Party goes on until the music stops

Corruption is a way of life . . . a migrant worker returning home for the Chinese New Year holidays. The country has become the most inequitable in Asia.

Corruption is a way of life . . . a migrant worker returning home for the Chinese New Year holidays.
The country has become the most inequitable in Asia.
Photo: AFP
John Garnaut in Anhui Province
January 17, 2009


COUNTY officials in a forgotten corner of one of China's poorest provinces have finally solved what they have been treating as their most pressing policy problem. The local government and Communist Party headquarters is on the shaded north side of a mountain, exposed to the cold north wind. The fengshui - the balance of aesthetics, astrology and architecture - is all wrong.

For four years the officials at Mingshan county* (the name has been changed to protect officials, scholars, peasants and businessmen who spoke candidly with the Herald) have tried to build sparkling new offices at the sunny, southern foot of a geometrically pleasing mountain, protected from the north winter wind and facing the southern sun. But higher tiers of government have repeatedly squashed the "face" project as a waste of taxpayers' money.

The Mingshan officials' crusade was not helped by media attention on another group of Anhui local officials building themselves a mini-replica of the US Congress. That local government's Communist Party chief was last month charged for arresting and then murdering the whistleblower.

In October, however, the central government began to worry that China's economic growth was collapsing. It began a dramatic U-turn from sustainable, equitable and "harmonious" development to a new policy that effectively supports GDP growth at all costs.

Suddenly, Mingshan's county government received the green light for its self-aggrandising plans. It sponsored an elaborate fireworks display and erected a large billboard that shows a new industrial park, a five-star hotel (funded by a Chinese Australian) and a sparkling set of government offices in front of a huge lake.

Perfect fengshui dictates that the new building should face south over a body of water. Three years ago the Mingshan government evicted hundreds of peasants from their rice paddies top make way for the building. The billboard shows the southern bank of the lake will be fringed by luxury condominiums.

Officials can spend enormous sums of public money on their own prestige because they wield enormous administrative power and face little accountability.

"China's biggest challenge is to change the relative position of the people and the Government," says Mao Yushi, a prominent public intellectual. "Now the Government dominates the people when it should be the other way around."

Typically, officials cultivate bonds of patronage within the system and claim a large proportion of local economic turnover as "grey income" for themselves. Some, like Mao Yushi, say corruption in China is no worse than other developing countries. Others boldly disagree.

"Corruption is everywhere in China," says Tao Ran, an economist at a prominent government think tank. "The claims that corruption is declining are absolutely not true."

The President, Hu Jintao, has launched regular anti-corruption drives but has so far failed to impose institutional reforms that might deliver results.

Officials in poorer regions milk their central government connections and those in richer areas make their money primarily from appropriating land from peasants and selling it to businesses at enormous mark-ups. "In western China they use all their networks to go to Beijing for transfers and 90 per cent or more is diverted operating costs such as salaries, dinner parties, official cars and constructing government buildings," says Tao. "In eastern China this is also pervasive but they also have 'extra budget revenue' from land sales."

Local governments are legally entitled to forcefully acquire land if they pay fair compensation. The problem is that "fair compensation" in China means whatever the township government wants it to mean.

In Minghsan, the land for the new government offices and an adjacent manufacturing park was acquired in 2006. Dispossessed peasants initially told the Herald they were happy with their compensation deal. "We are rushing towards a moderately prosperous society," said a jobless widow, adopting a formulation favoured by Mr Hu.

But the discussion soon became more forthright. "Thirty per cent of our land compensation from three years ago hasn't been paid," said a woman who gave her family name, Chen. "Our village team leader went to the township government but they just kicked the ball around to each other and gave no answers." The mark-ups and kickbacks on government land deals can be enormous. "The Government paid us 60,000 yuan [$13,300] for the forest land and sold it for 2.4 million," says Ms Chen. "We don't know who they sold it to, but the price was written on the auction board."

On most other transactions, however, officials settle for about 20 per cent. "The greedy ones take 30 per cent, the honest ones 10," says a local source. The informal tax applies every time the Government buys a car, takes it for maintenance or buys new stationery. Professor Yu Kuping, of the Government's Central Translation Bureau, told Chinese media last month that corruption was infesting the few areas that were traditionally sacred.

In Mingshan we are told that 80 per cent of official posts in the county are "auctioned" behind closed doors. The most lucrative and therefore most expensive job is running the main county hospital, with access to fee-paying patients and generous pharmaceutical companies.

Last month a Mingshan vice-mayor was sentenced to 15 years' jail for 67 counts of accepting bribes over a decade. He was only one person in a system that remains unchanged. Local sources say bribe-givers are not prosecuted because they would disclose dozens of other officials they also bribed.

Peverse official incentives are shaping the entire economy. Resources are systematically tilted towards construction because that generates the fastest and largest kick-backs. Manufacturing is also encouraged because it provides an ongoing revenue stream. Public and private sector services are neglected because they are more difficult to milk.

In Anhui province real estate construction rose 64 per cent in the first nine months of last year compared with 2007, according to the Economist Intelligence Unit. The amount of land under construction rose fourfold in the seven years before that. Hefei, the provincial capital, is now a forest of high-rise scaffolding. The central government has just approved a magnificent new international airport, in keeping with the national fashion, although there is no evidence that Anhui needs one. The deserted, four-lane highway that heads south-west out of Hefei is being duplicated into eight.

Peasants develop strategies to reduce their losses when their land gets appropriated. At one village, an hour out of Hefei, they are madly building second and third homes on their village land so they will get better compensation. They are building houses to knock them down again. They call it "growing houses".

Similar patterns can be seen across the country. As corruption has thrived the system has rewarded officials for attracting capital and generating economic activity regardless of utility.

The model has led China to produce manufactured goods for the rest of the world and buildings and infrastructure that people don't need. The systematic bias helps explain why household income and the general welfare of the population has not kept pace with China's 30 years of breakneck growth in the gross domestic product. The country has become the most inequitable in Asia and the most environmentally challenged in the world.

Economic growth collapsed late last year in part because the system encouraged an over-supply of buildings and infrastructure. Now the Government has responded by forcing the country to build more. Building and infrastructure accounts for more than three-quarters of the central government's 4 trillion yuan stimulus package.

The rivers of money may prolong the boom in Anhui province and revive the national economy.


The worry for China, and therefore the world, is that the Government's new economic rescue package simply removes the previous constraints on a model that has already failed. "Unfortunately, the biggest challenge will probably occur after 2010," says the Citigroup economist Huang Yiping.

One day the music will stop, the money will run out, but there is no guarantee officials will halt their predatory behaviour.