Corruption Blamed For China Trade Woes

An analysis by Michael Lelyveld
Cars at the entrance of the free trade zone in Shanghai, China, Nov. 28, 2013.

As China's foreign trade falters, there are signs that the government is looking for someone to blame.

So far this year, the country's trade performance has been dismal. In the first 10 months, exports have dropped 2 percent in yuan terms, while imports have plunged 15.2 percent, according to customs figures.

Analysts have cited a host of now-familiar factors, including deflationary energy prices, weakening economic growth and sluggish worldwide demand.

But the government may be casting about for other reasons, combining criticism of a key trade initiative with the latest major targets of its anti-corruption campaign.

On Nov. 10, the Central Commission for Discipline Inspection (CCDI) announced an investigation of Ai Baojun, Shanghai's deputy mayor, on suspicion of violating unspecified disciplinary rules, state media said.

The Ai investigation was reported along with a similarly opaque CCDI probe of Lu Xiwen, deputy chief of the Communist Party of China (CPC) in Beijing.

Both officials were removed from their posts on Nov. 16.

Taken together, the commission's new punishments marked a milestone of sorts.

"Corrupt officials above ministerial level have been found in all 31 provincial regions of the mainland," the official Xinhua news agency said.

After sporadic lulls in the pace of high-profile corruption cases, Xinhua has taken pains to deny that President Xi Jinping's three-year crackdown has run out of steam.

"Back in April and May, when no major corrupt figure was found, some said the campaign had ground to a halt," said a Xinhua commentary.

"No one should underestimate (the) CPC's determination to root out corruption," it said, suggesting pressure to find new targets for the campaign and counter impressions that it may be winding down.

That could explain the CPC's recent expansion of conduct rules that bar activities like membership in golf clubs as grounds for punishment.

Xinhua hinted that the crackdown has shifted its focus "from locating corruption to preventing it."

"Golf and gluttony are now disciplinary violations," it said.

Tens of thousands disciplined

On Nov. 22, the CCDI said that more than 71,000 officials were disciplined under the austerity rules last year.

But there were also hints that the campaign has become a tool for punishing poor execution of central government initiatives, citing corruption as the cause.

In Ai's case, attention has focused on his role as director of the Shanghai Pilot Free Trade Zone (FTZ) Administration Committee, making him responsible for a signature reform initiative of Premier Li Keqiang since 2013.

The FTZ was planned to serve as the laboratory for liberalized trade, investment and monetary measures that would gradually spread throughout China.

Similar FTZs have since been opened in the port of Tianjin and coastal provinces of Guangdong and Fujian to boost trade and financial flows with markets including Macao, Hong Kong and Taiwan.

On the surface, the Shanghai experiment has been a success.

By October, the zone included 1,959 foreign-funded enterprises with a contract value of more than U.S. $30 billion (191.5 billion yuan). Chinese firms had signed 596 foreign investment deals valued at U.S. $17.2 billion (109.8 billion yuan), the Ministry of Commerce said.

Incentives have included a "negative list" for foreign investment, taking the guesswork out of off-limit sectors, streamlined customs procedures and a recent plan to allow direct overseas investment by "qualified" individuals with eased capital controls.

But not far below the surface, the government has shown dissatisfaction with the experiment.

Most of the enterprises registered in the zone were "disappointed with the slow pace of reform," the official English-language China Daily reported after Xi toured the FTZ last year.

In a survey last March by the American Chamber of Commerce, 75 percent of respondents said the FTZ offered no tangible benefits to their businesses, the online publication Quartz reported.

And the most recent announcement from the People's Bank of China (PBOC) of eased investment rules and capital controls represented a step back from earlier reform plans, The Wall Street Journal said.

The PBOC has set no time frame for the measures, which would benefit "only a handful of people," China Daily reported. Officials are said to be worried by the risk of massive capital outflow.

The setbacks may feed suspicions that the FTZ is doing little more than attracting trade that would take place outside the zone anyway.

In the first 10 months, Shanghai's total trade fell 2 percent from a year earlier, according to the FTZ's website.

The performance is better than the 8-percent decline for the entire country but still a far cry from the government's goal of a 6-percent increase for the year.

If the government was looking to the FTZ as a way to bring back the boom times of double-digit trade growth, it is likely to be disappointed.

"The Shanghai FTZ has been troubled from the outset," said Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute in Washington, noting Premier Li has largely kept his distance from what was supposed to be his pet project.

Li wants 'stronger reforms'

On a visit to the Shanghai offices of the PBOC last week, Li urged "stronger reforms" and further investment access to financial service institutions in the zone, Xinhua reported.

"The pace of reform has been very slow," said Scissors. "Despite all the newly registered firms, no one spends any money because they don't see any gain from doing so," he said.

Most of the reluctance to press ahead with more significant market-opening reforms seems to be coming from Beijing, but Ai's ouster has highlighted troubles at the FTZ, also known as the free trade area.

"The fall of Ai, head of the Shanghai free trade area (FTA) — a symbolic reform initiative — has cast a shadow over the FTA," Xinhua said. "How can reform succeed if the FTA stewardship was riddled with holes from the start?"

It is unclear whether Ai will be made the main scapegoat for China's trade slowdown at the national level, but reports suggest that his alleged violations stem from his prior career in the steel industry rather than his political posts in Shanghai, which started in 2007.

According to sources close to the CCDI investigation quoted by the South China Morning Post, the probe focused on "economic crimes" during Ai's tenure at the Baosteel Group, one of China's biggest steelmakers.

Dai Haibo, the FTZ's former executive deputy director, is also being investigated for graft, the paper said.

Ai may have been targeted because of links to the family of former President Jiang Zemin, who previously served as party secretary of Shanghai, the website of the Epoch Times said.

While corruption in China has been widespread, the Shanghai cases may be providing a convenient cover for problems that might otherwise be traced to central government backtracking on its own initiatives.

"Unless it wasn't actually meant to accomplish anything, the Shanghai FTZ is clearly a failure to date. There are signs of a political dispute over this, and Ai taking the fall purely on policy grounds would be no surprise," Scissors said.


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