rules of the road are, and the only way to do that is to have on the ground knowledge or intelligence about what’s happening. How do you interpret current events and how it might specifically affect you? And it may affect foreign businesses in different ways depending on this actor. So my advice would be: you’ve got to understand China. You have to watch the ebbs and flows, and just have that local knowledge to understand how the political culture works.
TCB: Do you think western businesses were benefitting from the corruption atmosphere in China? Were they able to buy into the system and profit from that? Do you think that businesses will be harmed as corruption is ridded out of China?
RF: Western businesses really didn’t have to worry about demand for their technology and their know-how. What they had to worry about was their competitors—other foreign businesses and other countries whose firms and companies don’t have the same sorts of restrictions like FCPA that American businesses have for example. That led to an uneven playing field ironically from the foreign side and not the Chinese side. What the anti-corruption campaign does, in my view, is it levels the playing field a little bit because the Chinese government now is responsible for applying the rules equally to every company that comes to them. Fundamentally, I think that over the long-term, it is going to help western business because it makes things much more predictable and transparent. In the short term, it is going to slow things down bureaucratically. Officials are afraid to approve deals because they don’t want the perception that they were bribed or that there was some corruption involved. I think that’s basically done now.
TCB: Do you think that the economy is suffering because the anti-corruption campaign legitimizes Xi’s actions? You’re not as suspicious maybe of his motives?
RF: I think it’s a long-term investment. Let’s look at who Xi Jinping put in charge of the anti-corruption campaign, a man named Wang Qishan, who was vice premier in the previous administration in charge of the economy. He is also a troubleshooter, a crisis manager. He’s also one of Xi Jinping’s oldest friends from school days I believe. And I think that with Wang’s economic understanding, they probably were able to predict that the degree of effect it would have on the economy would be manageable and something that over the long-term is important for them to continue doing.
TCB: Of the four main people he’s brought down, Guo Boxing and Xu Caihou are two of the most official people in the military. If they are both corrupt, what part of the Chinese military isn’t corrupt? That seems like it would lead to more suspicion from the general public to the military. Do you think that’s having any effect in China?
RF: The Chinese have a saying, shājījǐnghóu, which is ‘kill the chicken in front of the monkey,’ this could happen to you if you don’t shape up. And in the military, by finding the highest profile individuals to take down, I think it has that type of effect. Also you’re looking at Gu Junshan, the Deputy Chief of the Logistics Department. That’s where you’re going to see most of the corruption, because they have access or connections to all the former PLA (People’s Liberation Army) enterprises and businesses. Yes, there might be a perception that the army might be corrupt, but I think that this is going to be a deterrent. Just this past Monday, I don’t know if you saw this, there was an article in People’s Daily, which is one of the official mouthpieces, and it was technically a column written by some midlevel PLA officer. But we all know that the propaganda department controls everything, and these are messages that they want to send out to the people and others. And what he said was, in essence, ‘to all of you retired senior officials, stay retired. Don’t try to interfere in the political system,’ which suggests to me that they, Guo, Xu, and Gu were trying to do something to interrupt the policy decisions and actions that were happening now. And the veiled threat here is if you don’t stay out of it, we’re going to go investigate you.
