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Article / 01 August 2014 at 13:28 GMT

Naked and afraid (of past sales) in China

Managing Director / Asia-analytica Research
China
• Corruption prosecutors are focusing on three industries
• Procurement officials are top of the graft-busters list
• Innocent and guilty alike will have to take media heat and face share price pressure

By Pauline Loong

Now is not a good time to tell shareholders just how successful the company has been in selling to the Chinese government. In fact, now is not a good time to say or do much of anything.

The Party is stepping up its investigations of procurement officials and the multi-national companies that sell to them – encouraged by the draconian anti-corruption legislation in most MNC’s home countries targeting overseas bribery which makes tracking the paper trail easier. It is also the latest twist in the campaign to expose so-called naked officials with family and assets overseas.

Speculation is that this might be the first step to expanding the campaign to encompass the entire state-owned business sector. 

Pharmaceuticals, electric power and software

Receiving priority attention from Chinese investigators are executives at state-owned enterprises or government officials in charge of procurement – especially those in charge of big ticket projects. 

The counterparties in these transactions are also under the microscope. After all, for every buyer, there has to be a seller. For every “corruptee”, there has to be a “corruptor”. The “goodies” that Chinese prosecutors say has been corruptly on offer to clinch sales point to involvement by companies with strong overseas link. 

Inducements include paying for or otherwise supporting the overseas study of the children of targeted officials, arranging expensive foreign holidays, and outright paying money into the official’s foreign bank account.

The head of the corruption prevention department of the Supreme People's Procuratorate took the unusual step of naming the worst-offending sectors involving multi-nationals. In an interview published this morning by China Daily, he said: "The worst-hit areas in terms of corruption are pharmaceuticals, the electric power sector and software." 

He added that because state-owned companies often need to purchase equipment and components from foreign firms, “some multinational enterprises” saw this as an opportunity to offer huge bribes to senior managers in state-owned companies or government officials to promote their products. 

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The Chinese anti-graft campaign is spreading its net ever wider as officials whose children may have 
gained a foreign education via inducements come under scrutiny. Photo: XiXinXing \ Thinkstock

Damage control, not skeletons in the closet

The talk on the ground is that authorities might as well arrest everybody since corruption is so widespread. Greasing the wheels or whatever else needs greasing has for decades been the accepted way of doing business – be it foreign or domestic.

Why the government is pushing the anti-corruption campaign so aggressively is the subject of much conjecture and debate. But the more important development for businesses to focus on is that this campaign will not be fizzling out for quite some time – certainly not before the corruption trial of Zhou Yongkang, the most senior political leader to be investigated, is wrapped up.

It’s too late to worry about skeletons in the closet – or protest that there aren’t any. And too soon to hope everything will just blow over.

Guilty and innocent alike will be facing media heat and the inevitable pressure on share price.

Companies not currently on the hit list may have dodged the bullet …but only for now. The innocent, in particular, should be preparing strategies to turn round public and shareholder opinion should the axe fall.
None without sin

Public perception is that business is all about shady deals. Even if no sin is now being committed, the sector itself came into existence from profiting from surreptitious activities illegal at the time. Hence the spread of the biblical concept of “original sin” with reference to business and commerce.

But the government’s concern is not ideological. To root out systemic corruption, the government has decided to start with “naked” officials. While not all officials with family and assets overseas have done something illegal, the behaviour is considered prima facie evidence of a dismissible offence at the very least. The perception is that sending spouses or children overseas is a disguise to launder money and obtain passports for when the official need to flee the country.

Will the campaign succeed in reducing the number of “naked” officials in China? One gauge available to the public is the number of EB-5 visas issued by the US under its investment programme. 

Applications from China so far this year are up 50 percent. It would be interesting to see how the numbers stack up by October which is the end of the programme’s quota year.

-- Edited by Martin O'Rourke

Pauline Loong is managing director of Asia-analytica Research and Senior Fellow of the CIMB ASEAN Research Institute
Important notice: Nothing in this report is intended to be, or should be construed as, an offer to buy or sell, or invitation to subscribe for any securities or as advice relating to legal, technical or investment matters. This report has been prepared on the basis of information that is believed to be correct and from sources believed to be reliable. Asia-analytica makes no express or implied warranty as to the accuracy or completeness of any such information and makes no undertaking to update any such information. Opinions expressed are subject to change without notice. 

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