Capital flight

Controversial central bank report targets corrupt officials

Capital flight

The average corrupt official leaves the country with $7 million

During the National People’s Congress earlier this year, Premier Wen Jiabao gave a review of the government’s performance. It highlighted, among other issues, “rampant corruption in some areas”. The assessment was then posted online for all to see, acknowledging a number of common misdemeanours carried out by those in government – from holding luxurious banquets to abusing an official position for personal gain.

Not all reports on corruption are deemed fit for public consumption. A more detailed investigation into the subject, published last week on the website of the People’s Bank of China, was quickly taken down after it attracted too much negative attention.

The report’s main finding does little to dampen the stereotype of the venal official. It estimates that up to 18,000 bureaucrats have smuggled a total of Rmb800 billion ($123 billion) out of the country, over a 15 year period starting in the mid-nineties. That puts an average amount stolen per head at just under $7 million, an extraordinary amount in a country where city dwellers (better off than their rural counterparts) earned an average $2,900 in disposable income last year.

For officials on the run, the US is the top destination, according to the report. This is usually an option only for the senior figures who have managed to scoop a significant amount of cash. Australia, Canada and the Netherlands are also popular places to start new lives. But officials that have swindled on a smaller scale tend to stay in Asia, often in countries close to China – such as Thailand, Burma, and Malaysia.

In theory, getting all of this cash to an overseas location should be impossible, since capital controls limit the annual funds that an individual can remit out of China to $50,000.

But the report lists a range of tricks that can be used to sidestep the restrictions. On a small scale, it might involve using credit cards abroad or hiring someone to carry the money over the border (at places like Shenzhen or Zhuhai) and then deposit it in bank accounts in Hong Kong or Macau.

Larger sums of cash can cross borders through investment proposals. A manager in a state-owned enterprise might characterise his own money as an offshore corporate investment, when it will only be used for personal profit. Another option is transfer pricing or faking trade documents. Again, illegitimate transfer can be given the appearance of legality.

The Beijing leadership makes frequent commitments to reducing graft in everyday life in China, although a report like the one released by the PBoC gives a sense of the scale of the challenge.

Paradoxically, a major crackdown might actually see more officials abscond, to evade punishment. But the Financial Times suggests that there could be further reasons for a wave of departures from China in the coming months. If Hu Jintao steps down as expected next year, his successor will want to shake up the entire bureaucracy. The ensuing power struggle is bound to uncover some unpleasant truths. Those who think they might fare badly under the new order, could choose to leave early in anticipation of the worst.

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